THE TOP 10 REASONS WHY PETROBRAS MATTERS, DEEPLY, TO THE DEVELOPMENT OF A GLOBAL BIOFUELS INDUSTRY

1. Transpetro, Petrobras' subsidiary in charge of transportation, has been piping ethanol in Brazil for over thirty years. It holds the most advanced technology in the world for such operations and is currently investing USD 1.2 billion in the construction of an ethanol export corridor that comprises a pipe grid, terminals, and large ocean vessels for ethanol. With total capacity of 12 million cubic meters per year, the project is the largest of its kind anywhere in the world. More on this - including detailed technical information - is available on Transpetro's web site (in English) here.
2. Petrobras is providing technology to a number of developing countries seeking to start a biofuels industry. In Nigeria, its is investing USD 200 million to build an ethanol production facility in partnership with the Nigerian National Petroleum Corporation, which will own 70% of the project. In Mozambique, it is working with state-owned oil company Empresa Nacional de Hidrocarbonetos to research and develop biofuels there.
3. In July 2008, its biofuels subsidiary, Petrobras Biocombustivel, was working on the development of 23 joint ventures for ethanol export - a critical move in the establishment of a global biofuels market. One of the projects, developed with Mitsui & Co., aims to export ethanol to Japan, which has authorized ethanol blends of up to 3% and is a strategic market for ethanol from Brazil and other countries.
4. Petrobras researches the development of new strains of sugarcane with higher sugar content, greater resistance to pathogens, and better adaptability to various climate and soil conditions - an essential process to jumpstart ethanol production in other tropical countries that would benefit from a biofuels industry. Research is being conducted at the company's Sugarcane Integrated Agri-Industrial Center in Quissama, Rio de Janeiro state.
5. Petrobras has research agreements with a number of foreign institutions, including the United States' National Renewable Energy Laboratory, with which it is collaborating on second generation biofuels research. The research project spans all parts of the production chain, including feedstock selection, cultivation, harvesting, and distribution.
6. Petrobras is using its expertise in Brazil, energy, and biofuels to build five ethanol plants around Brazil, in partnership again with Japan's Mitsui. The main objective is to ensure supply to the Japanese market - a pre-requisite for that country to invest in the infrastructure necessary to store, distribute, and use ethanol. The strategic importance of the Japanese market goes without saying.
7. Petrobras has biofuels partnerships with a number of key players in the global energy market, including ConocoPhillips, Portugal's Galp Energia, Italy's Eni, India's Bharat Petroleum and Oil and Natural Gas Corporation, the China National Offshore Oil Corporation, the Toyota Tsusho Corporation, Mitsui & Co., and Nippon Alcohol Hanbai. With the latter, Petrobras is planning to produce ethanol in southeast Asia for export to the Chinese and Japanese markets.
8. Petrobras is working with a number of foreign companies to open up markets for biofuels abroad, including firms like Korea's Samsung, Norway's Statoil, and the Petroleum Corporation of Jamaica, with which the company is developing a hub to trans-ship ethanol produced in Brazil and reduce its cost, as the fuel makes its way into the highly-protected US market.
9. Petrobras operates a pilot plant for second generation ethanol at its Cenpes research center. Through enzymatic hydrolysis, it was producing 220 liters of ethanol per tonne of sugarcane bagasse in July 2008. The company is currently working to develop more efficient enzymes, supplementing efforts in other research centers, in Brazil and abroad, which seek to produce cellulosic ethanol on a commercial scale. This line of research also leads Petrobras to investigate new processes for handling bagasse for use as feedstock. As Brazil is expected to produce upwards of 600 million tonnes of sugarcane this year, bagasse is considered the most viable feedstock worldwide for the production of cellulosic ethanol.
10. Petrobras is the lowest-cost producer of biodiesel in Brazil. It has three plants around Brazil and is working to develop a range of feedstocks that can be used in other tropical countries to produce biodiesel. In Brazil, it has successfully developed a production chain for castor beans as feedstock, and also uses soybeans.

US DEPARTMENT OF AGRICULTURE: BNDES FUNNELING MONEY INTO BRAZILIAN SUGAR AND ETHANOL INDUSTRY, MAY BE STOKING OVERCAPACITY

While most plants in Brazil can produce both sugar and ethanol, about 150 of the country’s 420 plants are ethanol-only operations (previous post). Most were set up during the ethanol fever that took hold of the industry post-2006, when oil prices were skyrocketing and the U.S. government embarked on an all-out to promote the use of ethanol.

