AMSTERDAM – Cosan S/A is Brazil’s largest, most consolidated sugar and ethanol producer. With 17 operational plants that process 40 million tonnes of sugarcane per year, Cosan sold 1.32 billion litres of ethanol and 3.25 million tonnes of sugar in FY’07. It has realised a market share of 7 to 8.6%, depending on whether you look at sugarcane capacity, sugar sales or ethanol sales. This may not seem like much, until you realize that its closest competitor, the recently formed Santelisa Vale, has a market share of 4.3% followed by a number of companies with approximately 2%. In August this year, Cosan also raised $1.2 billion in its initial public offering on the New York and São Paulo stock exchange to fund acquisitions and the construction of new mills in order to keep up with soaring demand for ethanol. To put it in the words of Cosan´s Chief Commercial Officer, Marcos Lutz, “Cosan’s strategy is aimed at growth.”
With $2.02 billion net operating revenue and $1.2 billion raised through its IPO, Cosan certainly has the capital and cash flow to choose between almost all strategic options. Ethanol Statistics sat down with Marcos Lutz to discuss the future of Cosan, how it will expand and where. Mr. Lutz shared that Cosan is now actively seeking to expand abroad, beyond the CBI region, to establish ´lifelong marketing relations´. He also substantiated Cosan’s decision to start production in Goías, a Brazilian state just outside Brazil’s main production area of São Paulo. Perhaps Cosan’s strategy can be summarized in just one quote from Mr. Lutz: “If I want to go to 150 million tonnes of sugarcane per year, we will need to produce in other places as well.”
Acquisitions
Greenfields, brownfields, productivity improvements and acquisitions. These are the key strategic modes of expansion for Cosan in the next few years, in descending order of expected frequency and importance. With such a large capital injection from its IPO, one would expect Cosan to aggressively acquire some of its smaller competitors. The market however, is currently not ideally suited for such a strategy says Mr. Lutz. “We have seen a lot of people trying to sell mills in Brazil, but there is not much happening in terms of effective deals. In the end, expected cash flow has to be close to what is being asked. That is certainly not the case right now.” Further explaining his point of view, Mr Lutz says “at this point I believe we have to wisely wait for the right time and be very disciplined in pricing. Of course we could spend money in expensive acquisitions, but we won’t do that.”
The danger of foreign investors
Acquisition does seem to be one of the most important entry strategies for foreign investors at the moment. The last 12 to 18 months companies such as Cargill, Abengoa, Infinity BioEnergy and Bunge Ltd. entered the market. Companies that are all financially strong multinationals. Is Cosan perhaps leaving too much room in the market for these companies? Surprisingly, Mr. Lutz is actually quite happy that well managed, international firms such as Cargill are joining the industry. The reason for this seems to be the inefficiency of a fragmented market as he says, “We have 350 players in Brazil. It would be better to have 20 of those companies expanding in the market because the discipline of those guys is so much better.” In addition, Mr. Lutz still sees considerable competitive advantages for Cosan relative to giant traders such as Cargill, Louis Dreyfus and Bunge. “We manage the society around the mill, which is key. We are an agricultural business. We plant, we fertilise, we raise cane, we cut cane, we operate the plants, we do everything. These major agribusinesses, they don’t do agriculture. They buy and sell supplies.
When we raised the example of Abengoa, Mr. Lutz had to admit that Abengoa is indeed trying to do this. “Yes, they bought Dedini, which I think was a good move even though it was twice as expensive as buying the same volume in Cosan on the stock exchange. But still, it was a good move. However, you have to deal with workers, unions, climate conditions, judges, cities and priests. That is not very easy for any company to do and it’s an expertise that you have to develop over time. As a Brazilian I can understand the culture better than an American or European. If I come to Europe to buy a wheat mill, it won’t be easy either. I have to deal with the French Union that have a strong lobby. It requires experience.”
Greenfields: Expanding outside São Paulo
Because Cosan sees current market prices as unfavourable for an acquisition oriented strategy and because it doesn’t see an immediate threat of foreign companies gaining too much market power, it is able to focus more on greenfield projects. More specifically, greenfield projects in the Brazilian state of Goías. Currently, Cosan has 3 greenfield projects in Goías, which is adjacent to Brazil’s main production state, São Paulo. The 3 projects have a combined projected capacity of 10 million tonnes of sugarcane, which is 25% of Cosan’s current capacity. Most companies tend to expand in the most productive sugarcane area of Brazil, São Paulo, yet there is a tendency among the larger companies to move more inland. The reason, Mr Lutz as says, “we need a place without sugar mills. A place where we can develop sugarcane fields surrounding the plants, to create clusters that act as a system. Having mills in a cluster reduces the cost of transportation to the mills and reduces the energy consumption.”
