April 24, 2008 / 9:50 PM / in 10 years

Ethanol consolidation to increase in Brazil

SAO PAULO (Reuters) - The purchase of Exxon’s fuel distribution assets in Brazil by ethanol producer Cosan and the entry of oil major BP in the ethanol sector signal growing consolidation in the country’s booming biofuels industry.

Analysts said Thursday the link between oil and ethanol markets will likely strengthen too, adding more scale to biofuels as exports of cane-based ethanol increase and more international oil companies arrive in Brazil

Britain’s BP Plc took a stake in a big biofuels project and announced $1 billion in investment jointly with Brazilian partners on Thursday, the same day Cosan sealed an $826 million deal with Exxon Mobil Corp.

“It’s a natural trend toward consolidation in the ethanol sector,” said Julio Maria Borges, director at Job Economia sugar and ethanol consultants, adding that more such deals were to come.

“In ten years we’ll certainly see Brazil harvesting 1 billion tons of cane with only 20 industrial groups,” Borges said. Nowadays, there are more than 350 sugar and ethanol mills in the country.

Cosan, a unit of Cosan Ltd, will become the first ethanol group to operate from cane planting to fuels distribution, a business that is dominated in Brazil by oil giants like state-run energy company Petrobras and Royal Dutch Shell Plc.

Borges said sugar will certainly be a “second class product” in the future, with the industry’s core business focused on ethanol and electricity generated from cane.

“This opens a new era in the ethanol industry in terms of vertical integration,” said Adriano Pires, director at the Brazilian Center for Infrastructure consultants.

“The news from both Cosan and BP indicate a change in the industry. Ethanol is now working within a logic of oil,” Pires said. “This won’t stop, for sure.”

Cane-based ethanol exports have increased less than producers expected in recent years, but once it starts growing, with more countries adopting the renewable fuel, prices will also be more linked to international oil prices, Borges said.

Brazil’s ethanol demand is starting to exceed gasoline usage as a result of a growing flex-fuel car fleet, which can run on gasoline or ethanol. The country is the world’s largest and most competitive ethanol exporter.

Petrobras signed last month a deal with Japan’s trading house Mitsui to create a company focused on bioenergy projects, notably ethanol.

“Big world energy players will come to Brazil. All this dispute between food and energy only reinforces Brazil’s advantageous position in the biofuels area,” Borges said.

Pires said foreign companies’ investments will likely focus more on technology development, adding that other Brazilian companies could follow the steps of Cosan to enter the distribution area in order to “cease being hostage” of oil-focused distributors.

Editing by Marguerita Choy

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