Highlights on the expansion of Brazil’s sugar and ethanol industry, taken from the USDA’s recently-released report on the 2009-2010 outlook for the Brazilian sugar and ethanol industry:

Dropping sugar and ethanol prices during 2007 and 2008 and the global financial crisis in September 2008 became a major obstacle to new investments in 2009 and 2010, although investments in the sugar-ethanol sector had been growing steadily during the last few years. (Financing from the National Bank for Economic and Social Development - BNDES, the major federal bank funding new projects, increased from R$ 3.56 billion in 2007 to R$ 6.5 billion in 2008.) Credit has become scarce, to fund both sugar export operations and investments in new mills. The industry estimates that total credit to finance investments should drop from R$ 12 billion in 2008 to R$ 7 billion or less in 2009. Approximately 40 percent of the mills that were supposed to start running in 2009 (35 mills) have already postponed operations until 2010.

US DEPARTMENT OF AGRICULTURE FORECASTS BRAZIL TO MILL 605 MILLION TONNES SUGARCANE IN 2009-2010, ETHANOL EXPORTS DROP

Inquiring minds are looking at the United States Department of Agriculture's GAIN (Global Agriculture Information Network) report on the 2009-2010 outlook for the Brazilian sugar and ethanol industry.

The numbers put out by the USDA's Foreign Agricultural Service, which has an office in Sao Paulo, are in line with those published at the end of April by Conab (previous post), the agency within the Brazilian Ministry of Agriculture responsible for forecasting agricultural production in the country, and with the figures offered in early April by Plinio Nastari's Datagro (previous post), the leading sugar and ethanol consultancy in Brazil.

Highlights from the USDA's GAIN report:

"Sugarcane for crushing for MY 2009/10 is projected at 605 million metric tons (mmt), up 7 percent from the previous year, due to continuing area expansion. Sugar production is forecast to increase to 36.85 mmt, raw value. Sugar exports are forecast at 24.36 mmt, up 4.05 mmt from the previous year, due to expected lower supply from other producing countries such as India. Ethanol production for MY 2009/10 is forecast at 28.45 billion liters, while ethanol exports are expected to drop to 3.7 billion liters."

COMPARISON OF DIFFERENT PROJECTIONS
FOR CANE, ETHANOL AND SUGAR PRODUCTION
2009-2010 HARVEST YEAR - BRAZIL

	USDA	BRAZIL GOVERNMENT (CONAB)	DATAGRO
Total sugarcane for crushing (million tonnes)	605	622 – 634	598
Y-o-Y increase in sugarcane for crushing	7%	8.6% – 10.7%	5.72%
Sugar production (million tonnes)	36.85	36.42 – 37.91	35.2
Y-o-Y increase in sugar production	14%	Up to 17%	11.38%
Ethanol production (billion gallons)	7.53	7.35 – 7.57	7.38
Y-o-Y increase in ethanol production	4.6%	n/a	3.0%

Source: USDA, Datagro, Conab

DELFIM NETTO, STIGLITZ SPEAK AT EXAME MAGAZINE SEMINAR ON 2009 OUTLOOK FOR BRAZIL

Delfim Netto is a widely-respected economist and Congressman who held a number of cabinet-level positions in Brasilia in the 1960s and 70s.

On Monday, May 11, he spoke at a conference held by Exame magazine, one of Brazil’s leading business publications, and made prognostications for the Brazilian economy throughout the rest of 2009.

• The Brazilian economy will resume growth “with some vigor” in Q4, but won’t see 4% growth until 2010.
• Brazil could have seen growth of 2% to 4% in 2009 if the Brazilian Central Bank had acted more decisively and in a more timely manner.
• The Brazilian Central Bank had the wherewithal to commit more resources to staving off the crisis because it was sitting on reserves of USD 200 billion; it was also extended a credit line of USD 30 billion by the US Fed.
• The Brazilian Central Bank has been correct in its initiatives, but has been seven months late and very conservative, declining to “use its muscle to force the economy to drop to 2%, 3% or even 4% growth”.
• The Brazilian Central Bank also erred in its preferential treatment of large banks over small ones, and of public institutions over private ones.
• The recent inflow of foreign capital into Bovespa, the Sao Paulo stock exchange, can be explained by the quality of the companies traded on the exchange and the likely capacity of the country to swiftly make its way out of the downturn. So far this year, Bovespa is up 36% in dollar terms. Net of taxes and fees, that figure represents a gain of 25% in a little over four months.
• The capital inflows have contributed to a sudden appreciation of the BRL, an event that may have a “devastating” impact on the productive system.