Clearly, the choice of Goías was a choice to create sufficient synergy. Something that is less viable in the increasingly cultivated lands of São Paulo. The logical question than is, why not the states of Paraná or Matto Grosso do Sul? From a logistical point of view, Paraná is much closer to Brazil’s coast and main fuel consumption market, São Paulo (city). Infrastructural development is the answer. “Linear distance is not equal to economic distance,” says Mr. Lutz, “the Goías cluster is 150 km from a river port that facilitates barges from there to almost Piracicaba, which is our closest mill to the market in São Paulo. In addition, the planned ethanol pipeline will also be in Goías.”
Pipeline
There have been plans for an ethanol dedicated pipeline system in Brazil for several years. The motives are to lower the high transportation costs for ethanol in general, to increase the accessibility of states such as Goías and to resolve congestion problems in the port of Santos. For years, the project has been under discussion because of reluctance in the market to a controlling share in the project from state owned oil company Petrobras. Therefore, there are now two planned pipeline projects. One is from Petrobras and one is a joint effort from sugar and ethanol cooperatives Copersucar, Crystalsev and Cosan. According to Mr. Lutz, “the project in which his company is involved is now finishing a study on the project and will start to apply for environmental permits early next year.” Whether Petrobras invest in the joint project or would than still pursue its own project Mr. Lutz can’t say. “Their project is a brownfield,” he says, “they have a lot of assets that can be used and leveraged for the pipeline, but at the end this is an infrastructure. Nobody will make a lot of money on it. But it will make business able to leverage. The main differences between the projects are therefore clear. Our joint effort is to create additional logistics for export, while Petrobras is trying to enter the market and gain some control on exports. From that point of view this sector can pay a big price just not to have Petrobras in control.”
Brownfields and expansion: A strategy for the São Paulo area
The fact that Cosan is currently not building new plants in São Paulo doesn’t mean it’s not expanding in there. Cosan plans to expand its capacity with an additional 10 million tonnes of sugarcane within the next 5 years, with brownfields and small expansions in 7 of its current plants in São Paulo. The expansions vary between 0.3 million tonnes per year in the Junqueira mill to 4.4 million tonnes per year in the Gasa mill. What makes it attractive? “Price”, says Mr. Lutz, “We can expand 10 million tonnes of sugarcane with an average cost of 47 dollars per tonne of capacity.” To put that into context, expansion in Cosan’s most important production cluster ‘Jaú’ would cost about 111 dollars per tonne of capacity just for acquiring the land to cultivate the crop. The economic logic is clear in this option.
Investing in the United States
But that’s domestic expansion. Consolidating a leading position in its home market. What about ambitions outside Brazil? Cosan’s Chief Financial Officer Paulo Diniz was quoted in September saying that Cosan would start taking its first international steps. At the time, three options were presented. The first would be to invest in an ethanol dehydration plant in the Caribbean, following in the steps of companies like Brazil's Crystalsev and U.S. giant Cargill. The second option would be to install a distillery in Mexico, which has free access to the U.S. market through NAFTA (North American Free Trade Agreement) from January 2008. The third and last option would be to invest directly in the United States. Mr. Lutz confirms all three options as viable but doesn’t consider investments in CBI countries as Cosan’s first international step. “CBI is a minor investment, which involves about 10 million dollars. What were talking about is actually having a plant or two in the United States. To have domestic supply there as well”.
Market access is obviously the main motive for Cosan. “What we are investing in are actually marketing positions. We want to be a player on the long run”. CFO Paulo Diniz was quoted saying this would take place before cellulosic ethanol would reach a commercial scale, making the investment corn based. A logical choice, according to Mr. Lutz as “you have to go for the killer application in the area. The best way to produce ethanol in Brazil is sugarcane. In the US, it’s corn based ethanol. If mango fruits would have been better, we would have chosen mango fruits. The main point is to have the plants, the tanks, the logistics and to develop commercial relations. The latter will last forever.”
Investing in other areas: Europe, Mexico, India, Africa, Thailand, Australia
So what about developing ethanol markets in Europe, or agriculturally rich area’s such a Mexico, India, Africa, Australia or Thailand? At the moment, Cosan believes in a future in Mexico and Africa. “Australia has a very big problem with availability of land and water,” Mr. Lutz explains his point of view, “India, is already occupied and they have 1.5 billion people to feed. I wouldn’t want mess with them because of food vs. fuel issues. I believe they will manage this internally. Thailand maybe, but I see Thailand, Japan and China having a large population compared to what they have in terms of consumption. Japan and China are definitely consumer markets, so I would pursue a marketing position there. Production wise it is only unclear what role Europe will play in the future.”
© Ethanol Statistics 2008