Questions for Brazil ethanol industry feature - Brazil-US Business ...

Questions for Brazil ethanol industry featureWith the growth of Brazil’s ethanol industry, and new demands for renewable fuels in the UnitedStates and elsewhere, new opportunities are emerging for U.S. companies interested in doingbusiness with Brazil. BIC Magazine recently discussed these opportunities with Igly Serafim,Senior Commercial Specialist with the U.S. Commercial Service in Sao Paulo Brazil. With itsoffices across the U.S. and locations at U.S. embassies and consulates in 80 countries, theCommercial Service works to help U.S. companies export and looks out for American businessinterests abroad.BIC: What initiatives led to the development of the ethanol industry in Brazil?SERAFIM: The restructuring of Brazil’s sugarcane agribusiness production – which undoubtedlyfacilitated the modern industry that Brazil has today – was initiated in the early 1930’s and wasonly possible due to a period of six decades of strong governmental intervention.Starting in 1933, when the Sugar and Alcohol Institute (IAA) was created, the Braziliangovernment took over a number of activities that back then shaped the sugarcane business inBrazil. The state’s intervention dominated practically all of the industry’s structure, and wasresponsible for the production and marketing cycle, including pricing, quotas, exports andimports.The IAA was created in a context where the government found the national sugar production tobe in excess of the consumption needs, the world trend towards limits on sugar production, theneed to ensure balance in the sugar market, and the production of ethanol as a feasible alternativefor the sugar industry. Accordingly, governmental policies were designed to sustain and keep theactivities of such an important industry organized and profitable.The National Alcohol Program (PROÁLCOOL) was created by a Presidential Decree in late 1975with the goal of “aiming to meet the requirements of the domestic and international markets, aswell as those of the fuel policy for automotive fuels.”PROÁLCOOL’s driver was an incentive to produce ethanol from sugarcane, cassava or any otherraw material. It is important to point out that Brazil had been gaining experience with the use ofethanol as fuel since the 1920’s. The basis of the program was an increase in supply that wouldbe stimulated by a greater supply of raw materials. Special emphasis was put on agriculturalproduction, the modernization and expansion of existing distilleries, and the establishment ofnew production units independent of annexes to existing facilities and storage units.The main motivation for launching the program was the strong adverse impact of the two “oilshocks” in 1973 and 1978 on the country’s economy. As a result of the incentives initiallyprovided by the National Alcohol Program, Brazil’s ethanol production increased from 555million liters in 1975/1976 to 17.5 billion liters for the 2006/07 crop.In 1979, Brazil decided to redesign aspects of PROÁLCOOL to stimulate the production ofhydrous ethanol for specific use in passenger vehicle engines. To that end, the National AlcoholCouncil (CNAL) was created.In order to ensure the sale of ethanol produced for use as a fuel, the National Oil Councilremained with the duty of setting up ethanol distribution programs for consuming companies and

oil distributors, whereas the prices of fuel ethanol were proposed by the National Oil Council andset by the National Alcohol Council. The Brazilian government also set up rules for thetransportation, marketing and storage of fuel ethanol.Brazil’s action on the national sugarcane agribusiness activities could not be maintainedindefinitely, and the reduction of state action proceeded quickly. This started with the release ofthe industry’s products for export in 1989, and price releases for several types of sugar and alsoanhydrous ethanol, and ended with the release of those prices still under official control, i.e.sugarcane, standard sugar and hydrous ethanol prices, in 1999.In 2003, flex fuel vehicles (FFV) were introduced in the Brazilian market. These vehicles aredesigned to be fueled with gasoline, ethanol, or any blend of gasoline and ethanol.On April 28th, 2011, President Dilma Rouseff signed Provisional Measure (Medida Provisoria –MP) #532 which lowers from 20 to 18 percent the minimum volume of ethanol required to blendwith gasoline. The new blend range varies from 18 and 25 percent. The current blend has been setat the cap (25 percent) since May 1, 2010. However, the Government of Brazil (GOB) has studiedthe possibility to reduce it to 18 percent due to the expected shortage in ethanol supply, aconsequence of the drop in the size of the sugarcane crop.In addition, MP #532 of April 28th, 2011, changes the status of ethanol from that of agri-businesscommodity to national strategic energy resource. The measure delegates greater authority to theNational Agency of Petroleum, Natural Gas and Biofuels (ANP) to regulate the ethanol supplychain. ANP will now expand beyond its traditional role of monitoring ethanol distribution oncethe product left the mill headed to the pump; the agency will oversee ethanol production insidemills – until recently the mandate of the Ministry of Agriculture (MAPA).Several measures are currently under discussion and are likely to be adopted by ANP in the nearfuture, including: (1) the introduction of 2-year contracts between ethanol suppliers and fueldistributors and, (2) a mandatory 8 percent minimum carryover stocks on March 1 to be held byproducers to guarantee ethanol supply. If domestic supply is not available at the time, that willforce ethanol producers to import the product to comply with the measure.BIC: What portion of the nation’s energy consumption is composed of biofuels?SERAFIM: Brazil is a global leader in the use of renewable fuels. Indeed, the Ministry of Minesand Energy (MME) has set the increase of biofuels’ share in the Brazilian energy matrix as one ofthe policy directives for the sector.In June 2011, the Ministry of Mines and Energy released the Energy Expansion Decennial Plan2011/2020 (PDE-2020) for public consultation. According to the plan, the share of renewablesources (hydroelectric, ethanol, biomass, etc.) in the Brazilian energy matrix is expected toincrease to 46.3 percent in 2020, up 1.5 points compared to 44.8 percent in 2010.The study also projects that ethanol demand for both the domestic market and exports shouldincrease to 73 billion liters in 2020.Brazil remains an important user of ethanol for fuel consumption. Total domestic demand forethanol for calendar year 2012 is forecast at 25.05 billion liters, up 2.85 billion liters from 2011consumption (22.195 billion liters), based on likely more attractive ethanol prices at the pumpcompared to 2011 and the steady sales of flex-fuel vehicles in the market. Total ethanol

