BRAZIL, ETHANOL JOIN “NEW GREAT GAME”

The “Great Game”, which unfolded between Great Britain and Russia in the XIX century in the deserts, mountains, and steppes of Central Asia, has made a comeback – with old and new players alike dueling for supremacy in a field that now includes not only the oil and gas fields of that region, but also resource-rich South America.

With Chinese (previous post), Japanese (previous post), Indian (previous post), American (previous post), and European (previous post) delegations crisscrossing Brazil to size up the country’s potential as a supplier of strategic materials, not least of which is ethanol, it is hard not to draw an analogy with the fight for hegemony that took place in Asia between Tsarist Russia and the British Empire, from the end of the Napoleonic Wars in 1815 to the beginning of World War I almost a century later.

The armies, spies, mercenaries, and agents provocateurs that played the game in Asia have now been replaced by investment bankers, consultants, and lawyers, at the service of governments and corporations, private and state-owned, vying for control over the most lucrative sectors not only of the Brazilian sugar and ethanol industry, but of other commodities as well. Iron ore, bauxite, orange juice, soy, corn, chicken, and beef, all of which have in Brazil a major producer, are at the top of the list.

Over the last month, France’s Louis Dreyfus bought all the sugar and ethanol refineries belonging to the Tavares de Melo Group, becoming the second-largest producer of ethanol in Brazil, “with significant capacity for growth”, as reported by Jornal Cana (previous post). Meanwhile, Tereos, also from France and formerly known as Beghin-Say, has announced that it plans an IPO for its Brazilian subsidiary Guarani on BOVESPA, the Sao Paulo stock exchange. Tereos is the third-largest producer of sugar in Brazil.

China, on its turn, has been aggressively pursuing deals throughout South America, clearly aware that it is operating in a territory the U.S. believes firmly planted in its sphere of influence. “The Economist” reports that ‘China's energy policy is now focused on securing a steady supply in the medium to long term. This means looking beyond traditional suppliers in Asia and the Middle East and seeking new alliances with potential suppliers in Africa and Latin America.

“Because the U.S. is still a much more valuable trade partner to Brazil than is China (‘In 2005 Latin America sent 47% of its total exports to the US, 14% to the EU and just 4% to China’, says the same article), ‘Latin America's importance to China is growing, (but) it will never become a core energy supplier. Further, relations are likely to remain of a commercial nature, and China is not apt to become a committed political ally for Latin America.’”

The Chinese are also pursuing an ambitious economic agenda in other South America countries. “The Economist” further reports that, “This investment policy has been implemented through China's two major oil firms, the China National Petroleum Corp (CNPC) and the China Petroleum and Chemical Corp (Sinopec). Although both these firms were opened up to private investment through Initial Public Offerings (IPOs) in 2000-02, the Chinese government retains a majority stake in each.

“Among CNPC's first ventures was a US$200m purchase of a 45% stake in an Argentinian-owned Peruvian unit, PlusPetrol Norte, in February 2004. PlusPetrol Norte is the main crude oil producer in Peru, and produced approximately 17.8m barrels in 2006. In September 2005 a CNPC-Sinopec-led consortium, Andes Petroleum, agreed the US$1.42bn purchase of the Ecuadorian assets of a Canadian oil firm, Encana. This deal gave Andes Petroleum control of five blocks, producing in total approximately 75,000 b/d, and with proven reserves of 143m barrels. The consortium also acquired a strategic 36% stake in Ecuador's Oleoducto de Crudos Pesados (OCP, the new heavy crude oil pipeline), which pumps 450,000 b/d, and as such CNPC will be able to exert some control over direction of exports through the OCP pipeline. A year later, Sinopec formed a consortium with India's ONGC Videsh to spend US$850m on a 50% stake in Colombia's Ominex de Colombia, a subsidiary of US-based Ominex Resources. Ominex de Colombia's oilfields produce 20,000 b/d and have proven resources of 300m barrels.

