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.