ETHABLOG INTERVIEWS LEADING BRAZILIAN BIOFUELS CONSULTANT

Marcelo Coelho is one of Brazil’s leading consultants in the sugar and ethanol industry.

Operating out of Ribeirao Preto, Brazil’s main producing region, Mr. Coelho has witnessed, firsthand, the boom in the sector. He has advised many of the delegations and foreign investors that have visited Brazil in recent months. He can be reached by clicking here.

Ethablog: You chose to leave a successful law practice in the city of Sao Paulo and set up shop in Ribeirao Preto, in the interior of the state. What led you to that decision?

Marcelo Coelho: The Ribeirao Preto region is the “agribusiness capital” of Brazil. It has the highest concentration of sugar and ethanol refineries, the largest production cooperatives, such as Cosan and Crystalsev, industrial-equipment manufacturers, which produce mills, cauldrons, and other heavy pieces of equipment. The Ribeirao Preto area is also home to several important services firms and universities that carry a lot of weight in the sector, such as ESALQ (Escola Superior de Agricultura Luis de Queiroz). And, finally, the biggest fairs in the sugar and ethanol industry in Brazil are held here, such as “Fenasucro” and “Agrishow”. This all makes establishing an extensive network and conducting business significantly more profitable.

Ethablog: What are the main differences between the sugar and ethanol business in Brazil today and that of ten years ago?

MC: I would say that scale and applied technology are the main differences. Planted area has more than doubled, due to internal demand, which surged because of Brazil’s adoption of flex-fuel cars. With growing foreign interest in adding ethanol to the energy matrix of other countries, sugarcane planted area grew exponentially. As to technology, we have adopted new varieties of sugarcane, developed by local universities. Sugarcane, as you often point out on Ethablog, yields a lot more energy than corn, and the new varieties are even more productive. They newest ones have been specially tailored to specific kinds of soil. Another fundamental difference is that the planting and harvesting processes have become much more mechanized, while plant and farm managers have developed better managerial skills.

Ethablog: What does the foreign investor coming to Brazil typically look like? What is he looking for? Greenfields, equipment, smaller companies, inventory?

MC: That is a very good question. Americans generally want to acquire units that are already operational, here in Brazil. They then seek to expand in a continuous and sustainable manner, in order to ship ethanol to the U.S.

Countries like China and India are intent on acquiring technology to use in their own countries. We also see Indonesia starting to head that way.

The Germans, on their turn, who are one of the leaders in biofuels technology and have solid public policies geared toward reducing dependence on foreign fossil fuel, have strengthened their ties with Brazil, in order to firm agreements that will address gaps in the energy matrixes of both countries.

Investors from other parts of the world are mostly interested in studying how Brazil transformed ethanol into a viable fuel, and how we have been using it in a commercially-feasible manner for over thirty years.

It is important to point out that the most conscientious investors come from Europe, who attach a lot more importance to the climate crisis and to the unstable nature of oil-producing regions.

Ethablog: Do you see any strong correlation between the price of oil and the price of ethanol?

MC: In Brazil, the price of ethanol is still adjusted by supply and demand, both for the domestic and the foreign market. Factors that might shift the supply and demand curves one way or the other include domestic income, Brazil’s population growth, the use of substitutes, the exchange rate, foreign income, weather conditions, and production costs.

Ethablog: Are there any assets on the local market that are often overlooked by foreign investors, but that could be of interest?

MC: We find investors to be willing to acquire only production units that are completely balanced, both tax-wise and financially. However, those that have significant tax and financial liabilities are often overlooked. I believe these companies represent the greatest opportunities for investment. Debts are negotiable – in many cases, they can be significantly reduced. Because of these debts, the amount to be paid is a fraction of what is normally charged on the market, and the terms surrounding the deal are much more attractive. After the liabilities are taken care of, and through the adoption of professional management, mindful of market conditions, the units pay off very quickly.