Most of this activity is fairly recent and can be traced back to a visit to Latin America by a Chinese legation in 2004. The April 5, 2007, online edition of “The New York Times” reports that, “Expectations ran high three years ago when Hu Jintao, the president of China, visited South America and toasted a ‘strategic partnership’ with his Brazilian counterpart, Luiz Inacio Lula da Silva, predicting trade between the two countries would double to $20 billion. China pledged $10 billion in investments, mostly in infrastructure.

“To some extent, Brazilians have been disappointed in the follow up. The Chinese have struggled with red tape in Brazil and hesitated while waiting for Brazilian rules to activate public-private investments. ‘Very little has happened,’ said Pedro de Camargo Neto, a former official in the Agriculture Ministry in Brazil who is now an agribusiness consultant.”

Just as the players of the Great Game in nineteenth-century Asia had to deal with searing desert heat and blistering mountain cold, investors in the Brazilian sugar and ethanol industry have to contend with impossibly-complex tax structures (excised at the national, state, and municipal level), a labyrinthine labor legislation calibrated to favor workers over capital (on account of the dire human rights record in Brazilian industry and agriculture in general), and a growing legion of NGOs and political agents that can, and often do, interfere with the conduction of business (Via Campesina, or “Peasants’ Way”, for instance, occupied the Cevasa mill, albeit somewhat peacefully, on March 7^th, 2007, the same day that President George Bush arrived in Brazil to sign an “ethanol memorandum” with President Lula. Cevasa had been purchased just last year by Cargill, the U.S. agribusiness giant whose grain terminal on the banks of the Amazon River was shut down by Greenpeace last March 21^st – previous post).

On the bright side, investors in Brazil gain access to 8.5 million sq. km of geopolitically stable land (an area larger than the continental United States), with very favorable conditions for agriculture, unified under a single government and a single language – advantages that companies used to doing business in Africa and Asia can appreciate.

Bringing the Great Game narrative full circle, on April 10^th, 2007, “The International Herald Tribune” carried a report from the Associated Press stating that, “Venezuelan president Hugo Chavez ‘pledged to undermine a U.S.-Brazil ethanol agreement, but denied any conflict with his South American neighbor and ally. In a televised speech on Tuesday, Chavez said he plans to ‘knock down’ the ethanol proposal in the same way he lobbied against a U.S.-backed hemispheric trade pact (the Free Trade Area of the Americas), reports the Associated Press.

‘We are working on an alternative proposal,’ he said without elaborating. ‘Just as we overthrew the Free Trade Area of the Americas, we will now overthrow’ the ethanol plan.

‘President Bush and his Brazilian counterpart, Luiz Inacio Lula da Silva, signed a memorandum of understanding (in March) to promote international ethanol use and production. The two countries are the world's leading producers of the alternative fuel.

‘Chavez has accused the United States of trying to promote an ethanol cartel to divide the region, and warned that ethanol production will end up destroying the environment if the aim is to replace U.S. gasoline consumption with fuel from industrial agriculture.’”

Mr. Chavez’s attacks signal a widening rift between Brazil’s Lula, a one-time rabidly ideological union leader and still head of the left-leaning Workers’ Party (PT), and Brazil’s oil-rich neighbor to the north (previous post).

In speaking out against the “ethanol alliance”, Mr. Chavez is apparently channeling the voice of Fidel Castro, who, according to this report from the April 13^th, 2007, online edition of The New York Times, “lashed out against American plans to increase use of renewable fuels, mainly ethanol, in a front-page article in the Communist Party newspaper, Granma, warning that food stocks for millions of people would be threatened. The article, titled ‘Condemned to Premature Death by Hunger and Thirst -- More Than 3 Billion People of the World,’” used the strongest terms to criticize the development of the “ethanol alliance” between the U.S. and Brazil.

Mr. Castro was, presumably, in turn channeling the voices of his Marxist-Leninist allies from Russia, who traded with Cuba on generous terms until the Soviet Empire fell and left the island energy-hungry in the late 1980s. With Mr. Castro’s peculiarly-timed intervention (he has been hospitalized for eight months now), the world sees Russia, or at least a Russian proxy, reintroduced into the Great Game, this time on the other side of the world.

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