AMSTERDAM – In August 2007, Abengoa Bioenergy announced that it would acquire Brazilian sugar and ethanol producer Grupo Dedini Agro (Dedini) for 216 million euros ($296.1 million). By doing so, Abengoa became the first and, up till now, only ‘global’ ethanol producer with significant production capacity in all three major ethanol markets: the United States, Europe and Brazil. Ethanol Statistics sat down with Javier Salgado, President and Chief Executive Officer at Abengoa Bioenergy, to discuss the strategic issues associated with Abengoa’s geographical reach. The European market is still in its infancy and lacks clear government support. The Brazilian consumer market is maturing, but its supply side is still consolidating. The United States is moving towards consolidation and it has logistical problems, but tremendous government support as well. Creating a cohesive strategy for all business units in such diverse markets is a challenge to say the least. In this first of two articles, Mr. Salgado focuses on the link between the potential synergies of Abengoa’s position and the strategic choice between acquisitions and greenfields is discussed.
Synergies
When asked for the overall strategy of Abengoa Bioenergy, Mr. Salgado says it is “essentially to get a global presence. To get a significant position in all major market places, to become a major producer and marketer of our product and third party products”. A strategy aimed for growth, but what about synergies? There isn’t an international market at the moment, or at least not a significant or structural one. Temporary shortages in the US and EU are solved by imports from Brazil, which is the only country able to export significant amounts of ethanol at the moment. So in the absence of an international market, there are no synergies to be gained in terms of supply and cost advantages. Mr. Salgado confirms that synergies are to be looked for elsewhere. “We are leveraging knowledge,” Mr. Salgado explains, “our operations in Brazil, the United States and Europe are completely different and mainly, we are learning about markets in which, raw material, technology, marketing, strategies and distribution channels are completely different. By doing that we are diversifying our sources of knowledge, we are becoming much more competitive in the way we operate our plants, the way we market our products, and the way we implement our new technologies.” In essence, Abengoa is learning and positioning itself for the near future, for a time when an international market has developed. “Our company is going to have a unique position,” he says, “in terms of understanding the local markets. We are getting those synergies now, and we expect to get more of it in the future when global commodity market emerges.”
Ethanol as a global commodity?
The question than of course is, when will Abengoa’s strategy start to return its optimal yield? When will this international market develop? As many others, Mr. Salgado finds it difficult to say because of the sheer number of factors that can affect this. Ultimately, however, these factors combine to the most important precondition for an international market to develop. “I believe that to talk about a universal market place, we should have a market structure that is similar on all continents” Mr. Salgado explains. “What that implies is that it’s going to be very difficult to develop a universal market place with first generation technology only. You will need cost-competitive ethanol production in the same price range on all continents, and for that you will need second generation. You will also need critical mass in all markets in terms of supply and demand, which especially Europe doesn’t have. So, it could take as much as 10 to 15 years before we see ethanol as a real global energy commodity.”
Different markets, different tactics
Until that time, Abengoa will have to deal with all the individual traits of the markets it operates in. “For sure the maturity in all those markets is completely different,” says Mr. Salgado, “ and that’s why our company is approaching the United States in a different way than we are approaching Europe. For example, in Europe we have a leadership position on ethanol production and marketing. Because the market itself is still in its infancy, we get a great opportunity to consolidate our position through greenfield projects. In Europe, we are positioning ourselves for a market that will be significant in the future.” The United States is in a completely different situation, moving towards consolidation, according to Mr. Salgado. “The way the U.S. market has grown over the last 2-3 years has been phenomenal, spectacular. As a result however, there are a lot of small distilleries that have not been able to position themselves to be in this market for the long run. The current crush margin is simply not good enough to sustain the situation as it is right now. The market is starting to go into consolidation mode, restructuring the assets, until we have a healthier situation with much fewer, but bigger players.” In terms of consolidation, Mr. Salgado compares the United States to Brazil. “The markets are different for many reasons,” he says, “but Brazil has been consolidating as well. It is an extremely fragmented industry with more than 350 mills, with many stakeholders per mill, with family oriented businesses. In the past 1.5 to 2 years, the larger companies, both domestic and foreign have started to acquire these smaller mills and I foresee this trend to continue in the next few years.”
Acquisitions over greenfields
Judging from the analyses of Mr. Salgado, Abengoa is moving towards a strategy based on acquisitions in Brazil and the United States. Surprisingly however, it is not. “Sure, there will be opportunities in those markets,” Mr. Salgado agrees, “but when you compare the value that you can create from an greenfield project to the price of acquisitions today, the equation is still not so clear. The choice depends on the size of the assets, the location of the assets, and accessibility of the assets, raw material prices, logistics to market your product. We have been comparing acquisitions and brownfield opportunities that we have come across in the last few years, but in all the calculations we have made, our conclusion has been that greenfield projects made more sense for us.”
Preconditions for successful greenfields
Mr. Salgado explains that all new projects of Abengoa have three common characteristics. They should all be around 100 million gallons, they should have excellent access to raw material and, most importantly, they should have water access. “Water access is extremely important for us, especially in the United States and Europe. It provides us a lot of flexibility to access new ethanol markets that we currently can’t reach.” In the absence of pipeline transportation for ethanol, most producers currently use rail. “The problem is that rail is going to be saturated in the future,” Mr. Salgado points out. “Because there is no real alternative on most locations, prices have gone up dramatically in the last 5 years. Water access provides us an alternative with extremely competitive pricing to access markets where we currently rail our product to.
Part 2 of this article will be available next week (December 24)
© Ethanol Statistics 2008