There is also the opportunity to acquire vast amounts of straw and bagasse (crushed sugarcane). These sugarcane byproducts allow for the production of synthetic fuels. Using gasification, we can produce carbon monoxide and hydrogen. It is important to point out that any biomass that contains carbon can be used for this process.

In Brazil, these byproducts are piled outside a plant, or sold at low prices to be burned, or used to cover the soil. All in all, a worthwhile investment.

Follow what's happening in the Brazilian ethanol market on Ethablog, the only blog in English dedicated to Brazilian ethanol.

TRACING ETHANOL-POWERED ENGINES IN BRAZIL TO THE 1950’S

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The greatest experiment in the world in the commercial exploration of biomass as a source of energy has taken place in Brazil. The Brazilian National Alcohol Program (ProAlcool – previous post), which has promoted the use of ethanol fuel made from sugarcane, is at the center of this experiment.

Brazilian experience has shown that it is possible to implement a large-scale alternative energy policy in a very short period of time. Ten years after the program’s inception in 1975, sales of ethanol-powered vehicles reached their peak. At the height of the program, between 1986 and 1989, over 90% of the automobiles produced by GM, Ford, Volkswagen, and FIAT in Brazil were powered by ethanol.

ITA (Instituto Tecnologico da Aeronautica, the Brazilian Air Force Technological Institute), was a pioneer center in the development of ethanol engines. Colonel Urbano Ernesto Stumpf, an engineer and professor, was at the forefront of the effort to develop the engine, a feat accomplished in 1953. The first steps towards industrialization were taken by Prof. Stumpf, who began his tests with the car fleet belonging to TELESP (Telecomunicacoes de Sao Paulo), the government-owned telecom carrier of the state of Sao Paulo. In the 1970s, the ethanol engine was introduced to the entire country.

Continued research on alternative engines and fuels led the Engine Division of the Institute for Research and Development (IPD) of the Brazilian Technical Air and Space Center (CTA) to also develop the first bus engine powered by natural gas.

Prof. Ernesto Stumpf was born in Rio Grande do Sul, Brazil’s southernmost state. He is considered the father of Brazilian ethanol, as he was head of the Engine Research Lab of the CTA, in the city of Sao Jose dos Campos, in the state of Sao Paulo. He began his career as a sergeant at the Specialists’ School of the Brazilian Air Force, in the field of Engine Mechanics. After several years of study, he became an Aeronautical Engineer at ITA, where he lectured for twenty years.

His interest in ethanol dates back to 1951, when he earned his degree. At the time, a project was required for graduation, and he worked on an ethanol-powered engine toward that end.

His company, called PENTRA, was charged in 1974 with developing ethanol engines, which met with immediate success. His pioneering attitude in a wide range of fields, from the introduction of ethanol as automotive fuel to the production of the first engine powered by vegetable oil, won him several awards.

Prof. Stumpf received a posthumous tribute in 2004, when Law # 10,968 was passed, changing the name of the airport of the city of Sao Jose dos Campos to “Sao Jose dos Campos Prof. Urbano Ernest Stumpf Airport”.

In the 1980s, several patents for an ethanol-powered vehicle were registered by the CTA, with Prof. Stumpf as the inventor. Patent PI 8106855 shows a carburetor specifically designed for ethanol. The invention describes a carburetor with a variable-area Venturi, designed to run on combustible ethanol. Traditional carburetors for gasoline-powered engines, when adapted for use with ethanol, presented deficiencies in the pulverization of ethanol and uneven distribution of the air-ethanol mix, in addition to problems involving the corrosion of the materials used.

Because traditional carburetors are made of zinc and tin, ethanol becomes a perfect electrolyte, because it contains water and conducts electricity. Attempts to line the inner surfaces with anti-corrosives or plastics did not work. Variable Venturi carburetors, in which the Venturi simultaneously executes power modulation, had been rarely used up to then because of problems with sealing. The invention proposed by Prof. Stumpf in this patent consists in the substitution of the metal body of conventional carburetors for a body made of plastic, with no canals or screws. A piston (12), which moves inside a cylinder (13) balances out the axial forces, due to differences in pressure, which acts on the fuse (9). This difference is balanced through a tubular stem (10). The pulverization orifices are found in a ring canal in the periphery of the strangled section of the Venturi.

