The bioethanol global market crisis will create a strong price increase of the product for the next year and maybe more. This is due to a number of factors affecting the two main world producers: Brazil and the United States. This situation, however, offers a number of opportunities for ethanol projects in Europe, as we’ll show below.
In Brazil, the last three sugarcane crops were close to catastrophic. This year for example, excessive rains in April generated a one-month delay in the start of the harvest period, as the crop cannot be harvested on wet ground since the harvesting machines tend to root it out. That meant a 41% decrease in the amount of cane harvested, the end result being more than fourteen ethanol plants shutting down and several foreign companies selling their facilities. Among these we find the Spanish Abengoa and French Total: the first sold two of its three ethanol plants and the second is selling 53% of its shares of another located in the state of Minas Gerais.
The problem is worsened by the strong international capital inflow in Brazil which allowed a large number of people to finally purchase a car. This led to a considerable increase in fuel use which could not be matched by the local ethanol production (in Brazil almost all cars are flex: this mean they operate with ethanol and gasoline) due to the aforementioned production problems. This created a rather odd situation where Brazil was being forced to import ethanol from the US to cover for its short term needs, but even that did not solve the problem.
This meant that the Brazilian oil company Petrobras was forced to import gasoline again, something I had stopped doing back in 2010 when ethanol use in Brazil actually became larger than gasoline. To make things worse, Dilma Rousseff’s government demanded that gasoline to be sold at subsidized prices in order to prevent inflation. The end effect was that the oil company showed the world's second worst result for the second quarter of 2012 and that the local ethanol market sank even further due to the public's preference for ethanol compared to gasoline due to the latter offering higher mileage (ethanol has 76% of the power of gasoline) and the fact Brazil does not allow diesel cars.
In America, the problem is a little different. The country is facing a disastrous corn harvest due to the worst drought since 1956, and its production is expected to fall by over 15%: the worst for the last seventeen years. To make matters worse, corn is edible and thus suffers from a strong “food x fuel” agenda. And never mind that the varieties used for fuel are not really edible: all of its opponents claim that using corn as fuel will create world famine. Moreover, if we consider that 4 in 10 bushels of corn produced in the US end up as ethanol and that the Renewable Fuels Standard requires 13.2 billion gallons of ethanol to be added to gasoline this year, we will see that, unless the country starts to imports it, it simply won’t have it.
Europe has a unique opportunity to produce ethanol for these two markets, which are the largest consumers in the world. In the specific case of Brazil, the import rate of 20% for ethanol ceased to exist a few years ago, and in the case of the US, the so called VEETC (Volumetric Ethanol Excise Tax Credit) which created a import tariff of 54 cents per gallon also was cancelled last year. This means that there is a market basically free of import taxes of a product which is unable to obtain internally at the required amounts.
So, if there is a right moment to pull from that drawer that old ethanol project, this is it, as both the US and Brazil are unable to generate enough feedstock for their ethanol needs due to environmental reasons in the US and underproduction in Brazil. Many times we heard that the biofuel market in Europe is very limited due to several unsuccessful attempts to implement it (like Germany with the E10), and therefore we have seen little investor interest for cellulosic ethanol or first generation ethanol projects. Well, that problem is partially solved: the U.S. government acknowledges that it will take around five years for its corn production to return to normal, and at least until the Olympics you can be certain Brazilians will continue to purchase cars at abnormal high levels, thus keeping the pressure on its already battered ethanol production.
Both Brazil and the US are countries in which ethanol is already a reality and therefore can hardly live without it, especially in the case of Brazil, where all the pumps carry E100 and everyone mixes it regularly with gasoline. So, regardless on the size of the ethanol market in Europe, those 2 ethanol superpowers markets are there for the taking, so if Europe does not take the lead, others such as India, Australia, etc will. Now is the time.
By. Al Costa