Abengoa: The Only Global Ethanol Producer (1)

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)