(to be continued)

Sources:

http://www.uol.com.br/bestcars/ct-combu.htm
http://www.uol.com.br/bestcars/ct/alcool.htm
http://geocities.yahoo.com.br/prcoliveira2000/motoresaexplosao.html
http://elogica.br.inter.net/ladislau/fontes.htm
http://elogica.br.inter.net/ladislau/biomassa.htm
http://www.ecomm.com.br/carosamigos/outras_edicoes/grandes_entrev/bautista.asp
http://www.mast.br/videos/tecnologia.htm
http://www.sbpe.org.br/v1n1/v1n1a2.htm
http://www.rits.org.br/pbsd
http://luciano.stanford.edu/~franca/ita/pub/ita.html
http://www.aondevamos.eng.br/boletins/edicao07.htm
http://www.udop.com.br/tecnologia/materias/tec_10_09_01.htm
http://www.udop.com.br/tecnologia/materias/tec_16_08_01.htm
https://www.planalto.gov.br/ccivil_03/_Ato2004-2006/2004/Lei/L10.968.htm

Cronologia do Desenvolvimento Científico e Tecnológico Brasileiro, 1950-2000 (“Chronology of Brazilian Scientific and Technological Development”), MDIC, Brasília, 2002, pages 83, 91, 93, 95
Crônicas de Sucesso, Ciência e Tecnologia no Brasil (“Tales of Success, Science, and Technolgy in Brazil”), Ed. Ciência Hoje, page 31

Special thanks to the inventor’s son, Ricardo Dantas Stumpf (stumpf@solar.com.br), who, in December 2004, contributed to this report.

Follow what's happening in the Brazilian ethanol market on Ethablog, the only blog in English dedicated to Brazilian ethanol.

PETROBRAS, BRAZILIAN STATE-OWNED OIL COMPANY, CONSIDERING ENTERING ETHANOL BUSINESS

"O Globo Online"
Via Ethanol Brasil
January 17, 2007

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Petrobras, Brazil’s state-owned oil company, has been considering the possibility of producing fuel-grade ethanol from sugarcane to meet growing demand, said a company executive on Wednesday, January 17, 2007.

Petrobras already operates in the transportation and distribution of ethanol (previous post) both in Brazil and abroad.

“The company Board still hasn’t made a formal decision… We are still studying the possibility”, Mr. Nilo Carvalho Vieira Filho, the company’s Executive Manager for Marketing and Business, said at the Reuters Global Biofuel Summit.

Speaking from company headquarters in Rio de Janeiro, Mr. Carvalho said Petrobras seeks to take advantage of the growing international demand for alternative sources of energy.

He said that, since the Oil Crises of the 1970s and 80s, Petrobras has been involved in the development of ethanol as fuel, initially serving only the Brazilian market.

“Brazil has a favorable climate, as well as the necessary technology and the lowest costs of production”, he said. “We are looking for new clients, opening up global frontiers”.

Mr. Carvalho said that Japan Ethanol Trading, a 50-50 joint venture between Petrobras and a Japanese state-owned trading company, is developing the Japanese ethanol market.

Commenting on a report from Reuters in Tokyo on the imports of MTBE from France as a gasoline additive, Mr. Carvalho said that this fact does not exclude the use of Brazilian ethanol, for the demand for energy is very robust.

Petrobras is already exporting ethanol to Venezuela and hopes to sell the fuel to Nigeria and countries in Scandinavia this year.

“Every day we receive new demonstrations of interest from other countries”, he added.

The company is also offering technical assistance for the use of ethanol, in agreements with South Africa, Venezuela, and Nigeria.

