AFTER IPO, COSAN, BRAZIL’S ETHANOL GIANT, RELEASES NUMBERS FOR 2006

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Last Friday (July 28th, 2006), the COSAN group, the largest sugar and ethanol company in the world, released its numbers for the 2005-06 production cycle, which ended in April 2006.

According to the company, the season was marked by a 30% increase in the company’s milling capacity, effected through the purchase of the Corona (Tamoio and Bonfim), Mundial, and Bom Retiro plants, and by the full incorporation of the capital of FBA (Franco-Brasileira de Acucar).

The company also highlights its entry in the business of renewable co-generation, marked by its participation in the “New Energy” (“Energia Nova”) auction of Brazil’s Ministry of Energy, and by US$ 403 million raised in its IPO, in addition to US$ 450 million brought in by the issuance of perpetual bonds.

According to the performance analysis issued by COSAN, the group closed the fourth quarter of the 2006 business year (February to April 2006) with net earnings of R$ 747 million (approximately US$ 340 million), 61% greater than earnings for the same quarter the previous year. The number raised the company’s net earnings for the entire year ending in 2006 to R$ 2.48 billion (approximately US$ 1.13 billion), a gain of 30% compared to the previous year.

EBIDTA also presented a significant gain in the last quarter, reaching R$ 168 million (approximately US$ 76.4 million), a 125% jump compared to the same period in the previous year.

The 2006 business year presented an EBIDTA of R$ 517.7 million (approximately US$ 253 million), 52% above what had been recorded for the previous cycle. The results reflected positively the international environment’s sentiment toward prices and the company’s growth strategy regarding volume.

Sales of sugar during the period reached 2.47 million tons, a 6% growth when compared to the 2005 business cycle. In the fourth quarter, sales of sugar reached 623 million tons, a growth of 12% in relation to the same period in the previous year. The volume sold in the last quarter includes sugar inventories purchased along with the Mundial and Corona plants, as well as part of the production of the month of April, as the harvest was brought in earlier than expected.

During the entire 2006 business year, 83% of the sugar sold was exported, and 17% was sold on the Brazilian market. The average price of R$ 764 / ton for sugar (~ US$ 347.27 / ton), above the mark of R$ 559 / ton (~US$ 254.1 / ton) recorded in the fourth semester of the previous year, reflects the large increment seen after the third semester of the year, yielding a small impact on the average price for the 2006 business year (R$ 603 / ton, or ~US$ 274.1 / ton).

Ethanol sales in business year 2006 totaled 1.02 billion liters, an expansion of 23% when compared to sales in the previous year. During the fourth quarter, ethanol sales totaled 240 million liters, an increase of 48% in relation to the same period in 2005. As was the case with sugar, inventories from Mundial and Corona were also included, as well as part of the production for April, due to the earlier-than-expected harvest.

The full consolidation of FBA also contributed to the significant increment in the volume of ethanol in 2006. This fact, however, did not impact sugar sales, as they had already been firmed by COSAN in previous years. During the entire business year of 2006, ethanol sales on the Brazilian market grew 29%, while exports were reduced 23% in order to improve supply to the domestic market. While the average price in the last quarter was R$ 1.02 / liter of ethanol (~US$ 0.46), the average price for the entire year was R$ 0.84 / liter (~US$ 0.38).

With the extraordinary results in the sales of sugar and ethanol, gross profits of R$ 240 million (~US$ 109 million) recorded in the fourth quarter (a 55% growth in relation to the same period in the previous year) were essential for COSAN to reach a total gross profit of R$ 757 million (~US$ 344.1 million) in the 2006 business year, a 35% increment over the gross profit for 2005.

The absence of net profit in the fourth semester led net losses in the year to R$ 65 million (~US$ 29.5 million) – net profit for 2005 had come in at R$ 17 million (~US$ 7.73). This number was heavily impacted by the extraordinary expenses associated with the company’s IPO (R$ 53 million, or ~US$ 24.1 million).

In addition to these non-recurring expenses, the unfavorable end result was compounded by the 6% increase obtained by sugar cane suppliers, with a retroactive effect on the entire harvest; administrative expenses in duplicity brought on by the acquisition of the Corona group; and the effects of the loss of a R$ 209 million (~US$ 95 million) hedge with the fixing of commercial prices in face of the sudden spike in the price of sugar.

Other items have been included in the composition of the final result, such as amortization expenses, with no impact on cash effect, of interest totaling R$ 143 million (~US$ 65 million) in the acquisitions that were carried out, as well as R$ 140 million (~US$ 63.64 million) in depreciation.

