EMERGING MARKETS: LatAm biorenewables witness investment jump

The continued rise in the price of gasoline to comfortably more than $100 per barrel, US government energy security concerns, and a host of new technologies are coming together to boost investments in biorenewables massively, with more than $1bn in new investments planned this year. Latin America is emerging as the region of choice thanks to its climate, abundant cheap land and proximity to the US, with investments reaching a tipping point.

Both the public and private sector are providing momentum to the industry. The most traditional sector, ethanol, received a fillip when the US congress failed to renew tariffs and subsidies at the end of last year. A hefty 54 cent-per-gallon tariff on imported ethanol, levied since the 1980s, was eliminated and a $0.45 subsidy per gallon of ethanol mixed into gasoline to US producers worth $6bn per year lapsed.

Investors are also focusing on petrochemical applications as prices have decoupled from petroleum prices: the price of asphalt has nearly doubled in the last 10 years, explains Tristan Brown, director of the Bioeconomy Institute at Iowa State University. That has fired up determination at the Department of Energy to look at all biorenewable sources for transport solutions. There’s an awareness that Latin America will have a role to play here, even if there’s some reluctance to put all the eggs in one basket: “although Brazil is seen more favourably by the US than many of the oil producers, such as Saudi Arabia, there’s still a strong desire to see much of this get done at home”.

Local governments have been quick to spot the opportunity presented by the US opening. The Brazilian government launched an ethanol program, Prorenova, with a budget of R$4bn this year to stimulate the renewal and expansion of sugar cane in the country and seek to reverse flagging ethanol output. The money could see 1m additional hectares come into production and boost production by between 2-4 billion liters through 2014.

Still, the recent past for ethanol in Brazil shows many of the difficulties: a very strong real has made the still fragmented and largely family-owned industry uncompetitive. Brazilian production had been falling with a drop of some 12% between the 2008-09 harvest and the 2011-12 harvest. Marcelo Junqueira, founder of Agrop, an agricultural service provider to the sugar industry based in Orlândia in São Paulo state, says it could take as much as five year for plantations to recuperate.

Yet Luiz Felipe Monteiro, assistant professor in the management department at The Wharton School of the University of Philadelphia, argues that significant foreign investment is putting the industry on a more sustainable footing, with planned investments helping to create a truly global market.

Trailblazers are already showing their willingness to make such significant investments, Monteiro points out. The $12bn joint venture between oil giant Shell and Cosan, Brazil’s largest ethanol producer and a key distributor of fuels, opened the path for oil majors. BP quickly followed suit, signing a US$680m deal last year to acquire 83% of Companhia Nacional de Açúcar e Álcool (CNAA).

Monies are coming from non-traditional investors in Brazil too. Emerging market sugar powerhouse India is proving active. The country’s Shree Renuka Sugars took over troubled São Paulo-based producer Equipav in 2010 paying some US$330m for a controlling stake and promising a further $120m in investments. 

That has encouraged Petrobras to step up its investment game. Brazil’s oil national brought a 49% stake in publicly listed Açúcar Guarani for US$920m. All this is building the momentum for the emergence of ethanol as a recognized global fuel, creating an irreversible process, thinks Monteiro.

The very rapid emergence of secondary players in the region is helping the industry gain the political clout it needs too. Colombia has been particularly active in building a domestic sugar cane industry with aggressive targets for ethanol blends into gasoline while Peru is also building its capacity and Central America benefits from its free trade agreement with the US. Colombian ethanol capacity alone is set to increase by 200,000 liters per day from 2011 levels of an estimated 300m liters.

At the same time, a host of new US biorenewable-dedicated companies is investing heavily in new pathways. For ethanol, they tend to pick Brazil but other countries are carving out niches too. Argentina is the focus for much biodiesel production thanks to high levels of soya production and spare refining capacity while much work on algae fuels is taking place in Mexico, says Brown.

Such private sector investments are in a number of fields and spread across the region. US firm Amyris which is producing renewable diesel from ethanol, has a pilot program where it is tested its product on a small part of the bus fleet in the city of São Paulo. LS9 is working on biodiesel technology in the region while Solazyme is seeking to ramp up production of algal based fuels, partly in Mexico and Brazil. BioAmber an industrial biotechnology company that converts feedstocks into chemical applications has just raised $30m and is planning a $150m IPO.

The bewildering number of initiatives and bets on alternate fuel types will ensure plenty of failures in the years to come: the embarrassing collapse of US government-supported solar panels manufacturer Solyndra all too painfully shows the immaturity of the industry. Moreover, interest waxes and wanes in line with the price of petroleum and petrochemicals products. But the increasing momentum for Latin American biofuels is becoming unstoppable. 

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