Brazil sweet on fuel source
January 8, 2012 - 4:36am By The Economist
SAO PAULO — "We’ve been waiting for this news for more than 30 years," crows Marcos Jank, the president of UNICA, the Brazilian sugarcane growers’ trade association.
The cause of his excitement is the demise on Dec. 31 of import tariffs and tax credits that have long sheltered ethanol distilled from corn in the United States from the same stuff made from sugarcane in Brazil.
Now, for the first time, the two countries that produce more than 80 per cent of the world’s ethanol can sell in each other’s backyard at market prices.
Distilling ethanol from tropical sugarcane takes less land and uses less fossil fuel than starting with corn grown in temperate climes. That makes Brazilian ethanol, unlike the pampered and grotesquely wasteful American version, competitive with hydrocarbons and genuinely good for the environment.
Most of Brazil’s cars run on a mix of the two fuels. The standard blend contains 18-25 per cent ethanol. Poor weather and cash-strapped growers delaying their replanting after the 2008 credit crunch have recently squeezed production — and led to Brazil importing some American ethanol. But in more normal times, Brazilian distillers believe they can supply their home market and export to America at sweet prices.
America’s subsidies and trade barriers were long defended by senators from over-represented and under-populated rural states (and protected by the fact that corn-loving Iowa holds the first presidential caucuses). But the corn lobby’s influence is waning. Ethanol tax credits cost $6 billion in 2011, a hard sell in hard times. Corn prices are high, making this a good moment for American corn growers to start paying for their enormous pickups unaided.
If ethanol is ever to become a globally traded commodity — the long-term dream of boosters in both countries — the two sides need to make common cause. On other biofuels, for example in the aviation industry, they already are, with America’s Boeing partnering with Brazil’s Embraer.
At present, America’s corn ethanol producers distil 14 billion gallons a year — enough to provide 10 per cent of America’s motoring needs and meet federal rules for renewable fuel use. But those rules will grow stricter over the next decade, and most of the new demand must be met from other sources. Under the 2007 Energy Independence Act, biofuel use is supposed to rise to 36 billion gallons by 2022, of which 21 billion gallons must come from a source other than cornstarch.
A few experimental options, such as biodiesel made from algae, look close to commercial viability, says Andy Steinhubl of Bain & Co., a consulting firm. But their coming has been heralded before and proved premature, he adds. So the only contender right now is sugarcane ethanol.
Before Brazil’s sugarcane growers can take advantage of this new market they need to make up lost ground. Last year, the country crushed 610 million tons of sugarcane, with 165 million tons of mill capacity left unused. Planting is picking up again, says Jank, and the spare capacity will not remain idle for long. In the longer term, new plantations, sugar mills and distilleries will be required. The conditions are right for investment, says Andre Nassar of ICONE, a Brazilian research institute.
He predicts efficiency gains as well, with increasing use of smarter techniques such as crop rotation and the greater use of bagasse (the part of the cane left after the sugar is extracted) for generating electricity and feeding cattle. A long-mooted pipeline carrying ethanol from Brazil’s central and southern sugar growing regions to Santos, its largest port, might finally get built.
In recent years, Brazil’s government has made investment in the sector less attractive by fiddling with the price of fuel, Nassar says. To help control inflation, it pressured Petrobras, the country’s state-controlled oil giant, to keep gas prices low, thereby capping the price of ethanol.
And in 2011, it cut taxes on gas, but not ethanol, and reduced the mandatory blend of ethanol mixed with standard motoring fuel, thereby reducing demand. Access to a big foreign market should be the pick-me-up Brazil’s ethanol producers need to start spending again. |
