Brazil’s ethanol-fuel industry going global


When U.S. President George Bush urged aggressive expansion of the domestic ethanol market during his State of the Union address in January, politicians from the U.S. grain belt weren’t the only ones to applaud. Brazil, the world’s leading ethanol maker, also welcomed the pronouncement, part of an ambitious, albeit sketchily rendered proposal by Bush to slash U.S. gasoline consumption 20% by 2017.

Brazil has managed to tap growing U.S. ethanol demand both by direct and indirect means, despite formidable trade barriers. It believes growth in the U.S. ethanol market will lead to more such sales for its surging renewable-fuels industry because its ethanol, made from sugarcane, is cheaper to produce than the corn-based ethanol that thus far predominates in the United States.

Evidence that Brazil’s optimism might not be misplaced came this month, when Bush kicked off a tour of Latin American countries by signing an ethanol agreement with Brazilian President Luiz Inácio Lula da Silva. The pact calls for the sharing of ethanol research, the creation of a world ethanol standard to facilitate trade and the promotion of ethanol production in other countries. The visit also showcased another green-fuel front on which Brazil is a step ahead of the United States: biodiesel, which by law must be mixed with all diesel sold here at a concentration of 2% starting next year and at 5% possibly as early as 2010.

Brazil’s world-leading renewable-fuels program has potential downsides, one of which is that it could prompt significant expansion of the crop-farming frontier as demand for biofuel feedstock rises. Green groups worry this process might add significantly to farming pressure on the Brazilian cerrado, Latin America’s largest expanse of woodland savanna and home to an enormous range of plant and animal species. They point to ethanol-industry estimates that the extent of land devoted to sugarcane cultivation—13.6 million acres (5.5 million has) in the 2006-07 harvest season—will reach 20.5 million acres (8.3 million has) by the 2012-13 harvest, an area bigger than the state of Maine. Experts also cite the increased danger of spills of ethanol and of vinhoto, a liquid byproduct of ethanol production stored in reservoirs and then diluted and used to fertilize and irrigate sugarcane plantations.

Vinhoto spills—whether from reservoir overflows or distribution-line breaks—have contaminated rivers, occasionally causing large fish kills. Plínio de Sá Moreira, an environmental scientist and professor at Mato Grosso do Sul Federal University, points to a vinhoto spill in São Paulo state in 2003 that killed off the fish population along a 95-mile (153-km) stretch of the Rio Grande, one of the state’s major rivers. Because of concern that such damage might be done in the Pantanal, the world’s largest freshwater wetland system, the Mato Grosso do Sul state Assembly in Nov. 2005 rejected a bill that would have allowed the construction of ethanol plants in the area. (See “Wetland conservation trumps ethanol plan”—EcoAméricas, Dec. ’05.) Says Sá Moreira: “There have been a number of small vinhoto spills and a few large vinhoto accidents that have caused varying amounts of ecological damage. As ethanol production increases, so should the frequency of accidents, small and large.”

Thus far, however, such worries have taken a back seat in Brazil to the appeal of biofuels as a renewable, relatively climate-friendly alternative to oil-based fuels, which in recent years have shown unnerving price volatility. Particularly in the case of ethanol, Brazil has translated that appeal into a viable and growing alternative-fuels market. In the process, it has positioned itself to benefit from growth in the demand for ethanol products and services in the United States and other nations looking to reduce their dependency on oil. “As U.S. demand for ethanol grows, so will the U.S. demand for ethanol from Brazil, its biggest [foreign] supplier,” says Antonio de Pádua Rodrigues, technical director of Unica, the association of sugarcane producers in São Paulo state, the center of Brazil’s ethanol production. “How much and how quickly will depend on the extent to which U.S. ethanol production is unable to keep pace with U.S. demand.”

Brazil began spurring production of sugarcane-based ethanol amid the skyrocketing oil prices of the 1970s. Government tax incentives for ethanol producers and manufacturers of cars that ran on the fuel worked so well that by 1985, ethanol-powered automobiles accounted for 96% of the 650,000 cars made in Brazil. Sales of these cars plummeted in the 1990s after oil prices had eased and sugar prices spiked, causing ethanol shortages as cane processors focused on sugar production. But ethanol has regained its appeal due to the return of oil price and supply concerns and the development in Brazil of the flex-fuel car, which allows drivers to choose ethanol, gasoline or both. (See Q&A—this issue.)

