ETHANOL FUEL ADVANTAGES DEMONSTRATED IN THE INDY 500

I worked with Tom MacDonald from April to August 2007. He has a long track record at the California Energy Commission with fuel ethanol, with knowledge about "the many energy, environmental, health and safety, and economic advantages of alcohol fuels".

MacDonald Associates continues to apply a long career experience working with alcohol fuels in California to analyzing and documenting the broader national and international potential and benefits of alcohol fuels. As another example... Today’s Indy 500, won by Brazilian driver Helio Castroneves, adds more dramatic evidence of the safety-related advantages of alcohol fuels. Graphic footage seen by worldwide audiences of the major pit fire experienced by the #14 AJ Foyt Racing team and driver Vitor Meira (also a Brazilian) illustrates several of the important differences between alcohol fuels and petroleum-based fuels that weigh heavily in favor of alcohols – further validating the selection of alcohol fuels for Indy racing following the explosive gasoline-fuel crash that claimed drivers Eddie Sachs and Dave McDonald in the 1964 500. First and foremost, today’s pit fire sequence shows the fire-fighting advantage of alcohol fuels, an advantage that should be recognized and duly appreciated by everyone involved with fuel-related fire safety. The use of water application to quickly extinguish this fire, ALLOWING THE CAR AND DRIVER TO RESUME THE RACE, would clearly not have been possible if the car had been gasoline-fueled! Secondly, the lower volatility/explosivity and lesser heat release associated with ethanol was another important factor in minimizing and containing this fire and preventing injury to the driver, the pit crew and others nearby. While the fire briefly engulfed the entire vehicle and the driver, the lesser energy release and the rapidity with which the crew was able to extinguish the fire avoided a much more serious incident that would likely have resulted from a similar mishap with gasoline. The distinct visibility of the above fire, even on the television screen in broad daylight, was also noteworthy given past safety issues involving the lower flame luminosity of alcohol fuels. The fact that the fire was instantly so visible is strong evidence that lower flame luminosity may not be as much of a concern for ethanol-fueled fires as has previously been suggested for alcohol fuels. The above incident – and various other crash sequences in today’s Indy 500 coverage – add to an accumulating body of evidence with ethanol’s use for racing fuel that, if properly assembled and utilized, can offer a compelling testimonial to the safety-related advantages of alcohol motor fuels. MacDonald Associates remains available to assist the ethanol industry and other ethanol stakeholders in efforts to better define and report on the many energy, environmental, health and safety, and economic advantages of alcohol fuels, and to help correct the misunderstandings and erroneous stories that typically affect public policy and popular views on these fuels.

Tom MacDonald MacDonald Associates Independent Transportation Energy Consultants (and California Energy Commission – retired) Sausalito California USA (916) 529-6582

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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.