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Published on: Monday January 7th 2008
Domestic demand: Pending natural gas shortage and flex-fuel vehicles
Contrary to international demand, domestic demand is skyrocketing because of the increasing market share of flex-fuel vehicles. In October, 86.5% of all new car sales was accounted for by flex-fuel vehicles and according to Mr. Lutz this causes an annual increase in domestic demand of 3 billion litres. But surprisingly, that is not the most important development at the moment. Mr. Lutz shares his concerns about the natural gas shortage in Brazil. According to him, “that immediately affects 2 to 3 billion litres of domestic demand, because natural gas vehicles can burn ethanol and gasoline as well. This is an immediate demand, causing a major problem that is about to happen in the short term.”
Delayed construction
Domestic demand seems to be able to compensate for declining international demand, yet we read that new projects are delayed because of tight margins. To what extent is this actually happening? Mr. Lutz finds it hard to say, but has noticed people moving slower. “I haven’t seen investments cancelled, but some new projects seem to be postponed. It is hard to measure, but I would say current price levels would cut at least half of the projected growth. But than again, these price levels will probably not maintain on the long run.”
Consolidation: Timing is key
Current tight margins do seem to push a considerable number of mill owners to offer their facilities for sale. Consolidation seems inevitable with over 350 companies in the market. But the timing for large scale acquisitions is currently not ideal according to Mr. Lutz. “What we have seen is a lot of people trying to sell mills in Brazil, but there is not much happening in terms of effective deals. This is because the expectation of the seller is different from the expectation of the buyer. In the end, expected cash flow has to be close to what is being asked and that is currently not the case.“ Something that will probably change in the near future, as he adds “The sellers are selling because they need to sell. So I see the prices going down first.”
Foreign capital: International competition
Considering the acquisitions of Bunge, Cargill, Infinity BioEnergy and Abengoa, foreign investors don’t seem to mind the current price level for acquisitions. But even they will adjust their growth strategy says Mr. Lutz. “The fact is that a lot of new capital came into Brazil with a focus on market entry, on placing themselves. But on the long run, I see international capital much more organized and disciplined than Brazilian capital. Currently, Cosan is still the only large consolidator in Brazil, so I look forward to other companies joining that party.
© Ethanol Statistics 2008
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