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October, 2008 Roberto Giannetti da Fonseca

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The ideas and suggestions contained in this presentation are our intellectual property and, therefore, subject to the prevailing laws concerning authorship. Total or partial publication or distribution to third parties is not permitted.

Agenda: Trends
Sustainability Trends in Production Consumption domestic market Consumption foreign markets What lies ahead!

Trends in Brazils Ethanol Industry

Sustainability: 3 Pillars
Ethanol Production must be sustainable: Economical, Social and Environmental!
Should not compete with food. Biofuels should not create inflationary pressure Sugarcane Should be competitive without subsidies. Product mix to increase revenue: cogeneration represents 20% of revenue stream investment increase capacity; Technology improvements on agriculture efficiency and yields (feedstock is 70% of cost), and on industrial process; Cellulose from sugarcane bagasse and gasefication of vinasse.

Economical

Rural development

Social

Mechanical harvesting more than 50% in So Paulo State, and must be 100% by 2014. Pace must be controled no to create a social problem, once this is the most labour intensive activity of the industry; Technical training

Sustainability: 3 Pillars
Ethanol production should lower the Carbon Footprint GHG life-cycle will be a criteria for US and EU markets

Environmental

Zoning for development of Sugarcane: So Paulo first and now Brazil already mapped and defined areas that production will be authorised. 37 milion hectares mapped and identified on zoning criteria Production should grow in degrated pasture land. Sugarcane and other crops will grow only based in higher productivity in cattle farming.

Land Allocation (Mi. ha) 2006 2018* Pasture 172 162 Other Crops 70.8 81.4 Sugarcane 6.2 11.8 Sugar 3.1 4.1 Ethanol 3.1 7.7

3% of allocated land

Brazil is now aware that sustainability is mandatory for the development of the ethanol markets
Source: ICONE, Valor Economico, MAPA, - Elaboreted by Ethanol Trading, * Projections by ICONE

Ethanol Production: Brazil and World


BRAZIL
Sugarcane Production Harvest Area Sugar Production domestic exports
Unit Mi tonns Mi. hectares Mi. tonns

2007/8
430 6.3 30.2 12.2 18.6 5.9 5.0 1.0 1,800

2015/16
829 11.4 41.3 11.4 29.9 12.4 9.1 3.2 11,500

2020/21
1,038 13.9 45.0 12.1 32.9 17.3 13.1 4.1 14,400

Domestic Market
75% 25%

Ethanol Production domestic exports


BioElectricity - Cogeneration
World

Bi. gallons MW

15% of Brazils Energy Mix

USA, the largest producer of ethanol, forecasted to produce 15.3 Bi gallons by 2015 corn based Brazil, based on sugarcane, as the second largest producer of ethanol is forecasted to produce 12.4 Bi gallons of ethanol by 2015/16.
Source: UNICA , F.O. Licht, USP *Elaboreted by Ethanol Trading

Ethanol Production Supply base Brazil


Marketing Alliances: Copersucar S.A. & Allicom (So Martinho), CrystalSev

Trends:
M&A & Greenfields

Industry Consolidation M&A Marketing Alliances

Traditional Brazilian groups: Cosan, Santaelisa/Vale, New Groups: Brenco, ETH, Infinity Foreign Companies: partnering & greenfield Major trading houses: Bunge & Itochu, Cargill, Dreyfus, ADM Energy Companies: BP, Abengoa Financial Investors: domestic and International (Gavea , CSFB, Khosla )

INVESTMENTS Over the next 5 years it is estimated that US$ 33 billions will be invested in this industry: 80 new projects

EXAMPLE OF PLAYERS

Source: UNICAMP, Dedini and UNICA *Team analysis and forecast

Ethanol Production: Smaller Scale Units


Pilot project in Jaiba North of Minas Gerais

Sugarcane based 3 plant sizes! Require less area in the proximity of plant Much lower investment requirement Producing ethanol and bio-electricity at competitive cost. Pilot project in operation

DAEG Destilaria Aviador Edward Gomes, owned by IB Bioenergia S.A. Production capacity of 10,000 liters/day