The United States has the capacity to find its own alternatives, but Petrobras has extensive experience with fuel ethanol, which can be used to develop solutions when the need arises, said Carvalho.

Mr. Carvalho said that ethanol exports are expected to rise to 850 million liters in 2007, compared to 120 million in 2006.

Shipments have included sales to the United States, directly or through the Caribbean, a region that has preferential access to the American market. Mr. Carvalho noted that sales were not larger because of U.S.-imposed tariffs.

Follow what's happening in the Brazilian ethanol market on Ethablog, the only blog in English dedicated to Brazilian ethanol.

CLEAN ENERGY BRAZIL ADMITTED TO LONDON'S AIM

My comments on the piece below:

The smart money in Europe shares many of the views expressed on Ethablog. The following quotes appear further below in the body of CEB's press release.

• "Brazil is the world's largest sugar producer and exporter and is the lowest cost producer of raw sugar in the world."

• "As a result of the reform of the European sugar regime the directors (of CEB) believe there will be a sharp decline in EU sugar production and exports, thereby reducing world sugar supply, and hence benefiting Brazil."

• "Overall demand for Brazilian bioethanol is expected to rise due to the recent introduction of flex-fuel cars - cars which can run on any mix of gasoline or ethanol."

• "The directors of the Company believe that the global bioethanol market is in its infancy, and that high energy prices, environmental concerns and political pressures will continue to support expansion in the use and development of biofuels."

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Clean Energy Brazil Plc, an investment company with a mandate to invest directly into Brazil's sugar and ethanol industry, is pleased to announce its admission to trading on the AIM Market of the London Stock Exchange (which is expected to occur at 8am today)

Numis Securities conceived and developed the CEB concept, built the management team, and has backed the company alongside institutional investors. Numis is also a major shareholder in Temple Capital Partners, which will manage CEB's funds.

Admission Statistics

Placing Price per Ordinary Share: £1

Number of Ordinary Shares in issue on Admission: 100 million

Gross proceeds of the Placing: £100 million

Market capitalisation at the Placing Price: £100 million

Warrants which are also expected to commence trading on AIM at 8am today have been issued on the basis of 1 warrant for 4 ordinary shares. Placees will also receive shares in Temple Capital Partners Limited.

Overview

• An AIM listed investment company, designed to take advantage of the growth potential and the consolidation opportunities in Brazil's sugar and bioethanol industry

• CEB has agreed an initial investment of $137m into a fully integrated existing sugar/ethanol asset with associated greenfield projects, full due diligence has been performed and the investment agreement has been finalised

• CEB is seeking to pay a 5p dividend in respect of the period to 30 September 2007, and is targeting an aggregate IRR of 25% on capital invested

• CEB's Non-Executive Chairman is Antonio Monteiro de Castro, the current chief operating officer of British American Tobacco plc

Strategy

CEB proposes to invest in both existing sugar and bioethanol production units and in new greenfield projects. Investing in new projects will capture the inherent development premium, whereas acquiring equity in existing assets will capture immediate cash flows.

The target assets comprise agricultural sugar cane plantations, industrial milling facilities, sugar and ethanol production facilities, and associated export logistics infrastructure.

There is significant scale in the sugar cane industry in Brazil; the current total land dedicated to sugar cane production is approximately 6 million hectares. However, consolidation in the sector is very rare, most ethanol/sugar production facilities still remaining family owned and run businesses.

Investment Adviser - Temple Capital Partners

Two leading industry advisors have been brought together by Numis to form one of the largest teams of professionals working in the sugar/ethanol sector in Brazil.

• Czarnikow Sugar: one of the largest physical brokers of sugar in the world, Czarnikow Sugar dates back to 1861 and is today represented in 11 countries, employing some 130 professionals. Czarnikow Sugar provides mergers and acquisition advice, trading, hedging, shipping, consultancy and risk management services. Its key clients include large international corporations, sugar millers, refiners, and traders around the world.

