Brazil's biofuel industry dries up

Economy stalls ethanol efforts

By Alan Clendenning
Associated Press / November 23, 2008
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SAO PAULO - Brazil's biofuel industry just months ago was being flooded with billions in new investments for vast new sugarcane plantations and gleaming distilleries that churn out the cheapest ethanol on earth.

But the global financial crisis has put the brakes on that boom, drying up foreign investment and domestic credit, stalling new projects and prompting cash-strapped ethanol producers to indefinitely postpone expansions.

"I'm still ready to play ball, but the ball disappeared," said former Brazilian Agriculture Minister Robert Rodrigues, whose plans for an ethanol start-up were recently put on hold as foreign investors withdrew cash amid fears that a global recession would slow demand for fuel.

Heavily leveraged small and mid-sized ethanol operations are likely to be bought out by their larger counterparts, if emergency credit lines from state-owned banks aren't enough to stave off crushing debt obligations, participants at a recent biofuels conference in Sao Paulo said.

One large ethanol maker filed for bankruptcy earlier this month to restructure $100 million in debt it could not pay. "We're going to see more bankruptcies," said Eduardo Carvalho, director of the ethanol and sugar unit of conglomerate Odebrecht SA, one of Brazil's biggest companies.

Some $30 billion to $40 billion in investment that was expected in the industry over the next four years will be slashed, Marcus Jank, president of Brazil's powerful Sugar Cane Producers Association, said. Brazil's biofuel industry, born in the 1970s and concentrated in sugarcane-rich Sao Paulo state, has long been considered a global model, and its method of producing ethanol from sugarcane is cheaper and more efficient than rivals, including the United States, which uses corn.

John Melo, chief executive of US-based Amyris Biotechnologies, said Brazil's ethanol industry will survive because demand for cheap renewable fuels will rebound with oil prices.

The Brazilian and US governments are meanwhile funding research and development projects to spur ethanol start-ups throughout Latin America, but the financial crisis will inevitably delay private sector investment, US Agriculture Secretary Edward Shafer told the Associated Press.

Most new sugarcane mills cost about $200 million and crush as much as 2 million metric tons of cane a year, producing 160 million liters of ethanol.

The full extent of the damage to one of Brazil's most promising export industries is still unknown: The sector is dominated by private companies owned by wealthy families who have attracted foreign partners but are not required to report their finances publicly.

But no one expects Brazil to lose its place as the world's biggest ethanol exporter and second largest producer after the United States - where industry losses appear even more severe.

With oil below $50 per barrel, down more than 60 percent since July, biofuels have become less competitive. But US-made corn ethanol is more expensive than Brazil's sugarcane-based fuel: Oil must top $50 a barrel for it to be cheaper than gasoline. In contrast, Brazilian ethanol kingpins insist, their fuel is competitive as long as oil sells for more than $40 a barrel.

Brazil's strong domestic market will soften any blow to the industry if global demand for ethanol falls. The country has manufactured ethanol-only cars since the 1970s, and "flex fuel" cars - which run on ethanol, gasoline or any combination of the two - now make up nearly nine of every 10 cars sold.

And because state-run oil company Petroleo Brasileiro SA sets gasoline prices, ethanol in Brazil typically sells for nearly half the price of gas, making filling up a no-brainer.

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