Alcompac
Harvest area Crushing capacity / season Production/day Production/day Production/season

Units
hectares tons liters gallons gallons

10,000/d
394 31,500 10,000 2,642 554,761

Plant Size 30,000/d


1,181 94,500 30,000 7,925 1,664,284

60,000/d
2,363 189,000 60,000 15,850 3,328,568

Source: Alcompac

Consumption: Domestic Market main market


Otto-Cycle Fuel Consumption in Brazil Jan 2000 to Aug 2008
100% of Brazilian Gasoline is blended from 20 to 25% ethanol, defined by the government.

48.8%

Gasolina A

Gasoline C (E20 E25)

Price at the Pump: R$ 2.40 liter *


16.3%

Anhydrous
34.9 %

Consumer decision. Not Mandatory E100 - FFV Available in 33,000 gas stations across the country Price at the Pump: R$ 1.20 liter *

Hydrous

Since March 2008, ethanol represents more than 50% of Brazils otto-cycle fuel consumption. In 2007, Brazil consumed 2.5 Bi gallons of hydrous Ethanol and 1.6 Bi gallons of anhydrous blended with gasoline
Source: ANP - Elaborated by Ethanol Trading pices refer to State of So Paulo in August 2008.

Consumption: Domestic market is FFV


New Vehicles Fleet
10.96%

Gasoline

89.03%

Alcohol

Flex - FFV

FFV is the driver to future increasing consumption of ethanol on the world market; FFV started to be supplied in Brazil in March 2003, currently represents over 90% of new cars sold

and aprox. 25% of the entire fleet, today close to 6 Mi. FFV on Brazilian streets;
Consumer made an option! Thus, manufactures dont have a choice any longer! They must offer FFV !!! Why not to have FFV available to consumers worldwide ? : a energy hedge for countries and drivers !!!
Source: ANP, ANFAVEA elaboreted by Ethanol Trading

Consumption: new uses!


On sale from March 2009 Consumer decision of fuel gasoline or ethanol 300 cc Delphi Automotive // Amazonas Motocicletas Especiais First FFV motorcycle Bio-Chemestry BioPlastic Ethanol to Polyethylene

Source: UNICA, FT - Elaborated by Ethanol Trading

Exporting the Brazil Ethanol Experience


Regulatory Framework Agriculture Industrial & Processing Management Distribution & Marketing Markets & Consumers

Brazil is increasing exports of its sugarcane based Ethanol Experience For the entire BioEnergy value chain: from crop to cars! Market and regulation must be secured to promote production in other parts of the world.

World Ethanol and Sugarcane Production in 2007


Country US Brazil EU China Canada India Thailand Colombia Central America Australia Pakistan Paraguay Others Total Ethanol Mi Gallons 6,508 5,026 569 487 212 106 79 75 40 26 9 5 16 13,158 Main Feedstocks Used Corn Sugarcane Beetroot / Wheat Corn / Cassava / Wheat Corn / Wheat Sugarcane Cassava / Sugarcane Sugarcane Sugarcane Sugarcane Sugarcane Sugarcane Sugarcane Tonns 27,750,600 514,079,729 60,000 106,316,000 355,520,000 64,365,682 40,000,000 27,340,800 36,000,000 54,752,000 3,400,000 328,080,167 1,557,664,978

There is a huge potencial to increase sugarcane based ethanol production around the world.
Potential for Sugarcane Ethanol Production

Source: F.O. Licht, UNICA, FAO, Elaborated by Ethanol Trading-

Areas that could grow sugarcane for ethanol

Foreign Markets: Brazil Ethanol Exports


JAN-SEPT 2007
BRAZIL EXPORTS Thous. gl USA CBI EUROPEAN UNI. AFRICA SOUTH AMERICA ASIA OTHERS TOTAL 214,716 212,599 142,671 39,449 3,766 86,353 22,370 721,924 US$ 350,556,380 320,760,783 239,789,664 64,897,751 7,132,346 142,789,907 36,214,843 1,162,141,674 Thous. gl 341,119 287,704 262,720 21,746 4,189 67,838 15,517 1,000,832 US$ 640,505,150 486,357,557 448,726,908 39,071,157 7,754,886 109,346,872 29,918,850 1,761,681,380 gl 59% 35% 84% -45% 11% -21% -31% 39% US$ 83% 52% 87% -40% 9% -23% -17% 52%