• Agrop: a leading sugar cane agronomy outsourcing company in Brazil,

Agrop provides agronomy and agricultural/industrial services for some of the largest sugar mills in Brazil. The Chief Executive Officer and joint owner Marcelo Junqueira is a landowner, farmer and shareholder in one of the largest sugar mill companies in Brazil. The Junqueira family is one of the most well-known and respected 'sugar families' in Brazil.

Rationale: Ethanol/Sugar/Brazil

• Brazil is the world's largest sugar producer and exporter and is the lowest cost producer of raw sugar in the world.

• As a result of the reform of the European sugar regime the directors believe there will be a sharp decline in EU sugar production and exports, thereby reducing world sugar supply, and hence benefiting Brazil.

• Overall demand for Brazilian bioethanol is expected to rise due to the recent introduction of flex-fuel cars - cars which can run on any mix of gasoline or ethanol.

• The directors of the Company believe that the global bioethanol market is in its infancy, and that high energy prices, environmental concerns and political pressures will continue to support expansion in the use and development of biofuels.

Peter Thompson, Chairman of Temple Capital Partners Limited, and Director of Czarnikow Sugar commented,

'Clean Energy Brazil gives a London equity window on the world leading Brazilian sugar and ethanol industry. Both the industry and Clean Energy Brazil are facing enormous growth in demand for their products; they will benefit from the growing awareness that cars fuelled by ethanol from sugar cane can be part of the solution to global warming.

To maximise the return to investors we have raised only the money that we believe we can immediately invest. CEB is seeking to become a major participant in the Brazilian sector, and has numerous projects under consideration.'

Oliver Hemsley, Chief Executive of Numis commented,

'We continue to set Numis apart as an innovative investment banking business. The Numis team conceived and developed the concept of Clean Energy Brazil and has built the management team. As partners with Czarnikow Sugar and Agrop we look forward to building a company of scale in this growing market.'

Marcelo Junqueira, Founder and CEO of Agrop, and Non-Executive Director of Clean Energy Brazil commented,

'The sugar cane industry in Brazil is the major player in the international sugar market, and the world leader in ethanol production. Understanding Brazil's sugar and ethanol sector at a local, hands-on level is absolutely fundamental to the success of CEB, and I believe investors have recognised the quality and depth of the team we have assembled.'

18 December 2006

Enquiries:

Numis

Andrew Dawber - Managing Director, Corporate Finance

020 7776 1500

Tom Frost - Associate Director, Corporate Finance

Smith and Williamson Corporate Finance

Azhic Basirov - Director

020 7131 4000

David Jones - Director

College Hill

Peter Pantlin - Director

020 7457 2020

Paddy Blewer

Biographies of key personnel

Antonio Monteiro de Castro - Non-Executive Chairman of CEB

Antonio is the chief operating officer of British American Tobacco plc, a constituent of the FTSE 100 index. In addition, Antonio is non-executive chairman of the Souza Cruz S.A. Administrative Council (one of Brazil's leading companies), and a director of Fundacao Getulio Vargas, Brazil's foremost education and research foundation. Antonio has an MBA from Babson College in the US.

Peter Thompson - Chairman of Temple Capital Partners, Director of Czarnikow Peter has 20 years' experience of working in the sugar industry, the last 10 years as a director for Czarnikow. Based in London, Peter typically spends one week a month in Brazil and is responsible for Czarnikow's Brazilian activities. He is a fluent Portuguese speaker, and will lead the Temple team in providing advice to CEB.

Marcelo Junqueira - Founder and CEO, Agrop

Marcelo is the CEO of Agrop. He has spent his entire life in the sugar and ethanol industry in Brazil, and he is a member of one of the most influential sugar families in Brazil.

Numis Securities

Numis' New Energy and Emissions sector team is dedicated to developing and presenting investment opportunities across the renewable energy and emissions reduction spectrum.

Follow what's happening in the Brazilian ethanol market on Ethablog, the only blog in English dedicated to Brazilian ethanol.