September 27, 2012

Brazil Needs 90 New Ethanol Mills in the Next 10 Years

Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.

Brazil needs 90 new ethanol mills by the year 2021 in order to reduce the amount of gasoline it is currently importing for the domestic automobile fleet. At least that is the latest assessment from the Union of Sugarcane Industries (Unica). These 90 new mills would be dedicated to only producing ethanol and collectively they could produce an additional 27 billion liters of ethanol or the equivalent of 18 billion liters of gasoline.

Due to tight ethanol supplies and inadequate gasoline refining capacity, Petrobras is currently importing gasoline to meet the domestic demand. During the last 12 months, Petrobras has imported more than R$ 3 billion in gasoline and they lost R$ 1 billion because they had to sell the gasoline domestically at prices lower than what they paid on the international market.

If the ethanol production in Brazil is not increased, the amount of gasoline imported into the country would increase from its current level of 6 billion liters per year to 20 billion by 2021 and Petrobras could lose R$ 6 annually by 2021 on imported gasoline.

These 90 new mills would require about R$ 100 billion in investments and 95% of the money would be spent on Brazilian made products such as construction material, equipment, farm machinery, etc. From the initial phase of construction, each new mill would take about three years to come online. Each new mill would also require about 25,000 hectares of new sugarcane production for a total of over two million hectares of new production.

The Brazilian government maintains the price of gasoline at artificially low levels in order to help control inflation, but that also depresses the price of ethanol as well because owners of flex fuel vehicles will only purchase E100 ethanol when the price of the fuel is 70% or less the price of gasoline. If gasoline prices were allowed to rise then ethanol prices would rise as well and investors would be more willing to foot the bill for new ethanol plants.

Sugarcane production in Brazil is concentrated in southeastern Brazil, principally the state of Sao Paulo where approximately 60% of Brazil's sugarcane is grown. Sugarcane production has been slow to expand in the state of Mato Grosso, which is the largest grain producing state in Brazil, because of zoning restrictions of where sugarcane can be grown. Sugarcane is not allowed to be grown in the lowland Amazon forest region of the state or the Alto Paraguai River Basin. The principal area where it can expand is the Araguaia River Basin in the eastern part of the state.

Ironically, since the expansion of sugarcane is somewhat limited in the state of Mato Grosso, there is serious consideration in the state to expanding corn-based ethanol production. Corn production in the state has greatly expanded in recent years, but high transportation costs makes it nearly prohibitive to move the corn from Mato Grosso to livestock producers in southern Brazil or exporters in southeastern Brazil. Many feel it would be more economical to convert the corn into ethanol and use the resulting distiller's dry grain for the livestock industry in the state.