Investments carried out by the company during the 2006 business year totaled R$ 745 million (~US$ 338.64 million), significantly above the R$ 310 million (~US$ 140.9 million) for the previous year.

Total acquisitions reached R$ 536 million (~US$ 243.64, including the Mundial, Bom Retiro, and Corona – Tamoio and Bonfim – plants), and were the main factor behind this increase.

Another highlight was the sum of R$ 135 million (~US$ 61.36 million) allocated to sugar cane plantations, both for harvesting operations and for the acquisition of mature crops, in an effort to reduce the poor conditions of cane fields purchased along with previous acquisitions.

The rest of the investments, directed mainly toward the construction of warehouses at port terminals and plants to improve the management of stocks and minimize logistics expenses, totaled R$ 74 million (~US$ 33.64 million), the same levels seen in previous years.

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DUPONT’S RANGER® COMPLETES SUGAR CANE LINE

DuPont’s Agriculture and Nutrition Division has announced that it is about to launch Ranger®, a herbicide that complements the company’s line of products for the sugar and ethanol industry and is aimed exclusively at crops of sugar cane of the “soca” variety.

DuPont’s portfolio of defensive chemicals for use in sugar cane plantations, such as Velpar® K and Advance® herbicides and Curavial® and ZAZ® maturing agents, is now complete with the introduction of Ranger®.

According to agronomist Marcio Farah, marketing manager for DuPont for the sugar cane segment, the new herbicide was tested by the company over the past two years, and proved to be quite successful. According to Mr. Farah, it is a herbicide for use in pre-emergencies, recommended for the control of wide-leafed weeds.

“In addition to an excellent control spectrum, Ranger® is a new alternative, one that presents the best cost-benefit ratio in its segment”, says Mr. Farah.

Among the main benefits of the new herbicide, Mr. Farah points to the broad residual effect, the practicality, and the easy, safe use, in addition to the usage doses, which vary between 1.8 kg and 2.5 kg per hectare, “according to the type of soil, level of infestation, and weed that has to be brought under control”, notes the executive.

Mr. Farah also points out that Ranger® acts as an inhibitor of chlorophyll and photosynthesis; it is also selective as to sugar cane and presents a residual effect that may last up to 120 days, a fact which also reduces the so-called “picking” in sugar cane plantations.

The new herbicide will be sold in a wetting powder version, in hidrosoluble packages of 500 grams, inside aluminum-coated bags of 5 kg. The bags will be nested in shipping packages that weigh up to 15 kg.

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BRAZIL’S STATE-OWNED PETROBRAS HITS THE BIODIESEL MARKET

DINHEIRO RURAL MAGAZINE
By Fabio Stefano

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It’s like a shock between tectonic plates. This earthquake – a producer of good vibes – is being wrought by Petrobras and may very well revolutionize Brazilian agribusiness. After all, when the largest Brazilian corporation, with revenues of R$ 136 billion (approximately US$ 62 billion), moves in a certain direction, the effects can be felt miles away.

That is what is happening right now in a strategic area. On the one side, Petrobras has just presented H-Bio to the world. The process, invented by company engineers, produces diesel based on a mixture of oil and vegetable oil, made from several feedstocks, especially soy. The technology implies adding, in theory, up to 18% of the green product to the fossil material, to obtain a product that is identical to the one being sold today.

On the other side, BR Distribuidora (Petrobras’ distribution unit – H.O.), a subsidiary of Petrobras, has started selling biodiesel (a separate product) in 700 stations. It is a mixture that adds 2% vegetable oil to conventional diesel.

“We have taken a decisive step to create a new kind of economy around the world”, José Sérgio Gabrielli, the president of Petrobras, told “Dinheiro Rural”. “Soon, selling biodiesel will be a routine activity, just like selling gasoline or ethanol”, adds Graca Foster, president of BR Distribuidora. Ale Combustiveis (“Ale Fuels”), another Brazilian company, is a pioneer in this market. It already sells the product in 168 stations.

To get an idea of the impact caused by Petrobras’ entry in the agribusiness market, look no further than what happened in Araucaria, in Parana state (southern Brazil), at the end of June. To wrap up H-Bio tests at Petrobras’ own Getulio Vargas Refinery (Repar), 1.8 million liters of soy oil were used – an amount sufficient for only four days' production.

Initial production with the H-Bio technique, which will be carried out in only three company refineries, will demand 256 thousand cubic meters per year. This amount represents 10% of soy oil exports from Brazil this year.

