Cosan’s Strategy for Future Growth

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.”