JAN-SEPT 2008

% Change 08/07

1 Bi Gallons exported in 2008 (Sep) 39 % more than same period of 2007. When compared to 2007, main growth was direct exports to US (59%) and to European Union (84%) CBI Hydrous ethanol; indirect exports to US

Share of Brazil Exports Jan Sep 2008

63% US Summer & Brazilian Harvesting Season


Source: SECEX - Elaborated by Ethanol Trading

Foreign Markets: Brazil Ethanol Exports


Monthly Brazil Ethanol Exports Jan 2006 Sep 2008 (gallons) Total Brazil US

CBI

Monthly Shares Brazil Ethanol Exports Jan 2006 Sep 2008 (%) Rest of the World CBI

US

Source: SECEX - Elaborated by Ethanol Trading

Main Foreign Market: US Ethanol Imports


US Ethanol Imports (000 gallons)
Summer 2006 MTBE substituition

US Total Ethanol Imports From Jan 1993 to Jul 2008 (thousand gl)
Summer 08 Floods in Mid-West & Corn @ U$$ 8,00/ bushel

CBI

Brazil

Share of US Imports Country of Origin


Canada

Due to US$ 0,54/gal import tariff: Brazils direct exports to the US market are spot and market windows. Or Brazilian hydrous is dehydrated in CBI countries.

China

Costa Rica Virgin Islands El Salvador Trinidad Tobago Jamaica

Brazil

Source: DoE - Elaborated by Ethanol Trading

What lies ahead: logistics!


Brazil needs to solve its internal logistics problems: To the port: currently ethanol is mainly trucked to ports Ethanol dedicated pipeline to ports: many projects under discussions; 3 only to the port of Santos! also important to increase rail freight to port Ports: Almost 70% of Brazils Ethanol Exports are through Santos already on the limit. Demurrage is an issue! Logistics in foreign markets: Brazilian companies are starting to invest in terminals overseas to be able to get closer to final clients.

Share per Ports of Brazils Ethanol Exports

Source: SECEX - Elaborated by Ethanol Trading

What lies ahead: technology!


Sugarcane Crop varieties: increase yields, reduce water usage, reduce feedstock costs Brazilian companies are investing in sugarcane genetics

Production of Ethanol

Cellulosic technology, enzimatic or acid hydrolises, will allow fast increase in ethanol production with higher environmental and economic benefits (also end the food vs. fuel discussion).

Sugarcane Bagasse will help to bridge Brazils energy projected gap Retrofit and greenfield: increase investments in cogeneration

Cogeneration
Technology developments driving this industry: High pressure boilers Reduction of steam waste on operations Bagasse and straw (top) Gasefication of vinasse (future)

What lies ahead: market access!


Two Products: Two Markets

E10
90% Gasoline blended with 10% Ethanol Ethanol as an additive to gasoline Mandatory Market by Government Legislation and Regulation Compulsory and Firm Demand 100 % Auto Fleet in the Region/State Existing Gas Station Pump Terminals

E85
15% Gasoline blended with 85% Ethanol Ethanol as a substitute to gasoline Voluntary Market / Fuel Switchers Price Oriented and Volatile Demand Only Flex Fuel Vehicles FFVs Required new Pumps on Gas Stations

US could import Brazil Ethanol tariff free only for the E85 market. Dyed ethanol not to mix with E10 market (special RIN) There are more than 6 million FFV vehicles in the US, but only 1,800 pumps of E85 in the entire country E85 market does not compete with, mandatory, E10. Would help to achieve RFS targets and to promote ethanol consumption in the US.

Energy Security is not Energy Independency, Energy Security is Energy Diversity!