Wednesday, July 13, 2011

Brazil looks to US to kickstart biofuels: 7/10/11

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July 10, 2011 6:05 pm

Brazil looks to US to kickstart biofuels

By Samantha Pearson in São Paulo

Moves by the US to scrap ethanol subsidies and tariffs could prove to be the catalyst that transforms Brazil's biofuel industry from a sprawl of debt-ridden family farms into the world's alternative energy hub.

However, it is a transformation that could also heighten tensions over food security and cause deep social changes in Brazil as air-conditioned harvesting machines replace thousands of low-income manual labourers.

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Last week US senators reached a deal to repeal an ethanol tax credit worth $6bn per year and remove a 54 cent per gallon import tariff, raising hopes in Brazil that Congress will soon abolish what has been an important source of conflict between the two countries.

Global oil groups, such as Royal Dutch Shelland BP, have already started piling into Brazil in anticipation of the change, vying to control the sugarcane fields that will supply this vast new market.

"It's great news for our commercial relations and we are already working on various ethanol initiatives within the government," Mariângela Rebuá de Andrade Simões, director of energy at Brazil's foreign ministry, told the Financial Times. "But at the end of the day, it will be the market, the industry itself, which will respond."

Brazil is the second-largest producer of ethanol behind the US. But it is a more efficient one as it generates the biofuel from sugar rather than corn, making the Latin American country an attractive target for companies looking to get into the market.

One of these is Shell, which kicked off its joint venture with Brazil's Cosan last month.

"Shell got involved because it believes the amount of energy needed by the world is not going to be possible just by [relying on] fossil fuels...and the motivation for Cosan was to transform sugarcane ethanol into an international commodity," said Vasco Dias, Raízen's chief executive.

Ethanol is a highly popular fuel for cars in Brazil, so much so that in April the government altered its legal status from an agricultural product to a "strategic fuel".

By 2020, 86 per cent of all vehicles in Brazil will be flex-fuel, which means they can run on gasoline, ethanol or any mixture of the two, according to estimates byUnica, the country's cane industry association.

Although these flex-fuel cars are rare in the US and Europe, demand for ethanol is set to surge because of political pressure to increase the amount of ethanol blended with gasoline.

The industry still needs $80bn of investment over the next 10 years according to Unica, but the arrival of international companies has already brought big changes.

Raízen plans to cut all of its cane by machine by 2017, the first ever sugarcane accreditation board has been created to improve standards, and companies are starting to diversify products.

"You already have research and initial production of advanced forms of ethanol for jet fuel, innovative ways of making bioplastics, and even cosmetics," said Paulo Sotero, director of the Brazil Institute at the Woodrow Wilson International Center for Scholars.

However, the promotion of ethanol means a smaller proportion of Brazil's sugarcane will be used to produce sugar, raising tensions over food security.

In 2010, 54.2 per cent of Brazilian sugarcane was used for ethanol but this is set to rise to 68.5 per cent by 2020, according to sugar consultancy Datagro.

During a meeting of G20 agriculture ministers last month, Brazil's biofuel policies faced criticism from China and Russia for driving up sugar prices to a 30-year high.

But Brazil has argued it can increase production of both sugar and ethanol without clearing huge amounts of land – an argument that should gain momentum now that José Graziano da Silva, a Brazilian defender of biofuels, has been appointed head of the United Nations Food and Agriculture Organisation.

"There are issues related to food security but sugarcane ethanol is really not part of the problem," said Mr Sotero. "Instead, it's part of the solution to a much bigger problem: climate change."

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