Brazil local demand to drive ethanol production

SAO PAULO (Reuters) - International demand for ethanol is expected to rise but Brazil's domestic market will be the main driver of production in the world's largest biofuel exporter, a top Brazilian analyst said on Monday.

Boosted by the growing flex-fuel cars fleet, ethanol demand was record in the country in 2007 and is forecast to surge again in 2008, as new car sales boom, said the head of Datagro consultants, Plinio Nastari.

"For the next five to seven years, the most important market will be the domestic one. Ethanol exports will increase but only in a modest way," Nastari told at the Reuters Global Agriculture and Biofuel Summit in Sao Paulo.

After stagnating for 20 years, Brazil's ethanol consumption rose by 3.7 billion liters to a record 16.7 billion liters in 2007. This year, it should grow by another 2.9 billion liters, following a surge in auto sales, the consultant said.

Faster economic growth and falling interest rates in Brazil encouraged new vehicle sales to rise by 28 percent in 2007 and are forecast to increase by around 18 percent this year. Flex-fuel cars accounted for 86 percent of all new sales.

The competitive prices of ethanol in 2007 in filling stations also encouraged a rise in car sales, Nastari said.

But world demand has fallen short of most Brazilian producers and traders' expectations. A sharp increase in U.S. output, trade barriers and some government's hesitation to introduce mandatory blends frustrated more optimistic views.

After surging in 2006, Brazil's ethanol exports dropped in 2007 to 3.8 billion liters and are expected to fall again this year, to 3.4 billion liters, said Nastari.

STRUCTURAL CHANGE

Nastari said the expansion of the local ethanol market is causing a "structural shift" in Brazil's centenarian sugar industry as mills will prioritize more the biofuel production instead of sugar.

Datagro puts Brazil's ethanol demand at 32 billion liters by 2014, when ethanol will make up for 53 percent of fuels used by light vehicles, due to the increase in the flex-fuel fleet.

Exports are expected to total not more than 7 billion liters by 2014.

At this time, mills will be diverting around 62 percent of the country's cane crop to ethanol output, compared with around 55 percent in Brazil's center-south in 2007/08.

The U.S. energy bill, which was signed into law in December, could signal an opportunity for the Brazilian fuel by 2015 -- but not necessarily, the consultant said.

The law sets a cap for the production of corn-based ethanol and ambitious targets for the usage of other kinds of feedstock for ethanol, like cellulose, by 2015.

However, these targets could be easily changed in the future to protect the U.S. industry, Nastari said.

"The most promising market for ethanol is the United States... (But) I believe they will stick to its (54 cents a gallon) import tariff and create a quota, and then administrate this quota under geopolitical criteria," he said.

Despite the tariff, eventual direct exports could happen depending on prices in Brazil and in the United States.

As ethanol demand rose in the U.S. market last year, local ethanol surplus dropped and prices reached a level in late December (of around $2.45 per gallon) that made direct exports from Brazil temporarily viable, he said.