On the other hand, using the vegetable-based product allows Petrobras to save 15% in diesel imports, generating US$ 145 million in savings a year. “The H-Bio technology, which complements the biodiesel technology, allows Brazil to move on further down the road of energy independence”, says Gabrielli.

(With a tip of the hat to Caio Heleno - H.O.)

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JAPANESE INVESTORS VISIT BRAZILIAN BIOFUELS CENTER

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July 26^th, 2006

The head of the Brazilian National Biofuels Units, Weber Amaral, will act today as host to a delegation of Japanese investors and researchers, who have traveled to the country on an information-gathering expedition.

The meeting will take place at the Escola Superior de Agricultura Luiz de Queiroz (School for Higher Studies in Agriculture) of the University of São Paulo (USP). Participants include Yasushi Ninomiya, director of the Research Department of Japan’s External Trade Organization (Jetro). Jetro is the Japanese governmental agency in charge of trade and foreign investment – and researcher Saori Miyake, from Tokyo's Advanced Studies Research Organization (Gendai), a private sector organization with ties to the automotive industry.

FROM US TO CHINA, BRAZIL’S COSAN FIRMS ALLIANCES

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Brazil’s COSAN, the country’s largest individual producer of ethanol, has been establishing partnerships with companies from different parts of the globe. In 1999, it established a partnership with Britain’s Tate & Lyle, to whom it sold 10% of its port terminal. In 2002, it allied itself with France’s Tereos and Sucden, and established FBA (Franco-Brasileira de Acucar e Alcool SA – French-Brazilian Sugar and Alcohol Inc.)

In 2005, the group sought partners outside of Europe and firmed a relationship with China’s Kuok, one the globe’s most dynamic and diversified conglomerates. In 2006, COSAN closed a deal with Teas to set up a port specifically designed for shipping ethanol (Terminal de Exportacao de Alcool Santos – Santos Alcohol Shipping Terminal), in tandem with America's Cargill, the Nova America Group, and Crystalsev.

According to COSAN, the new partnerships add resources and technology, and consolidate the group’s role of world-class player in the ethanol market.

Hear it from the horse's mouth - follow what's happening in the Brazilian ethanol market on Ethablog, the only blog in English dedicated to Brazilian ethanol.

ARE SHELL, EXXON-MOBIL, AND TEXACO ALREADY DISTRIBUTING ETHANOL ON A WIDE-SCALE BASIS?

by Henrique Oliveira

Many of the major oil companies have been distributing and marketing E100 and E20 (and only E100 and E20, with the exception of diesel for trucks) since 1975 in Brazil.

The list of major ethanol distributors includes:

• Shell Brasil Ltda.
  
• Esso Brasileira de Petróleo Ltda.
  
• Texaco Brasil S.A.
  
• Petrobras Distribuidora Produtos de Petróleo S.A.
  
• Companhia Brasileira de Petróleo Ipiranga
  
• Flag Distribuidora de Petróleo Ltda
  
• Petronova Distribuidores de Petróleo Ltda

These companies make their money not only by selling E20 and E100 (the only kinds of automotive fuel in Brazil), but also by marketing the many other operations and products that surround the sale of fuels: lubricants, convenience stores, financial products, etc. (pictures below)

BRAZILIAN EQUIPMENT GIANT SELLS WORLD’S FIRST INTEGRATED BIODIESEL / ETHANOL / SUGAR PLANT

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Disclaimer: Ethablog is not affiliated in any way with any of the companies mentioned in the following paragraphs. H.O.

Dedini, the world’s largest manufacturer of equipment for ethanol and sugar refining, closed a groundbreaking deal with Usina Barralcool, a traditional producer in Brazil, a company spokesperson announced on Thursday. The new plant will be capable of using both the ethylic and the methylic routes to produce biodiesel. It is the first biodiesel unit in the world to operate integrated into a plant.

Barralcool expects to invest R$ 25 million (approximately US$ 11.4 million), with operations scheduled to begin in July ’06.

• Client: Usina Barralcool S/A
• Location: Barra do Bugres, state of Mato Grosso
  
• Capacity: 50,000 tons/year (57 million liters/year)
• Materials: vegetable oils and ethanol or methanol
  
• Process routes: ethylic or methylic
  
• Product: biodiesel as defined in ANP Law 11.097/05 or EN 14.214 or ASTM 6751-03
  
• Subproduct: glycerin with minimum 80% purity
  
• Opening date: July 2006

When the ethylic route is in use (i.e., when bioethanol is being used), the resulting biodiesel will be “100% ecological", as it will have used exclusively plant-derived products that come from renewable sources. This holds even for the energy that powers the process, during which bagasse (crushed sugar cane) is burned.

