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Published on: Monday January 7th 2008
AMSTERDAM – For investors that have been trying to keep up with the latest developments in the Brazilian ethanol market, news report didn’t seem to offer a very clear picture in the past few weeks. Early last month, CNN reported that “long-term investors in Brazilian ethanol (are) unfazed by (the) dollar crash”. FX Street reported the same day, “Brazil sugar and ethanol market loses competitive edge on dollar”. Dow Jones reported near the end of October that the Brazilian ethanol consumption “shows no sign of slowing”, substantiated by a Reuters article reporting that “Brazilian auto sales jump to record high in October” of which 86.5% was flex-fuelled. Reuters, however, also reported that “tight profit margins in Brazil's ethanol and sugar industry this year have led to delays in the projected start-up of new plants” and sugar consultant Kingsman said “(ethanol) export will be challenging because of logistical problems and large supplies in United States”. To summarize, Brazil has record domestic demand for ethanol and an rapidly increasing flex-fuel vehicle market share, yet also declining ethanol exports in 2008, tight profit margins resulting in delayed construction, in a time when the Dollar/Real exchange rate reduces its competitive edge, yet not on the long run.
Ethanol Statistics sat down with Marcos Lutz, Chief Commercial Officer at Brazil’s largest ethanol producer Cosan, to discuss the latest developments in the Brazilian ethanol market. Mr. Lutz was able to provide the proper context that is needed to interpreted the news reports mentioned above. He emphasized the flexibility of Brazil’s supply chain. “From the consumer to the distributor we have a matrix that is flexible as a whole,” he said, “and because of that, we are able to cope with a lot of changing variables.”
Brazil could export 10 billion litres within one year
One of the best examples of Brazil’s flexibility, according to Mr. Lutz, was the surge in international demand from the United States, following the MTBE ban in 2006. By lowering the mandatory ethanol blend from 25 to 20%, by converting more sugarcane to ethanol instead of sugar and because 12-13% of its vehicle fleet was capable of running on both gasohol and E100 ethanol, “Brazil was able to reduce its internal demand by 30% in just 5 months, to enable Brazilian producers to export to the U.S.” The range of this flexibility is enormous according to Mr. Lutz. “Why did we export 3 billion litres? Because the demand was 3 billion litres. I would say that, if we have a one year notice, Brazil could export more than 10 billion litres of ethanol. And we need that one year notice only to adjust the logistics for export, nothing else.”
Smaller international demand, changing geographic markets
Impressive as that may be, experts currently predict a sharp decline in international demand. To that, Mr. Lutz agrees. “International market will be smaller than last year and next year it will be even smaller. This is because European countries and the United States are increasingly filling their demand with domestic production.” This, however, does not imply that exports will evaporate next year. A shift in export markets does seems logical. “Europe is trying to fill its demand, but with some problems. I foresee some shortages in Europe if the prices of wheat maintain current levels, resulting in high ethanol prices.” In addition, although the short term effects is “huge”, Mr. Lutz doesn’t foresee any long term effects from the weak dollar, saying “I cannot see the depreciation of the dollar relative to the real go too much further. The Big Mac in São Paulo is probably twice as expensive as in New York, which doesn’t make sense.
© Ethanol Statistics 2008
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