Cosan’s Strategy for Future Growth

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.”