Abengoa: The Only Global Ethanol Producer (1)

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.”