Identifier
Created
Classification
Origin
08SAOPAULO269
2008-06-02 14:43:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Consulate Sao Paulo
Cable title:  

BRAZILIAN BIOFUELS: ETHANOL PRODUCTION EXPANDING

Tags:  ENRG EAGR ELTN ETRD TRGY BTIO BR 
pdf how-to read a cable
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TO RUEHC/SECSTATE WASHDC 8258
INFO RUEHBR/AMEMBASSY BRASILIA 9386
RUEHRI/AMCONSUL RIO DE JANEIRO 8735
RUEHRG/AMCONSUL RECIFE 4120
RUEHAC/AMEMBASSY ASUNCION 3409
RUEHBU/AMEMBASSY BUENOS AIRES 3161
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RUEHMN/AMEMBASSY MONTEVIDEO 2713
RUEHLP/AMEMBASSY LA PAZ 3820
RUEHSG/AMEMBASSY SANTIAGO 2409
RUCPDOC/USDOC WASHDC 3100
RUEATRS/DEPT OF TREASURY WASHDC
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RUEHRC/USDA FAS WASHDC 0728
RHMFIUU/DEPT OF ENERGY WASHDC
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UNCLAS SECTION 01 OF 04 SAO PAULO 000269 

SENSITIVE
SIPDIS

STATE FOR WHA/BSC, WHA/EPSC
EEB/ESC AND GREG MANUEL
STATE FOR OES/EGC DREW NELSON
STATE FOR OES/PCI FOR LARRY SPERLING
NSC FOR FEARS AND DAVID MCCORMICK
DOE FOR GWARD, AKARSNER, BBARTON
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/DRAMBO
STATE PASS USTR FOR KATE DUCKWORTH
TREASURY FOR JHOEK

E.O. 12958: N/A
TAGS: ENRG EAGR ELTN ETRD TRGY BTIO BR
SUBJECT: BRAZILIAN BIOFUELS: ETHANOL PRODUCTION EXPANDING

REF: A) SAO PAULO 207, B) SAO PAULO 227, C) BRASILIA 656

UNCLAS SECTION 01 OF 04 SAO PAULO 000269

SENSITIVE
SIPDIS

STATE FOR WHA/BSC, WHA/EPSC
EEB/ESC AND GREG MANUEL
STATE FOR OES/EGC DREW NELSON
STATE FOR OES/PCI FOR LARRY SPERLING
NSC FOR FEARS AND DAVID MCCORMICK
DOE FOR GWARD, AKARSNER, BBARTON
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/DRAMBO
STATE PASS USTR FOR KATE DUCKWORTH
TREASURY FOR JHOEK

E.O. 12958: N/A
TAGS: ENRG EAGR ELTN ETRD TRGY BTIO BR
SUBJECT: BRAZILIAN BIOFUELS: ETHANOL PRODUCTION EXPANDING

REF: A) SAO PAULO 207, B) SAO PAULO 227, C) BRASILIA 656


1. (U) SUMMARY: Soaring petroleum prices and a rapidly growing
domestic fleet of flex-fuel cars are driving double-digit expansion
in ethanol production in Brazil. In the coming year alone, Brazil's
production of sugarcane-based ethanol is projected to increase 14.8
percent. Domestic demand for ethanol is large and growing,
currently consuming 85 percent of all production. The other 15
percent is exported, primarily to the United States. The ethanol
private sector in Brazil is increasingly partnering with
international companies in building production facilities, both in
and out of Brazil, as well as addressing the internal logistics
problems that undermine the potential profitability of Brazilian
ethanol exports. Infrastructure bottlenecks in Brazil, as well as
various international tariff regimes, will likely continue to pose
hurdles to the expansion of Brazilian ethanol exports and the
internationalization of ethanol as a commodity. END SUMMARY.

-------------- --------------
DOUBLE-DIGIT GROWTH IN SUGAR AND ETHANOL PRODUCTION
-------------- --------------


2. (U) According to the USDA's Agricultural Trade Office in Sao
Paulo (ATO),both sugar and ethanol production is expected to
increase during the current market year (MY) corresponding to May
2008 to April 2009. During this period, land dedicated to sugarcane
cultivation is projected to expand by 12 percent from 7.19 million
hectares to 8.05 million, equivalent to approximately 2.3 percent of
Brazil's arable land. An increasing percentage of that sugarcane is
projected to go towards ethanol production instead of sugar (56.5
percent in MY 2008/2009 vice 54.5 percent in MY 2007/2008). In
absolute terms, ethanol production for MY 2008/2009 is projected to

see a 14.8 percent increase (25.71 billion liters vice 22.39).
(Note: Sugarcane is currently the sole feedstock for ethanol in
Brazil. End Note.)


