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February 3, 2010 / 6:46 PM / in 8 years

Brazil hopes Shell-Cosan can boost ethanol exports

By Inae Riveras - Analysis

SAO PAULO (Reuters) - Brazil’s ethanol industry, which invested heavily to boost output of the cane-based biofuel, is counting on a tie-up between sugar and ethanol producer Cosan and Royal Dutch Shell Plc to revive its prospects after exports fell short of expectations.

The $21-billion-a-year ethanol joint venture announced by the two companies on Monday will enable Cosan, Brazil’s biggest ethanol maker, to move product more efficiently thanks to Shell’s global fuel distribution and retail system.

Cosan views the venture as a way to make Brazil’s ethanol a global commodity.

But whether that happens will depend largely on outside factors: whether oil is costly enough to make ethanol competitive; whether Brazil’s mills can provide a steady stream of biofuel; and whether key markets such as the United States will be more open to ethanol imports.

“Shell chose ethanol as the renewable fuel they want to be in and it chose Brazil. Whether this will mean more exports will depend on a series of circumstances beyond the companies’ control,” said ethanol expert Eduardo Pereira de Carvalho.

The slow rate of growth for ethanol exports has disappointed Brazil, where more than 450 mills joined the ethanol sector’s expansion drive in recent years.

Some analysts say any growth in ethanol exports will depend on oil prices more than other factor.

“The deal itself does not raise or reduce the economic viability of blending anhydrous ethanol in gasoline. This will be determined by the oil market,” said sugar and ethanol analyst Julio Maria Borges, director at Job Economia.

In 2008, when oil prices reached record highs of $147 per barrel, Brazil exported 5.1 billion liters of ethanol, up sharply from 3.5 billion liters the previous year. Countries simply bought more of the fuel to replace gasoline.

High oil prices together with environmental woes were then feeding discussions about a broader adoption of biofuels as an alternative to fossil fuels.

But oil prices tumbled as the global credit crisis intensified, and there was a similar decline in foreign interest for the cane-based fuel. Brazilian ethanol exports in 2009 slipped to 3.3 billion liters despite extremely low prices on the Brazilian market.


If ethanol is economically viable compared to oil, however, Brazilian ethanol exports should benefit from Shell’s global infrastructure, commercial relationships and know-how.

Shell, with distribution centers and 45,000 filling stations around the world, will have access to annual supplies of 2 billion liters of Cosan ethanol.

“Shell will be able to strike long-term deals with clients around the world, something that currently hardly exists, as it will be backed by a big provider,” Borges said.

But the lack of steady supplies from Brazil, which produces 26 billion liters of ethanol a year that are mostly consumed domestically, may trouble potential long-term buyers.

Futures markets for ethanol have been incapable of minimizing producers’ risks. Deals are largely done on a spot basis -- both in and outside Brazil. This makes it difficult for buyers and sellers to hedge against market volatility.

Brazil’s government has worked on ways of softening this problem by providing financing to mills to build stocks, which also smoothes out local prices over the year. But the system remains stubbornly inefficient.

“The same old problem will continue. Mills say they will expand production if there’s demand but demand will only be created if there’s the certainty of stable supplies,” said an ethanol expert based in the United States.

A U.S. tariff on imports of cane-derived ethanol is another roadblock to Brazil’s expansion goals. Some in the industry have suggested Shell’s entry into ethanol production in Brazil could mean extra pressure for removal of the tariff.

But it is not clear whether there could be a move in that direction.

“The oil industry was always against the U.S. tariff. The news is that it is now seeing a solution in cane,” said Joel Velasco, the North American representative for Brazil’s Sugarcane Industry Association, Unica.

But the announcement that the biggest-ever foray into biofuels by an oil major would happen in Brazil was a clear sign of preference for the fuel over other options.

“It’s difficult to predict (when exports could rise)... but the strategic meaning of a company the size of Shell to invest here is the most important point,” Carvalho said.

Editing by David Gregorio

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