Ethanol: hitting rock bottom before things get sweeter

Petrobras' weak fourth quarter results - down over 50% year-on-year - highlight just how bad things have become in ethanol in Brazil.

A surge in domestic petroleum sales at prices dictated by the government hurt the bottom line of the oil giant. That is because ethanol is no longer price competitive. The chronic lack of investment by Brazilian farmers in the sugar cane-ethanol complex is rippling its way down to consumers. Brazilian production has been falling with a drop of some 12% between the 2008-09 harvest and the 2011-12 harvest.

A study undertaken in January by Brazil’s National Petroleum Agency found that in only one of Brazil’s 26 states, and that the agricultural heartland state of Goiás, was it cheaper to fill up with ethanol than petroleum. Last year, gasoline prices rose 6.92% compared to 15.75% for ethanol.

Several years of under-investment and exploding demand at home have turned Brazil into a net importer. Brazil resorted to importing nearly 1.1 billion liters of ethanol from the US, an all-time high, and way up on the 74 million liters imported in 2010.

There is much good news emerging though at this bleak moment and the industry is now looking poised for a renaissance. The newly-announced Prorenova program, with a budget of R$4bn this year, is set to stimulate the renewal and expansion of the industry. The opening of the US market at the end of last year with the elimination of a  54 cent-per-gallon tariff on imported ethanol and a $0.45 subsidy per gallon of ethanol make Brazilian ethanol competitive. Finally there has been a trend towards  large-scale foreign investment.

All this mark ethanol out as a key sector to watch.

About admin

I've been researching and writing on Brazilian financial markets, industry and economy since 2006 for a wide range of specialist media, consultancies and investors. Before that I spent over 10 years in London and New York writing for and editing magazines and journals dedicated to finance, investment and economics in developing markets, mostly for the Euromoney Institutional Investor group and Thomson Financial. Areas of coverage Below are samples of areas that I cover and some of the common themes that I investigate. Capital markets BM&FBovespa markets *capital raising trends: via equities (IPOs and secondary issuance), debt and loans *the asset management industry: legislation and coverage of the key hedge, pension and investment funds * corporate governance: how the regulator is seeking to strengthen best practice and limitations * debt markets: the nascent corporate markets, attempts to boost liquidity and new insturments. * private equity market: why this market has been so successful, who’s involved. *electronic, high frequency trading and alternative trading platforms: what does the future hold? Banking *credit: the growth of consumer and business credit and competition between banks and models *Public versus private: the role and market share of public and private sector banks and the politicization of the industry * internationalization: which Brazilian banks are expanding overseas and where * investment banking: the growth of the domestic market and who’s winning which mandates *regional banks and development banks: what role they play in the industry and how they compete Mining *licensing: the complex process of obtaining environmental, water, land and operating licenses at a state and federal level. * capacity: the feasibility and sustainability of capacity increases * financing: how miners are raising finance in Brazil and abroad *competition: the interplay Vale, MMX and junior miners *logistics: rail, road and port connections Oil and gas: the fund raising issues related to the massive of pre-salt (link) Multilatinas: Who are they and how and where they are expanding Meatpacking: Are debt burdens sustainable, what are the different business models for areas such as branding and distrbution Agriculture: How are farms consolidating, what are environmental risks, how can foreign investors be involved. IT and software: Can Brazil take on India and build a viable long-term IT industry? For more information on clients and work, please see the media and consultancy sections.
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