Joseph Stiglitz, recipient of the Nobel Memorial Prize in Economic Sciences, also spoke at the conference and stated that one of the positives originating from the crisis is that it will allow Brazil to lower its interest rate to a level closer to the global average. Mr. Netto joked that doing so is of little consolation at a time when the Brazilian economy went from an excellent situation to a much worse condition.

Mr. Netto summed up the points that will help Brazil decouple from the crisis:

• Brazil is the only BRIC country to have a functional constitutional democracy.
• Brazil has a single language and no border, ethnic, and religious problems.
• Brazil can produce a considerable amount of renewable energy and has enormous oil reserves.
• Brazil has a reduced likelihood of facing a crisis in its foreign accounts, as it has substantially reduced its debt-to-GDP ratio and its liabilities in foreign currencies; it also has large reserves in hard currencies.

The Exame article closes with a quote:

“We will probably not have an energy shortage or a crisis in the balance of payments. So Brazil will be able to get out of this crisis, will be able to build a concrete road, a German Autobahn for the next 25 years. But, without the State, that will not happen. The State has its problems, but must be intelligent enough to help the private sector go down this path.”

BOVESPA, COMMODITIES BOOM LEAD US DOLLAR TO PLUNGE AGAINST BRAZIL'S REAL

The Brazilian central bank bought up dollars on Friday, May 8, in an attempt to stop the precipitous plunge of the USD against the BRL. In spite of the Bank's efforts, the USD closed at BRL 2.068, the lowest rate since October 3, 2008. This past week, the dollar depreciated 5.18%, with a 2.04% drop on Friday alone.

The ongoing boom in commodities has kept a steady stream of money coming into the country, while foreign investors poured BRL 2.061 billion (about USD 1 billion) into Bovespa, the Sao Paulo stock exchange, on May 4 and 5 alone, the month's first workdays. This flow brings the total YTD to BRL 7.719, or about USD 3.747 billion.

LACK OF CREDIT COMPROMISES QUALITY OF BRAZIL SUGARCANE FIELDS, TIGHTNESS IN SUGAR MARKETS SEEN INTO 2010

Sugar experts gathered yesterday, May 6, in New York at the ISO/Datagro Sugar Conference to discuss the outlook for the industry. The event was sponsored by the Brazilian Ministry of Agriculture, Cosan, Crystalsev, Bloomberg, and the newly-formed International Ethanol Trade Association, known as IETHA, among other organizations.

Speakers included Joel Velasco, Unica’s chief lobbyist in Washington, Sergey Gudoshnikov, of the International Sugar Organization, and a few other economists.

The outlook for sugar has improved considerably since the beginning of 2008 (chart - source: Cepea, own calculations). Indeed, the commodity was one of the few whose price did not crash in Q3 2008.

Among supporting factors is a prolonged, severe drought in the countries surrounding the Indian Ocean. Australia’s two main river systems have dried up, while the shortfall in India will lead the country to become a net importer of sugar. Indeed, according to Estado de Sao Paulo, one of Brazil’s leading dailies, Mr. Gudoshnikov of the ISO projects a supply deficit of 4.3 million tonnes for 2009. Brazilian output is expected to grow substantially, but the increase will be partially offset by declines in production in India and production issues plaguing Brazilian sugarcane fields. Thus, the tightness is expected to continue into 2010.

This outlook stands in contrast to the situation in the 2008-2009 harvest year, which saw a surplus of 6 million tonnes.

Mr. Gudoshnikov further projects that global imports in 2008-09 will total 50.2 million tonnes, compared to 45.9 million tonnes in 2007-08. He estimates availability for export also at 50.2 million tonnes, an increment of 3.6 million tonnes over the previous harvest year. Dow Jones reports that the ISO places final world inventories at 61.9 million tonnes, a drop from the 69.7 million tonnes of the previous season.

