BRAZIL BIOFUEL UPDATE, JUNE/JULY 2006

UNCLAS SECTION 01 OF 02 BRASILIA 001461 SIPDIS SIPDIS STATE PASS USTR FOR MSULLIVAN DEPT FOR EWHITE OES/EGC AND PKELLY OES/STC; OES/ETC GTHOMPSON; BSC WPOPP DEPT PLEASE PASS TO SLADISLAW DOE E.O. 12958: N/A TAGS: TRGY SENV ENRG KSCA ETRD EAGR BR SUBJECT: BRAZIL BIOFUEL UPDATE, JUNE/JULY 2006 BRASILIA 00001461 001.2 OF 002 RISING EXPORTS -------------- ¶1. Brazil's main sugarcane-producing center, in the southwest region of the country, exported a record 428 million liters of ethanol in June 2006, in contrast to 268 million liters of ethanol over the same period last year. Most of the region's exports went to the United States, which has been importing large volumes of ethanol this season due to the elimination, in May, of the country's use of the gasoline additive MTBE. According to the technical director of the Sao Paulo Sugar and Alcohol Producer Association (UNICA), Antonio de Padua Rodrigues, the region is likely to export 1.5 billion liters by September, and will have to revise its 2006-2007 ethanol export estimates, which forecast 1.9 billion liters of total export. Rodrigues added that it is possible that Brazil will export 2.5 billion liters still this season. U.S. demand accounted for over 60% of the direct shipments in June. PETROBRAS MOVING IN -------------- ¶2. On June 30, 2006, the Administrative Council of Brazilian state-run oil company Petrobras approved and launched a program of new investments aimed at leading Latin America in oil, gas and biofuels production. The company is planning on investing US$ 87.1 billion in new projects between 2007 and 2011. Company CEO, Jose Gabrielli, justified the investment by saying that Petrobras wants to lead the world in biodiesel production. The total estimated investment for the development of renewable energy sources and biofuels is US$ 0.7 billion. CARGILL TOO -------------- ¶3. Two major Brazilian dailies recently reported that American company Cargill Inc. concluded a US$ 70 million deal to purchase a 63% stake in Cevasa, a sugar and ethanol mill in Sao Paulo. The company's chairman in Brazil, Sergio Barroso, is quoted as saying that Cargill has been analyzing the sugar and alcohol industry in Brazil for some time and that becoming more active in this promising sector is a logical step for the company. Barroso further mentioned the high degree of competitiveness reached by the Brazilian sugar cane industry through its technological, industrial and agricultural expertise. The company's decision is strategic due to the recent announcement by U.S automakers to double production of vehicles using the flexible-fuel technology by 2010. DIESEL OPTIONS -------------- ¶4. The Brazilian newspaper Estado de Sao Paulo also ran an article saying that Petrobras will test the first samples of bio-diesel made from bovine sebum, estimated to be cheaper than the bio-diesel made from soybeans. Petrobras will receive 31 million liters of the new fuel through the end of the year. According to the producer of the fuel, Carlos Zveibil Neto, bio-diesel can be made from various oleaginous substances, such as the bovine sebum. The fuel is an Italian invention, which Brazilian producers have received a license to use and produce. ¶5. Petrobras also announced the development of a new diesel fuel mixed with vegetable oils that will sharply reduce the country's need for imported diesel. Petrobras said that the new fuel, called H-Bio, is cheaper when compared to the diesel produced only from petroleum. H-Bio was developed over 18 months of tests utilizing oil from sunflower seeds, cotton, castor beans and, mainly, soybeans. According to Petrobras CEO Gabrielli, H-Bio is a very important for Brazilian independence in energy and, initially, the country will save as much as US$ 240 million annually (25% of the country's importing of the product) until 2008 on oil imports. The new H-Bio fuel is different from bio-diesel, which is also produced with vegetable oils. In June, Minister Furlan predicted to Secretary Gutierrez that by 2008, approximately 20% of Brazil's soy SIPDIS oil will be exported for this purpose. JAPANESE FINANCING -------------- ¶6. The International Cooperation Bank of Japan will finance over US$ 600 million for the production of ethanol and biodiesel in Brazil. BRASILIA 00001461 002.2 OF 002 Half of this amount will be invested in expanding production in three Brazilian states and the other half will finance biodiesel projects in the Northeast region of the country. Japan imported 317.8 million liters of ethanol for industrial purposes and has been a significant consumer of the Brazilian fuel since the passage of a 2003 law, which allowed for a 3% mix of ethanol in gasoline. WILLIAMSON