May 27, 2011

Brazil Needs 150 New Sugar/Ethanol Mills by 2020

The president of the Union of Sugarcane Industries in Brazil (Unica) Marcos Jank, is concerned that the sugarcane industry in Brazil is not investing the needed resources to keep the industry growing. Sugarcane production in Brazil increased at an annual rate of 10% between 2002 and 2008, but after the financial crisis of 2008, sugarcane production in Brazil has only grew at a 3% pace over the last three years. At the same time, the sales of flex fuel cars have surpassed 90% of all new car sales in Brazil since the mid-2000. The concern now is that the sugarcane industry is not expanding fast enough to keep pace with the increased domestic demand.

During the last three years, instead of focusing on the construction of new sugar/ethanol mills in Brazil, the focus has shifted to consolidation in the industry as the stronger participants have been buying up the smaller mills that are struggling financially. Mills are changing hands, but not much new sugarcane is being planted.

According to Jank, 150 new sugar/ethanol mills need to be built in Brazil by the year 2020 to keep pace with the increase in domestic demand for ethanol. The total investment needed in the industry by the year 2020 is estimated at R$ 80 billion. One of the reasons for the slowdown in expansion is the increased cost of growing sugarcane in Brazil. In 2005, it cost an average of R$ 39 to produce a ton of sugarcane in the state of Sao Paulo. Today, the cost has increased to R$ 54 per ton.

Tight supplies of ethanol in Brazil over the last several years have resulted in higher ethanol prices at the pump. Since ethanol contains less energy than gasoline, any time the price of ethanol is more than 70% the price of gasoline; it is more economical to use gasoline. As a result, many owners of flex fuel vehicles have switched back to gasoline due to the high cost of ethanol.