3. (U) Much of Brazil's ethanol production continues to be destined
for the domestic market, with domestic demand expected to rise 16.2
percent in MY 2008/2009 (22.05 billion liters vice 18.97). The
expanding fleet of flex fuel vehicles, which today account for 90
percent of new car sales, explains the expanding domestic demand
(Ref A). In the month of April, for the first time in 20 years,
sales of ethanol surpassed gasoline in Brazil.
Largely due to fuel demand, in 2007, sugar and its derivatives
passed hydro power as the second largest source of energy in Brazil,
contributing 16 percent of Brazil's overall energy matrix (compared
to petroleum at 36.7 percent and hydro at 14.7 percent). In 2007,
bioelectricity accounted for three percent of Brazil's electricity
(1,400 megawatts). The Brazilian Sugarcane Industry Association
(UNICA) predicts that given the proper government incentives to tie
into the main power grid, this number could increase to 11,500
megawatts by 2015 and 14,400 megawatts by 2021 - equivilant to 20
percent of Brazil's electricity usage today.

--------------
ETHANOL EXPORTS: PRESENT & FUTURE
--------------


4. (U) For over thirty years, Brazil has been by far the world's
largest producer of ethanol from sugarcane. Correspondingly, it has
been and remains today the world's largest exporter of ethanol.
According to the Brazilian Secretariat of Foreign Trade (SECEX),
major export markets for 2007 included the U.S. (841 million
liters),Holland (793 million liters) and Japan (363 million
liters). Exports to Caribbean and Central American countries

SAO PAULO 00000269 002 OF 004


(Jamaica, Costa Rica, El Salvador and Trinidad & Tobago) amounted to
910 million liters. Virtually all of this volume was then
re-exported to the United States under the Caribbean Basin
Initiative (CBI) and CAFTA-DR tariff concessions after going through
the process of dehydration. (Note: These numbers are inconsistent
with U.S. census data that shows ethanol imports from Brazil of 714
million liters in 2007. End Note.)


5. (U) Despite the negative perceptions in some international
quarters about the role of biofuels in contributing to food
inflation (Ref B),concerns about the environmental impact of
ethanol production, and allegations of precarious working conditions
of sugarcane workers (septel) - Brazilian sugar and ethanol
producers see growth potential in the export market, apart from the
rising domestic demand. ATO projects that Brazil will export 3.9
billion liters in MY 2008/2009, a 13 percent increase over MY
2007/2008. Other interlocutors also see high oil prices further
supporting ethanol exports to the U.S. - both direct and through the
CBI countries. The Brazil Renewable Energy Company (Brenco) told
Econoff that conservative analysts believe ethanol will remain
competitive in the international market vis-`-vis gasoline at least
as long as petroleum costs exceed USD 70 to 80 per barrel.


6. (U) Brazilian exporters believe there is significant
international market potential in the blending of ethanol with
gasoline, particularly the E10 blend (90 percent gasoline and 10
percent ethanol) and possibly as much as E25 (75 percent gasoline
and 25 percent ethanol). Brenco is largely basing their business
model on exporting ethanol as a partial fuel substitute. Even in
countries that do not have a significant number of flex-fuel cars,
ethanol can be blended up to a certain level with gasoline and run
in standard gasoline engines without the need to overhaul the
downstream infrastructure or modify vehicle engines.


7. (SBU) Brazilian industry experts are concentrating particularly
on the U.S. market, largely because they believe that the U.S. will
not be able to reach Congressional and Executive branch mandates for
ethanol or biodiesel production of 36 billion gallons by 2022.
According to Plinio Nastari (editor of the leading ethanol industry
newsletter),and Roberto Gianetti da Fonseca (associated with
Ethanol Trading SA and the Federation of Industries of the State of
Sao Paulo, FIESP),U.S. domestic production will peak at 15 billion
gallons given current technology. Some Brazilian ethanol exporters,
and especially Gianetti da Fonseca, argue for a change in U.S.
policy that would allow for tariff-free access to the U.S. market
for E85 blends to fuel the growing U.S. fleet of flex fuel vehicles.
(Comment: While most ConGen contacts are critical of the ethanol
tariff, the sentiment is not universal. Miguel Dabdoub, coordinator
for the Biodiesel Brazil Project out of the University of Sao
Paulo's Laboratory for Clean Technology Development, argues that the
tariff is necessary for a period of time as a mechanism to build up
domestic support among the U.S. population and as part of a larger
strategy to make ethanol an acceptable alternative globally.
Interlocutors at FIESP have also stated that an immediate removal of
the tariff would hurt supply in Brazil as more companies would seek
to immediately export to the U.S. Similarly, while many
interlocutors at MRE and in Congress urge the immediate removal of
the tariff, the Ministry of Agriculture does not urge this point.
End Comment.)