Brazilian Monster Crop not Big Enough

The tightness in supply will persist, even with Brazil’s sugarcane crop expected to reach a record 620 million tonnes, an increment of 47 million tonnes over the output of the 2008-2009 season, which drew to a close at the end of March. A growth of 35 million tonnes is expected for the following season, indicating that the expansion of Brazil’s sugarcane production is slowing down.

Lack of proper care and field renewal, associated with adverse credit and macro conditions, are responsible for the drag on agricultural production. At least 40% of the sugarcane produced in 2009-2010 will come from a fourth cutting (sugarcane plants can be cut up to seven times, with decreased sugar content in the stalks produced each year by new growth).

Fourth cuttings yield from 70 to 75 tonnes per hectare, while first cuttings have a much higher yield: 120 to 130 tonnes per hectare. In the season that has just ended, 18% of the sugarcane processed came from a first cutting; in the current season, that figure is expected to drop to 10%.

ETHANOL PRICES IN BRAZIL PLUNGE

The collapse in the price of ethanol over the past three months has been astonishing (chart). With the harvest season barely beginning, the price is the lowest it has been since Q3 2007, when the sugarcane harvest was in full swing.

Compounding the problem is the fact that the country suffers from insufficient storage capacity – a problem that the government, through BNDES, has set out to tackle (previous post). In March, BNDES announced that it would channel USD 1.1 billion towards the construction of storage facilities for up to 1.32 billion gallons of ethanol. The stated goal is to allow for a more even flow of the fuel to the market throughout the year.

DATAGRO'S PLINIO NASTARI: CALIFORNIA'S LCFS DECISION SHOULD OPEN DOORS TO BRAZILIAN ETHANOL IN FOURTEEN OTHER STATES

Plinio Nastari, founder of leading sugar and ethanol consultancy Datagro, believes that the recent decision by the California Air Resources Board (CARB) to approve the Low Carbon Fuel Standards sets the stage for a number of other states to pass similar legislation, with the goal of reducing carbon emissions through the use of clean-burning fuels, like sugarcane ethanol. Mr. Nastari's estimates show that the expansion of the markets for Brazilian ethanol represents about 30% of the total US market for gasoline.

According to a Brazilian business newspaper, Mr. Nastari believes that, "the United States will have to import sugarcane ethanol because (the production of) corn ethanol will not be enough, nor is corn ethanol clean enough to meet the standards approved in California", where the goal is to promote a 10% reduction in the carbon intensity of all fuels by 2020.

BRAZILIAN 2009 ETHANOL EXPORTS TAKE A TUMBLE IN Q1

A local newspaper reports that the southern state of Parana, Brazil's second-largest producer of ethanol, exported 174 tonnes of ethanol in the first three months of 2009, representing sales of USD 87,646. Over the same period in 2008, exports reached over 75,000 tonnes, which brought in USD 39 million. The blow from this precipitous drop in exports, laid down to the global economic recession, was softened by higher prices for sugar. The data come from the federal government's Agency for International Trade, known as Secex.

The same agency reports that, of the ten products leading the state's exports, only three saw an increase in volumes over Q1 2008. Strong sugar sales to international customers helped make up for the loss of revenue from ethanol. In Q1 2009, sugar exports climbed from 299 thousand to 476 thousand tonnes, representing sales revenues of USD 137 million - a 71% increment over the same period for 2008.

CONAB: BRAZIL TO CRUSH MORE THAN 620 MILLION TONNES OF SUGARCANE IN 2009-2010

Conab, a Brazilian government agency that is part of the country’s Ministry of Agriculture, has just released its estimate for the production of sugarcane in the 2009-2010 harvest year.

This first assessment (the agency conducts a total of three throughout the year) projects that Brazil will crush between 622.03 and 633.72 million tonnes of sugarcane between now and the end of the harvest season, in Q2 2010. This volume sets a record and represents an increment of between 8.6% and 10.7% over the previous harvest season’s output, which saw production of 572.57 million tonnes.

According to the agency, one significant factor pushing up volumes is a total of 28 million tonnes of sugarcane left over from the 2008-2009 harvest season and that are expected to be milled this year. Area under sugarcane cultivation has also grown 9.9%, an expansion associated with 25 new plants coming on-stream.