consumption for use as fuel is estimated at 22.5 billion liters for 2012. Ethanol consumption forother uses is projected at 2.55 billion liters, up 200 million from 2011 due to steady demand fromthe chemical industries.The size of the Brazilian light vehicle fleet is roughly estimated at 28 million units and purehydrous ethanol and flex fuel powered vehicles represent together approximately 50 percent ofthe total fleet. Industry projections report that the share of flex fuel vehicles is likely to reach 86percent by 2020.The use of ethanol as a fuel in Brazil reached 19.1 million cubic meters in 2011. Braziliangasoline contains between 20 and 25% of ethanol.BIC: What are the latest technological advances in ethanol production?SERAFIM: In addition to actions aimed at a strong dissemination of technologies that arealready commercially available, innovation in ethanol production processes and productdiversification (from sucrose and lignocellulosic sugar-cane waste) are going to take place.New technologies for ethanol production are under development such as: improvement ofprocesses for water saving, increase in ethanol production efficiency, improvement of processesfor energy cogeneration, development of new processes based on ethanol chemistry andsugarcane biomass development, improvement of motors and turbines for maximization of energyefficiency in the use carburant ethanol.The genetic modification of sugarcane is advancing very fast in Brazil both on an experimentalscale and in field-testing. For example, the sugarcane genome was originally mapped in 2001 inSao Paulo, and dozens of projects that also address functional genomes are being developed byboth public and private institutions.Product diversification is being expanded to include sucrose products and ethanol chemistry, as isan increase in energy production from the sugarcane biomass. Excluding sucrose, the energycontained in one metric ton of sugarcane (including the straw) is equivalent to 2/3 of the energycontained in an oil barrel. That biomass can be recovered at relatively low costs, and less thanhalf of it is used today. Available technologies can generate additional electric powercorresponding to 30 percent more than the sugar and ethanol sale price using the bagasse and 50percent of the straw. The development of an efficient conversion of biomass into ethanol(expected for the next 10 years) could lead to an equal additional sale value.BIC: What are the prospects for cooperation between the United States and Brazilwith regard to ethanol?SERAFIM: The United States and Brazil have signed a Memorandum of Understanding onbiofuel cooperation. The two nations pledged closer cooperation on researching alternativeenergy production, promoting alternative fuels in the region and developing industry widestandards and codes that could lay the groundwork for a global biofuels market. Steps are alreadybeing taken to cooperate on harmonization of ethanol markets, transforming the biofuel into acommodity and developing partnerships in technology.

Looking to Export? The U.S. Commercial Service Can HelpU.S. energy and industrial service companies pursuing business opportunities in Brazil canbenefit from the services of the U.S. Commercial Service. With its network of offices across theU.S. and in more than 80 countries, the U.S. Commercial Service of the U.S. Department ofCommerce utilizes its global presence and international marketing expertise to help U.S.companies sell their products and services worldwide:Business counseling and customized market research to fit a firm’s specific needs.The Gold Key Service that arranges pre-screened meetings with potential overseasbusiness partners and government agencies, tailored to U.S. companies’ needs.International Company Profile that provides due diligence and background checks onpotential overseas business partners.Customized contact lists of potential partners and key foreign government agencies tohelp you make those key connections.The Commercial Service also anchors a Commerce Energy Team with expertise in powergeneration, renewable energies, coal, and oil and gas. For the latest energy trade leads,visit www.buyusa.gov/eme/Foreign companies such as those in Brazil can also benefit from Commercial Service partneringprograms as well to source products and services from U.S. companies.The U.S. Commercial Service in Brazil has four offices—in Rio de Janeiro, São Paulo, BeloHorizonte and Brasila. This includes nine U.S. commercial officers and over 50 Brazilian staffmembers, who are based in Brazil and are fluent in both English and Portuguese. Many of ourstaff have many years of sector-specific experience with the private sector and with Braziliangovernment entities. For more information, contact the nearest Commercial Service U.S. ExportAssistance Center at www.export.gov or visit www.buyusa.gov/Brazil.gov###