SWEETER ENERGY? NORTHEAST HOPES FOR ETHANOL

UNCLAS RECIFE 000040

SIPDIS

DEPT FOR WHA/BSC, EPSC

E.O. 12958: N/A
TAGS: EAGR ENRG BR
SUBJECT: SWEETER ENERGY? NORTHEAST HOPES FOR ETHANOL


1. Summary: Sugar has dominated Brazil's Northeast for
centuries, but the boom in ethanol production for fuel has yet
to fire up their economy. Only 15 percent of Brazil's ethanol
comes from the Northeast compared to 85 percent from the South,
even though the harvest seasons are complementary and costs may
be lower here, according to the Pernambuco sugar industry
spokesman Renato Cunha. Yet Brazil's regulations give the less
developed Northeast preferential treatment in exporting ethanol.
As the U.S. looks for alternatives to oil, Brazil, the leading
producer of ethanol, would be the obvious place to go. Cunha
predicts a better future for Pernambuco's sugar producers and
more investment in irrigated lands. End Summary


2. With Brazil facing a shortage of ethanol to fuel its
"flex"cars and cut oil consumption, the traditional
sugar-producing Northeastern states might be expected to be
happily distilling away. But the chairman of the Sugar and
Alcohol Industry Association in Pernambuco (SINDACUCAR),Renato
Cunha shakes his head. The harvest season just ended, cane
production was less than expected due to late rains, and
distilleries will remain idle until the next crop which could
begin in August. With 20 sugar refineries in his organization,
Cunha knows the sugar-to-ethanol business. He told the Consul
March 7 that the Northeast has the potential to export much more
ethanol in the future, even though the South of Brazil is by far
the largest producer.


3. The harvest season in Sao Paulo and the South is April to
November, when 85 percent of the ethanol is produced; the
Northeastern states supply only 15 percent, most from the states
of Pernambuco and Alagoas, in the period from August to
February. "But the law allows the Northeast a preference for
exports of ethanol in order to compensate for social
conditions," Cunha said, pulling out his copy of the law
regulating the internal market of ethanol (Law 9,362 December
13, 1996). Article 7 states that "sugar-derived products
destined for preferred markets will be given to the
North/Northeast region, taking into consideration its
socio-economic stage." According to Cunha, export markets are
"preferred" since they offer higher prices, and the Northeast
producers could take advantage of lower labor costs and
proximity to sea ports to price their ethanol at competitive
rates. The tax on ethanol in Pernambuco is 12 percent versus 25
percent in Sao Paulo, according to SINDACUCAR.


4. In 2005, Brazil exported 261 million liters of ethanol to the
American market, despite the import duties of US$0.54/per
gallon. The potential is certainly bigger, as Brazil is the
world's largest ethanol producer. According to data reported in
the Brazilian press, the average price per liter in southern
Brazil (using the January rate of exchange) is 25 cents (about
one dollar per gallon),while U.S. corn-based ethanol costs 33
cents per liter (about $1.32 a gallon.)


5. The issue for the Northeastern producers is how to increase
their output efficiently, which means increased sugar cane
acreage. In Cunha's vision, one backed by local politicians
including President Lula's Minister of National Integration Ciro
Gomes, the answer is irrigation of the "sertao" dry lands with
San Francisco River water. (The fruit and wine center around
Petrolina is already a showcase of desert transformation,
attracting foreign investment.) This major water project, known
as the "Transposition," would carry water by canals as far as
Ceara and Rio Grande do Norte, but Cunha explained how
Pernambuco would get its own "sugar canal" to irrigate rich soil
in the western region of Pernambuco. (Comment: This is not
likely to happen any time soon since the grand water project is
tied up in court, being fought by the states upstream.) But if
the weather cooperates this year, it will still be at least six
months before Pernambuco's distilleries fire up with their
bagasse (cane hulls or waste products that produce thermal
energy) to produce more ethanol.

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