As the biodiesel plant will be installed adjacent to the bioethanol and sugar refineries, certain synergies begin to develop – part of the sugar cane juice (“garapa”) and all other raw materials will come from inside the plant itself. This kind of plant, incidentally, has lower operating costs than a stand-alone unit. Furthermore, Barralcool will grow its own soy beans, which will be cultivated while the sugar cane fields are being renewed. This will contribute to a reduction in the price of the oil to be processed; bioethanol produced on site will fuel the process. All of this adds up to lower costs for biodiesel.

Another of the project's highlights is the social benefits that accrue: most of the material – oil-producing grain – is bought from small family-run farms in the region, thanks to an agreement signed with the Ministry for Farm Development. This confers upon Barralcool the distinction of receiving the Brazilian government’s “Social Stamp” (“Selo Social”).

The concept of an integrated unit, where biodiesel benefits from the synergies of a next-door ethanol and sugar plant, was first presented to the market in 2004. Later it was developed and presented again during SIMTEC 2005, in the city of Piracicaba, interior of Sao Paulo state.

Dedini believes that any plant that currently processes sugar and ethanol or biodiesel have a lot to gain from integration.

For more information, call:

• Dedini – José Luiz Olivério – (19) 3403-3006
• Barrálcool – João Petroni or Silvio Rangel – (65) 3311-1800
  

Hear it from the horse's mouth - follow what's happening in the Brazilian ethanol market on Ethablog, the only blog in English dedicated to Brazilian ethanol.

VENEZUELA’S PDVSA BECOMES WORLD’S FIRST OIL COMPANY TO ACQUIRE 100% STAKE IN ETHANOL DISTILLERY

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Brazil’s Dedini, the largest manufacturer of sugar and ethanol-refining equipment in the world, sold an entire ethanol-producing plant to Venezuela’s PDVSA. The unit will refine molasses to produce the fuel.

Dedini negotiated the terms of the sale for all the different areas inside the plant, including fermentation, distillation, dehydration with a molecular sieve, and vinyasse concentration.

The new plant will be built in Tocuyo, with an annual production capacity of approximately 8.5 million liters.

This is the first time a plant specifically designed for producing ethanol is sold to an oil company, and PDVSA will become the first oil company to own 100% of an ethanol plant’s equity. PDVSA will use it to produce its own bioethanol. The ethanol to be produced will be mixed with gasoline, effectively kicking off Venezuela’s biofuels program.

Hear it from the horse's mouth - follow what's happening in the Brazilian ethanol market on Ethablog, the only blog in English dedicated to Brazilian ethanol.

TRANSITIONING TO ETHANOL - IN 1975

• This ad is an early piece used in Brazil in the critical days after the Brazilian government established the “Pro-Álcool” (“Pro-Alcohol”) program in 1975, designed to reduce the country’s dependence on foreign funds and oil.
  
  Its main goal was to convince consumers to try out the new fuel – not an easy task, given that doing so would require purchasing a car with an engine especially designed for ethanol combustion.

So let us examine the situation in the Brazilian automotive market when that country’s government decided that national security concerns warranted the creation of a sizable ethanol-powered fleet:

1. A much smaller number of cars and light trucks meant that economies of scale would be less significant and harder to come by than will be the case when a similar transition occurs in the U.S.;
2. Lower per-capita income signified that purchasing any kind of car – a major investment in Brazil, even for the middle class – was a considerable barrier to participation in the new ethanol market;
3. Brazil’s vast geographic expanse made nationwide distribution – a critical element to the new fuel’s acceptance – a daunting task, a problem compounded by the absence or inadequacy of the country’s infrastructure.

Nevertheless, the Brazilian initiative succeeded in firmly establishing ethanol as an alternative to gasoline.

If a developing nation was able to pull off such a feat, what, but political considerations, keeps the U.S. from doing so as well?

When ethanol becomes a widely utilized, viable substitute for or complement to gasoline in the United States, the economies of scale that will be achieved will be substantial, signifying that the current ethanol prices in the few fueling stations around the country that sell it – already lower than the price of gas – could drop even more.

Americans’ higher purchasing power will significantly decrease the barriers to entry in the new market, vis-à-vis the Brazilian experience.

And the United States’ superior infrastructure will allow ethanol to be more easily – and more cheaply – distributed throughout the country. A modern railway system, in particular, is a factor that will greatly benefit the distribution system – unlike in Brazil, where the railway grid is limited and trucks are used to transport most of the cargo, even over very long distances.