Processors are responding. They made 4.2 billion gallons (15.9 billion liters) of ethanol from the 2005-06 sugarcane harvest, a 6.7% increase over the 2004-05 harvest’s yield, and they estimate the currently concluding 2006-07 harvest will produce 4.6 billion gallons (17.5 billion liters). Producers forecast that by the 2012-13 harvest, annual ethanol production will reach 9.43 billion gallons (35.7 billion liters)—more than double its current level. Automakers also are answering the call. Flex-fuel cars, introduced in 2003, already account for 11% of Brazil’s 23 million light vehicles (cars, vans and light trucks), and their share is expanding fast. Last year, 78% of the new cars sold in Brazil were flex-fuel models.

Brazil also has been making ethanol inroads abroad. Despite trade barriers erected at the behest of the U.S. farm lobby, its direct and indirect ethanol exports to the United States last year totaled 612 billion gallons (2.35 billion liters), accounting for nearly 70% of its worldwide ethanol exports and generating US$1.1 billion of its $1.6 billion in global ethanol-export income. Brazil produced 65% of world ethanol exports last year, shipping 898 million gallons (3.43 billion liters), or 31% more than in 2005. Processors estimate the country’s annual ethanol exports will more than double to reach 1.85 billion gallons (7 billion liters) by 2013. With such expansion in mind, the state oil giant Petrobras has joined Japan’s Mitsui trading company and a Brazilian construction firm to study the feasibility of an 800-mile (1,280-km) ethanol pipeline linking the interior state of Goias to coastal São Paulo state.

The United States imposes a 2.5% ad valorem tariff as well as a 54-cent-per-gallon duty on imported ethanol, yet Brazilian ethanol still competes with U.S. corn-based ethanol. That’s largely because sugarcane ethanol requires less land area, fertilizer and energy to produce. The resulting advantage in production costs helps explain why despite the U.S. tariffs, 83% of the Brazilian ethanol that entered the United States last year could be shipped in the form of direct exports, which are subject to the U.S. levies.

Some Brazilian ethanol entering the United States—17% of last year’s total—avoids U.S. tariffs because it has undergone final processing in Caribbean Basin nations, which under the Caribbean Basin Initiative (CBI) are allowed to sell limited amounts of ethanol in the U.S. market duty-free.These tariff-free CBI ethanol exports cannot exceed 7% of annual U.S. ethanol consumption. But if U.S. ethanol consumption grows strongly, Brazil might sell more ethanol through the indirect CBI route as well as in the form of direct exports.

“While the flex-fuel car is the biggest reason for the ethanol production boom [in Brazil], ethanol exports—mainly to the United States, directly or through CBI countries—are the second-biggest reason,” says Unica’s De Pádua Rodrigues. “And the growing demand for ethanol in the U.S. should guarantee it as Brazil’s biggest ethanol export market.”

Luiz Eduardo Andrade, ethanol division head of Coimex, one of Brazil’s largest ethanol exporters, agrees. Says Andrade: “Brazil is expected to supply much of the increasing demand for ethanol in the United States, which should grow considerably in the future, mainly because of high oil prices, growing consumer environmental concerns and ethanol replacing MBTE [the gasoline additive being phased out in the United States for environmental reasons].”

Brazil also sees export opportunities in Europe and Asia. Germany has made a mixture of 2% ethanol and 98% gasoline mandatory, while Spain, Italy and other European countries are using such mixtures on a voluntary basis, Andrade says. He adds that China and Thailand are expected this year to begin offering a blend of 5% ethanol and 95% gasoline, while Taiwan and Indonesia will follow in 2008 with a blend of 3% ethanol and 97% gasoline.

As Brazil has boosted ethanol production, international investors have bought a piece of the action. Last June, U.S. food giant Cargill Foods, a major soy processor and trader in Brazil, acquired a controlling, US$70 million stake in Cevasa, a Brazilian company with a plant devoted solely to ethanol production. Cargill—along with the Brazilian sugar trader Crystalsev and El Salvador’s local sugar company, Compañía Azucarera Salvadoreña—also has invested in a $13 million, 60-million-gallon-a-year ethanol processing plant that opened in El Salvador’s port city of Acajutla last September. The plant exports ethanol to the United States under the CBI trade agreement, which effectively allows Cargill to produce ethanol in Brazil, export it to El Salvador and, after putting it through final processing there, ship the resulting ethanol to the United States duty-free.

Brazil hopes not only to capitalize on ethanol, but on the means to produce it. The privately owned Brazilian Sugarcane Technology Center (CTC) in São Paulo has developed over 140 varieties of sugarcane seeds for different soil and climate conditions. It is also developing a biological process for producing ethanol from sugarcane waste, called bagasse, and leaves by treating them with fungus-based enzymes. Such a process could double the amount of ethanol produced from the same area of harvested sugarcane, according to Jaime Finguerut, the CTC’s research and development manager.

