Despite rising demand, Brazil ethanol sector struggles 01 декабря 2013, 15:19
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The prices of gasoline, ethanol and diesel fuel are shown at a gas station at Copacabana Beach in Rio de Janeiro November 29, 2013.©Reuters/Ricardo Moraes
Hobbled by rising production costs and low prices, Brazil's ethanol sector is in crisis, with many sugar mills closing despite rising demand, AFP reports.
The South American country is the world's leading sugar producer with an ever-growing share going toward biofuel production.
But despite an expected bumper crop for 2013-14 and growing domestic consumption, its mills are drowning in debt.
In the country's central southern region -- the main sugar production area -- 40 mills have shut down over the past three years and 60 others are expected to follow suit in the next 24 months due to unsustainable debts, Deutsche Bank analysts said in late October.
Hostage to gas prices
The main headache faced by producers are prices at the pump.
"Since consumers opt for hydrous ethanol (95 percent ethanol, five percent water) only if it is 30 percent cheaper than gasoline, we are hostages to the price of gas," said Antonio de Padua Rodriguez of industry association UNICA.
The federal government, keen to rein in inflation, has since 2006 set a ceiling for gas prices and, indirectly, for ethanol as well.
Yet production costs are skyrocketing.
According to the producers' association Orplana, the cost of leasing land soared 57 percent between 2005 and 2010, while labor costs shot up 47 percent and those of mechanization rose 28 percent.
Demand exceeds production capacity
On the export front, prospects are also grim.
The real's rebound in relation to the dollar during the September to October period hurt the competitiveness of Brazilian ethanol.
On top of that, the United States, which takes in 70 percent of exports, is planning to curb the mandatory percentage of ethanol in fuel products for the first time.
"Exports will be lower than last year, with 2.6 billion liters against 3.4 billion in 2012-13," according to UNICA.
Analysts say that in the long term, Brazil's production is also threatened.
In the absence of new support policies for the sector, "potential demand will exceed capacity by 2020," said Plinio Nastari, president of leading sugar and ethanol consulting firm Datagro.
"We estimate that the central-south region can produce a maximum of 600 million tonnes... which sets a firm limit on the amount of sugar (or ethanol) that can be expected from Brazil in the long term," Macquarie Bank estimated.
Not all bad news
The sector's woes come at a time when sugar cane growers should be rejoicing.
The central south region delivered 23 billion liters (six billion gallons) of sugar cane alcohol by November 16, up 15 percent from the same period last year.
That comes after UNICA -- which represents 60 percent of the country's sugar cane producers and processors -- said in October that it expected record sugar cane production in 2013-2014.
More than 54 percent of the sugar cane harvested this year was forecast to be earmarked for ethanol output, up from 50 percent last year.
And domestic consumption, which absorbs 85 percent of Brazil's sugar cane-based ethanol, is growing at the same pace as the market for flexible fuel vehicles, designed to run equally well on gasoline or a blend of up to 85 percent ethanol.
In 2020, the so-called flex vehicles are expected to make up 89 percent of the country's auto fleet, up from the current 61 percent, according to Datagro forecasts.
In May, meanwhile, the government approved an increase from 20 to 25 percent per liter in the percentage of anhydrous ethanol that must be mixed with gasoline.
Still, the crisis has reached such proportions that it has become political.
And in early November, more than 300 lawmakers set up a parliamentary front for the promotion of the sugar-energy sector.
By Helene Seingier