In short, the U.S. should look at Brazil and see it as a 31-year “trial market”. In this sense, Brazil, an industrialized country comparable in size to the United States, is a window into the future that America would do well to examine more closely.

Hindsight, after all, is 20-20.

Hear it from the horse's mouth - follow what's happening in the Brazilian ethanol market on Ethablog, the only blog in English dedicated to Brazilian ethanol.

ENVIRONMENTAL IMPACTS OF BRAZILIAN MONOCULTURES ON THE AMAZON REGION

by Henrique Oliveira

One of the reasons green advocates like the idea of using ethanol in lieu of fossil fuels is that burning ethanol produces far less greenhouse gases. However, many are already examining the possible environmental impacts that an expanded sugar cane monoculture in Brazil, essential to the development of a sizable market in industrialized nations, will entail.

They specifically fear that pristine lands in Brazil's Cerrado (grasslands) and Amazon basin, today covered largely by forests and native bush, will be cleared to make room for new plantations. Some advocates of expanding Brazil's planted area say that such fears are unwarranted - expanded monocultures will simply optimize the use of land that today yields less than what modern farming methods, and associated elevated productivity, could produce.

A study by Brazil's Applied Economics Research Institute (IPEA), released in January 2005, used soy - Brazil's largest crop after corn - to assess environmental effects. The study pointed out that the northward expansion (i.e., into the Amazon region) in the amount of land occupied by soy monoculture - a 13.5% increase between 2001 and 2004 - occurred on previously degraded areas or pastures. In other words, it simply used land that had already been cleared, in many cases several decades before.

The study, however, was harshly criticized by environmentalists in Brazil and abroad. It is true that soy now occupies much of the land that was used for grazing - but the study fails to acknowledge that cattle raisers, deprived of cheap land due to rising costs brought on by increased competition from soy, were themselves clearing forest lands to use as pastures.

Daniel Cohenca, who works for the Brazilian government's environmental conservation agency (IBAMA) decided to study the issue in depth. He wrote a monograph, presented at one of Brazil's leading universities in agricultural research, in which he presented several interesting conclusions. Using satellite images of northern Brazil, where the bulk of the Amazon forest is located, he calculated that over 80,000 hectares of forest had been cleared between 1999 and 2004 - almost all of it illegally.

When he correlated the areas with the reason for which they were cleared, he confirmed that soy was, indeed, responsible for a substantial part of the damage. In 1999-2000, only three cleared patches were converted to mechanized agricultural production. Over the following two years, however, the ratio began to change. In late 2004, only one of the ten largest clearings in the forest was marked for cattle - all the other nine were used for monocultures.

Bottom line: any foreign corporation seeking to expand Brazil's monocultures, whether sugar cane, soy, or corn, should consider environmental impacts well beyond the immediate areas they occupy - or face an outcry from stakeholders, in Brazil and abroad, who are increasingly environmentally conscious.

Hear it from the horse's mouth - follow what's happening in the Brazilian ethanol market on Ethablog, the only blog in English dedicated to Brazilian ethanol.

INTERNATIONAL CONFERENCE IN BRAZIL TO DISCUSS ETHANOL R&D

The hydrolysis of bagasse (crushed sugar cane) to produce ethanol; new Brazilian bio-safety laws and their possible impact on sugar cane bio-technology; and the plans of Embrapa (the Brazilian Federal government’s institute for agricultural research) to develop genetically-modified sugar cane are some of the issues which will be discussed in a series of technical panels at the Brazilian Sugar and Ethanol Industry’s International Technology Symposium and Fair (Simtec).

The event will take place in the city of Piracicaba, in the interior of Sao Paulo state, from 18 to 21 July, 2006. The event, in addition to discussing themes related to research, as well as to agricultural and industrial production, will showcase the latest Brazilian breakthroughs and innovations in the sugar and ethanol business.

Contact: email simtec@simtec.com.br or visit www.simtec.com.br

My comments on the news item above: while foreign companies are spending hundreds of millions of dollars on R&D in other countries, they should also seize opportunities such as the Simtec conference and fair to get to know what Brazilian researchers and corporations are doing. After all, these individuals and organizations carry 30+ years of experience under their belts – a competitive advantage that even the most generous budgets for research and development in other countries cannot match. H.O.

Hear it from the horse's mouth - follow what's happening in the Brazilian ethanol market on Ethablog, the only blog in English dedicated to Brazilian ethanol.