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 second of two articles, Mr. Salgado focuses on the different strategies that are currently needed to cope with the differences in each geographic market; Brazil, Europe and the United States. He talks about the lessons learned in Abengoa’s Salamanca plant and the focus on flexibility that came out as a result.
United States: Size is needed to dilute fixed costs
Constrains in logistics are a pending problem for ethanol producers in the United States. The most important problem at the moment is however the extremely tight profit margin. Rising corn prices and low ethanol prices have made it difficult for ethanol producers to remain profitable. However, according to Mr. Salgado, its mainly the smaller plants that suffer from current margins. “For sure, the margins are hurting the industry. But if you analyze the composition of the industry, you will see that a significant part of the industry is running on 20 to 30 million gallon plants. The difference in running an 20 million gallons plant and a 100 million gallon plant is quite significant in terms of fixed costs; the difference can be as much as 35 cents per gallon. In today’s industry, you need a certain critical mass to dilute your fixed costs.” Mr. Salgado’s point seems to be substantiated by the news that E3 Biofuels filed for bankruptcy protection while it reorganizes its finances. The company stopped production in its 25 million gallons plant. Mr. Salgado said “In Indiana and Illinois we are replicating the size of our plant in Ravenna, which is 90 million gallons. We consider that a perfect balance in capital investment and capacity. I wouldn’t recommend anyone to build a plant below 75 million gallons anymore because of the reasons I mentioned.”
Europe: A lesson from the Salamanca plant
The European story is not much different in terms of size. But size is not the most important strategic issue in the European ethanol market; uncertainty is. Uncertainty in terms of government support and legislation, but also in terms of feedstock price levels. Abengoa recently suspended production in its production facility in Salamanca, Spain. The reported reason was that the plant was no longer profitable because of high wheat prices. But according to Mr. Salgado there has been a lot of misunderstanding and confusion about the decision to suspend production in Salamanca. “The primary reason to suspend production was the lack of regulation that provides us a long term sustainable market in the Spain. Salamanca was designed 5 years ago to sell all of its production on the domestic market in Spain, meant for direct blending. However, European oil companies are fighting direct blending and as a result, 100% of Spain’s ethanol demand is consumed through ETBE. Salamanca is located in the middle of Spain, for away from the coast and doesn’t have the logistics to facilitate exports to countries such as Sweden, Belgium, the UK or Germany.” Mr. Salgado said it was the combination of that situation with the unfavourable prices of coarse grains this year, that provided a situation in which Salamanca was no longer the cheapest option to cover its contracts. “Salamanca was never designed to compete for exports, it was designed to supply the domestic market. The Spanish government is currently discussing mandatory legislation for biofuels introduction in Spain between now and 2010. If that legislation is passed, Salamanca will have its own place in the market, as we originally thought.”
Europe: Uncertainty requires flexibility
Mr. Salgado admits that Abengoa has learned from its experience with the Salamanca plant. “It was a hard lesson,” he said, “and now we are trying to apply these lessons to our new projects. In our new projects in the United Kingdom, Germany and the Netherlands, we have paid a lot of attention to diversification of raw material, logistics and flexibility. I mentioned before that our two projects in the United States have water access and I can tell you that water access is also going to be a major issue in Europe. Our new projects all have water access, multiple feedstock flexibility and they will all produce 400 million litres, or approximately 100 million gallons. They can produce ethanol from corn, barley, wheat, sugar beet juice and wine alcohol and they have excellent access to local and export markets. I’m very pleased about the result.”
Brazil: Leveraging knowledge from Dedini
Similar to the United States, the Brazilian ethanol market seems ready for an aggressive acquisition strategy. Acquisition prices are expected to drop in the next few years and the market is still extremely fragmented. But the acquisition of Dedini was not the first step in such a strategy. “The most important strategic motive to buy Dedini was to acquire a major producer with excellent expertise on the agricultural side and an excellent reputation in the market. We can now leverage the expertise that was present in Dedini with our own and I think we can expand significantly through that. Acquisitions are also an option, but I think the major value will be created through organic expansions and new greenfields”.
Growth of Abengoa in the United States: Cellulose focussed
Looking at the aggressive growth plans of Cosan in Brazil and abroad, or looking at the production capacity of ADM, POET and Verasun Energy, we asked Mr. Salgado about the Abengoa’s goals in terms of growth. Focussing on the US market, he said “the important thing for us is to have critical mass in all three markets. We have 200 million gallons in operation today and 200 million that will come online in the next 2 years. Another 100 million gallons with our hybrid project in Kansas, that will produce 88 million gallons from corn, and 13 million gallons of cellulosic ethanol from biomass. That’s 500 million gallons and that is what we see a our critical mass. Our strategy is focussed on generating cash flow to invest on our biomass technology. Subsequently, any growth beyond 500 million gallons is going to be much more focussed on 2nd generation ethanol. If the hybrid concept in Kansas is successful in terms of Capex and Opex, we plan to replicate it on all our locations, because we don’t believe that second generation biofuels will be established immediately, without a period of transition from first generation.”
Vision: CO2-based value of ethanol
Besides its focus on cellulosic ethanol, Abengoa is currently pursuing aggressive plans to improve the life cycle of its plants. “We have the vision that ethanol in the future is going to be valued on the displacement of CO2,” he said. “In that sense, the same molecule of ethanol is going to have different value depending on which raw material is used and which energy sources is used in our plants. We are working very hard to provide products with an even better life cycle than we currently have.” For sure, its experience with raw materials in the US, Brazil and Europe will result in the synergies it is looking for.
© Ethanol Statistics 2008