Until last year, sugarcane plantations for sugar and ethanol production occupied 7.08 million hectares (17.49 million acres); this year, the figure is expected to jump to 7.79 million hectares (19.24 million acres).

Sugarcane for all uses (which includes the production of forage and spirits) grew from 9.4 million hectares (23.22 million acres) to 9.59 million hectares (23.69 million acres). This may bring the total of sugarcane produced in the country to 674.8 million tonnes. The head of Conab, Wagner Rossi, stated that, “this proves that the sugar and ethanol market remains strong, in spite of the economic crisis”.

It should be noted, however, that a part of the crop may not be processed, due to factors like precipitation, the availability of harvesting equipment, and issues related to infrastructure.

The states of Brazil’s Center-South region account for 90% of sugarcane processed, with the balance milled in the states of the North-East. In the Center-South, Sao Paulo state leads, with an expected production of between 360.41 and 367.69 million tonnes, or about 58% of all the sugarcane that will be processed.

Other states have seen significant progress: Goias state, also in the Center-South region, has an increment this year of 527.6 thousand hectares, or 31.3% over the previous total; Mato Grosso do Sul, further west, has an additional 335.1 thousand hectares, equal to 21.5% of the past year’s figure.

All the states of the Center-West region (Mato Grosso, Mato Grosso do Sul, and Goias) have witnessed combined growth of 20.5% in sugarcane area, reaching a total of 1.09 million hectares (2.69 million acres). Production follows a similar trajectory, with 30% added output (85.29 million to 87.01 million tonnes).

Plantations in the country’s South (which comprises the states of Parana, Santa Catarina, and Rio Grande do Sul) are expected to grow 18.3%, occupying 644.3 thousand hectares (1.74 million acres). The amount of cane used by sugar and ethanol makers is expected to reach between 53.24 and 54.31 million tonnes.

Parana state stands out in this expansion process – it is now the second-largest grower, producing an expected 53.1 million tonnes to 54.2 million tonnes – practically the entire output of the region. This figure places it behind Sao Paulo and ahead of Minas Gerais state, which will mill from 50.8 million and 51.8 million tonnes.

Sugar and ethanol mix changes

The amount of sugarcane marked for the production of sugar may grow by up to 17%, while that used for ethanol is expected to grow 7.7%. With this mix, Brazil will produce between 36.42 and 37.91 million tonnes of sugar and between 27.78 and 28.6 billion liters (7.35 million and 7.57 million gallons) of ethanol, with a breakdown between anhydrous (used for blending with gasoline) and hydrous (sold directly at the pump as E100) of 33% anhydrous to 67% hydrous.

Drivers that have spurred producers to favor sugar over ethanol include depressed prices for ethanol on the Brazilian domestic market, difficulties in exporting caused by tariffs and subsidies to inefficient agricultural systems in formerly-rich nanny states in North America and Europe, and a shortfall in production in countries around the Indian Ocean that was motivated by drought and that has made India a net importer of sugar. A strengthened dollar has also made international prices more attractive for sugar.

These projections were developed using satellite imagery from Canasat, a project sponsored by Brazil’s National Space Research Institute, by the University of Sao Paulo, through the Center for Advanced Studies in Applied Research, known as Cepea, by the Center for Sugarcane Technology, known as CTC, and by Unica.

BRAZIL ETHANOL PRODUCERS PLEASED WITH LCFS DECISION BY THE CALIFORNIA AIR RESOURCES BOARD

A series of initiatives to ensure that Brazilian producers have greater access to foreign markets are coming to fruition. Unica’s lobbying efforts in California are a case in point: on April 24, the California Air Resources Board “vote(d) to recognize sugarcane ethanol’s carbon reduction levels”, recognizing that “sugarcane ethanol’s carbon intensity is even lower than initially calculated” by the Board. Unica believes that the “decision means sugarcane ethanol will be in greater demand in California in the years to come”.

The CARB resolution caps the efforts initiated by Unica around the year 2000, when the organization’s officers, including former president Eduardo Pereira de Carvalho and Alfred Szwarc, its point man for emissions and technology, began making regular pilgrimages to California, where they met with officials at different state government agencies and laid the groundwork for CARB’s decision in April.