--------------
INFRASTRUCTURE BOTTLENECKS
--------------


8. (U) Like in most other sectors of the Brazilian economy, the

SAO PAULO 00000269 003 OF 004


ethanol industry suffers from inadequate infrastructure, the
so-called 'Custo Brasil' - costs other than those related to
production which significantly increase total cost and affect
competitiveness. Custo Brasil is seen along the ethanol production
line - from storage to transportation to port handling - and
represents an on-going bottleneck in increasing Brazilian ethanol
exports. Starting in the countryside at sugar distilleries, ethanol
destined for domestic consumption moves by truck (only occasionally
by rail or pipeline) to regional distribution centers, then onward
to secondary distribution centers, and finally to gas stations.
Ethanol producers hold stocks at the distributors' convenience, thus
imposing storage costs on mills. Many of the roads utilized to
transport ethanol, especially secondary or local roads, are in poor
condition. Highways in the main producing areas are often very
good, but tolls are expensive. Most of the existing sugar-ethanol
transportation routes are essentially unchanged from twenty years
ago. According to calculations of Weber Amaral of the Brazilian
Center for Biofuels, internal logistics account for 35 percent of
ethanol's total cost.


9. (U) Ethanol destined for export faces additional bottlenecks upon
reaching port. There is a limited amount of port storage dedicated
to ethanol, forcing exporters to rent space in multi-use chemical
terminals. This limitation of storage capacity represents a
significant restraining factor on any increases in ethanol exports.
The same obstacle exists in the contracting of vessels. As there is
no well-developed large scale international market for ethanol,
exporters rely on multi-use chemical tankers. This involves
substantial additional costs since storage facilities and tanks must
be bid away from other potential users, and be thoroughly cleaned
before and after use.

--------------
INDUSTRY TRENDS
--------------


10. (U) These existing obstacles do not seem likely to discourage
expansion in the sector as Brazil still produces the cheapest
ethanol in the world (22 cents a liter compared to 30 cents for U.S.
corn-based and 53 cents for European beetroot ethanol). Several
major private sector initiatives aim to substantially increase
Brazil's export capacity and reduce transportation costs. Brenco
outlined to Econoffs a plan to vertically integrate the entire
process in order to control their costs and get their product to
market.


11. (U) COSAN, Brazil's biggest sugar and ethanol producer, recently
announced USD 826 million-deal with Esso (Exxon Mobil Corp.) to
purchase all of its 1,500 gas stations in Brazil. According to
COSAN, this deal will make them the world's first fully integrated
renewable energy company. In April, BP announced a joint venture
with Santelisa Vale (the second largest sugarcane crusher),to build
and operate two ethanol refineries. This partnership makes BP the
first petroleum company to buy a commanding role in the ethanol
market and positions the new company, Tropical Bioenergia, to
compete with COSAN for the position of Brazil's leading sustainable
renewable fuels supplier of ethanol. Petrobras has also publicly
announced the intention to begin construction of a USD 315 million
ethanol pipeline in 2009 connecting mills in five states with
maritime terminals. (Note: Petrobras enjoys a substantial
advantage in building any pipeline, since the new line would be
built along rights-of-way where current petroleum and mixed-use
pipelines are located. End Note.)


12. (U) Many companies that are not making the headlines for the

SAO PAULO 00000269 004.2 OF 004


marriage of petroleum and biofuels are looking to ramp up their
investments in infrastructure in an effort to address existing
bottlenecks. In addition to Petrobras, industry leaders such as
Crystalsev, Copersucar, and Brenco have all announced export-driven
projects to build pipelines to move ethanol from producing regions
to port. Brenco's plan calls for a USD one billion investment to
build 10 additional refineries and a 700 mile six-terminal pipeline
to link its inland refineries with the Port of Santos. This
pipeline could potentially halve transportation costs for ethanol to
move from inland distilleries to port. The timeframe to build such
pipelines depends largely on the growth of worldwide ethanol demand
as well as access to credit.


13. (U) Port infrastructure remains a contentious subject. While
there are several billion-dollar private port projects on the table,
all are being held up until the Supreme Court rules on the legality
of private companies building and operating ports to move their own
goods. Until this issue is resolved, private port investment,
including for the ethanol industry, is moving ahead cautiously.
Coimex, a Brazilian logistics company that is among those wishing to
build a private port, is for the time-being looking to build a
liquid terminal for ethanol storage in the Port of Santos. Mining
and logistics company Vale (formerly CVRD) - which already uses its
extensive railroad, port, and maritime terminals to provide services
for Brazilian agriculture - is likewise planning the construction of
a maritime terminal in Vitoria in partnership with Oiltanking.

--------------
COMMENT
--------------


14. (U) High oil prics and growing numbers of flex-fuel cars will
signficantly increase domestic demand for ethanol. Ths can be
expected to continue to drive Brazil's xpanded sugarcane
cultivation and ethanol producion, and any increase in foreign
demand will addfurther pressure to expand production. Ethanol
exports face several significant hurdles including dmestic
Brazilian infrastructure that inhibits inreased exports as well as
potential fallout in sme quarters over the linkage between biofuels
an food inflation (Ref C). Other environmental and labor concerns
are additional obstacles which could impede the growth of Brazilian
ethanol exports. To the extent that Brazil's private sector can be
considered a bellwether, a series of recent investment announcements
indicate that industry leaders believe that the future of ethanol
domestically and for export is bright. END COMMENT.


15. (U) This cable has been coordinated with and cleared by Embassy
Brasilia and coordinated with the Agricultural Trade Office in Sao
Paulo.