Worldwide interest

“Brazil’s government is discussing partnerships with other sugarcane-growing countries, especially African countries such as South Africa, Nigeria and Sudan, to find the most effective enzymes for breaking bagasse and leaves into ethanol,” Finguerut says. “If we can double the ethanol produced from the same area of sugarcane, we’ll not only make ethanol production more profitable, but we’ll reduce its environmental impact by reducing the fertilizer, water volumes and acreage used.”

Dedini S.A. Indústrias de Base, a producer of turnkey plants that make sugar and ethanol, has found what it bills as a more promising means of converting bagasse and sugarcane leaves into ethanol. The company says the method, under development with the CTC initially and now by Dedini alone, uses ethanol itself as a solvent to break down bagasse far faster than enzyme-based processes can—and with significantly lower input costs. “[This technology’s] ability to produce double the amount of ethanol from the same sugarcane acreage in a rapid and commercially viable way will make it a must-have technology for sugarcane producers in Brazil and abroad,” says José Olivério, Dedini’s vice president of operations.

Brazilian ethanol producers aren’t waiting for breakthroughs. Some 48 new plants for producing both sugar and ethanol are expected to be completed by 2009, with 16 of them set to start operating this year. Less definitive plans call for an additional 50 plants by 2012. Most new plants are sponsored by existing ethanol producers such as Usina Moema, one of Brazil’s biggest, which plans four plants new, two in São Paulo state and two in Minas Gerais state. “The reason for expanding is simple: to supply the flex-fuel market and the ethanol-export market,” says Maurílio Biagi Filho, Usina Moema’s president. “Even if one of these markets experiences a downturn, which we think highly unlikely, we’ve always got the other.”

Land-use worries

With sugar and ethanol production more lucrative now than ranching, cane growers are adding the acreage they need by expanding onto pastureland that once was virgin cerrado. Green advocates worry what will happen when the supply of pastureland is exhausted.

“There will be a point in the not-so-distant future where there will be a scarcity of pasturelands for planting sugarcane,” says Paulo Jorge Moraes de Figueiredo of the Brazilian Institute of Environmental Protection, a research center. “Since the virgin cerrado abuts this degraded pastureland, there will be greater pressure to plant sugarcane there, too.”

In an attempt to head off such problems, the Agriculture Ministry this month was slated to begin conducting soil and climate studies that will be used to do agronomic mapping and zoning of nine states. The goal is to determine where in those states, which are located mainly in the north-central, northeast and central-west regions of Brazil, sugarcane could flourish without threatening regional ecosystems.

Officials say the maps will guide not only sugarcane farmers, but also bankers in deciding where new sugarcane cultivation should be financed. The agronomic zoning, they say, is meant to encourage decentralization of sugarcane plantations, 60% of which are now found in São Paulo state, with most of the rest in Brazil’s northeastern region. The effort, they assert, is needed as much for socio-economic reasons as for environmental ones.

“The ministry wants to encourage sugarcane farmers to decentralize new expansions to economically develop and create jobs in other regions,” says Angelo Bressan Filho, director of the Brazilian Agricultural Ministry’s sugar and agro-energy department.

- Michael Kepp

Maurílio Biagi Filho
Usina Moema
Orindiúva, Brazil
Tel: +(55 16) 3512-5900
Ângelo Bressan
Agronomist, Conab
Sugar and Agro-energy Department
Brazilian Agriculture Ministry
Brasília, Brazil
Tel: +(55 61) 3312-6261
Fax: +(55 61) 3225-8920
Antonio de Pádua Rodrigues
Association of Sugarcane Producers in São Paulo state (Unica)
Tel: +(55 11) 3812-2100
Plínio de Sá Moreira
Environmental scientist and professor
Mato Grosso do Sul Federal University
Campo Grande, Brazil
Luis Eduardo Andrade
Ethanol Division
São Paulo, Brazil
Tel: +(55 11) 3178-1901
Jaime Finguerut
Sugarcane Technology Center (CTC)
Piracicaba, Brazil
Tel: +(55 19) 3429-8147
Paulo Jorge Moraes de Figueiredo
Brazilian Institute of Environmental Protection
Piracicaba, Brazil
José Olivério
Vice President of Operations
Dedini S.A. Indústrias de Base
Piracicaba, Brazil
Tel: +(55 19) 3403-3007