Trends in Brazil's Ethanol Industry - Ethanol Trading BF2008

8/2/2019 Trends in Brazil's Ethanol Industry - Ethanol Trading BF2008

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October, 2008

Roberto Giannetti da Fonseca

The ideas and suggestions contained in this presentation are our intellectual property and,

therefore, subject to the prevailing laws concerning authorship. Total or partial publication ordistribution to third parties is not permitted.

Prepared by:



Agenda: Trends Agenda: Trends

Sustainability

Trends in Production

Consumption – domestic market

Consumption – foreign markets

What lies ahead!

Trends in Brazil’s Ethanol Industry



Economical

Should not compete with food. Biofuels should not createinflationary pressure

Sugarcane

Should be competitive without subsidies.

Product mix to increase revenue: cogeneration represents20% of revenue stream – investment increase capacity;

Technology improvements on agriculture efficiency andyields (feedstock is 70% of cost), and on industrial process;

Cellulose from sugarcane bagasse and gasefication of vinasse.

Sustainability: 3 Pillars

Social

Rural development

Mechanical harvesting – more than 50% in São Paulo State, andmust be 100% by 2014. Pace must be controled no to create asocial problem, once this is the most labour intensive activity of

the industry; Technical training

Ethanol Production must be sustainable:

Economical, Social and Environmental!



Environmental

Ethanol production should lower the Carbon Footprint

GHG life-cycle will be a criteria for US and EU markets

Zoning for development of Sugarcane: São Paulo first and now Brazilalready mapped and defined areas that production will be authorised.

37 milion hectares mapped and identified on zoning criteria

Production should grow in degrated pasture land.

Sugarcane and other crops will grow only based in higherproductivity in cattle farming.

Sustainability: 3 Pillars

Brazil is now aware that sustainability is mandatory for the

development of the ethanol marketsSource: ICONE, Valor Economico, MAPA, - Elaboreted by Ethanol Trading, * Projections by ICONE

2006 2018*

Pasture 172 162

Other Crops 70.8 81.4

Sugarcane 6.2 11.8

Sugar 3.1 4.1

Ethanol 3.1 7.7

Land Allocation (Mi. ha)

3% of allocated land



Source: UNICA , F.O. Licht, USP *Elaboreted by Ethanol Trading

Ethanol Production: Brazil and World

USA, the largest producer of ethanol,forecasted to produce 15.3 Bi gallons by

2015 – corn based

Brazil, based on sugarcane, as thesecond largest producer of ethanol isforecasted to produce 12.4 Bi gallons of

ethanol by 2015/16.

BRAZIL Unit 2007/8 2015/16 2020/21Sugarcane Production Mi tonns 430 829 1,038

Harvest Area Mi. hectares 6.3 11.4 13.9

Sugar Production 30.2 41.3 45.0

domestic 12.2 11.4 12.1

exports 18.6 29.9 32.9

Ethanol Production 5.9 12.4 17.3

domestic 5.0 9.1 13.1

exports 1.0 3.2 4.1

BioElectricity - Cogeneration MW 1,800 11,500 14,400

Mi. tonns

Bi. gallons 75%

25%

15% of Brazil’s Energy MixWorld

DomesticMarket



Source: UNICAMP, Dedini and UNICA *Team analysis and forecast

Over the next 5 years it isestimated that US$ 33 billionswill be invested in this industry:

80 new projects

INVESTMENTS

Trends:

Industry

Consolidation

M&A

Marketing

Alliances

Marketing Alliances: Copersucar S.A. & Allicom (São Martinho), CrystalSev

M&A & Greenfields

Traditional Brazilian groups: Cosan, Santaelisa/Vale,

New Groups: Brenco, ETH, Infinity

Foreign Companies: partnering & greenfield

Major trading houses: Bunge & Itochu, Cargill, Dreyfus, ADM

Energy Companies: BP, Abengoa

Financial Investors: domestic and International (Gavea , CSFB, Khosla )

Ethanol Production – Supply base Brazil

EXAMPLE OF PLAYERS



Ethanol Production: Smaller Scale Units

Source: Alcompac

Sugarcane based – 3 plant sizes!

Require less area in the proximity of plant

Much lower investment requirement

Producing ethanol and bio-electricity atcompetitive cost.

Pilot project in operation

Pilot project in Jaiba – North of Minas Gerais

DAEG – Destilaria Aviador Edward Gomes, owned byIBÁ Bioenergia S.A.

Production capacity of 10,000 liters/day

10,000/d 30,000/d 60,000/dHarvest area hectares 394 1,181 2,363

Crushing capacity / season tons 31,500 94,500 189,000

Production/day liters 10,000 30,000 60,000

Production/day gallons 2,642 7,925 15,850

Production/season gallons 554,761 1,664,284 3,328,568

Alcompac UnitsPlant Size



Consumption: Domestic Market – main market

Hydrous

Anhydrous

Gasolina AGasoline C(E20 – E25)

E100 - FFV

48.8%

16.3%

34.9 %

Since March 2008, ethanol represents more than 50% of Brazil’s otto-cycle fuel consumption.

In 2007, Brazil consumed 2.5 Bi gallons of hydrous Ethanol and 1.6 Bi gallons of anhydrous

blended with gasoline

Otto-Cycle Fuel Consumption in BrazilJan 2000 to Aug 2008

Consumer decision. NotMandatory

Available in 33,000 gasstations across the country

Source: ANP - Elaborated by Ethanol Trading – pices refer to State of São Paulo in August 2008.

Price at the Pump: R$ 1.20 liter *

100% of Brazilian Gasolineis blended – from 20 to

25% ethanol, defined bythe government.

Price at the Pump: R$ 2.40 liter *



Consumption: Domestic market is FFV

Source: ANP, ANFAVEA – elaboreted by Ethanol Trading

FFV is the driver to future increasing consumption of ethanol on the world market;

FFV started to be supplied in Brazil in March 2003, currently represents over 90% of new cars sold

and aprox. 25% of the entire fleet, today close to 6 Mi. FFV on Brazilian streets;

Consumer made an option! Thus, manufactures don’t have a choice any longer! They must offer FFV !!!

Why not to have FFV available to consumers worldwide ? : a energy hedge for countries and drivers !!!

Flex - FFVAlcohol

Gasoline10.96%

89.03%

New Vehicles Fleet



Consumption: new uses!

Ethanol to Polyethylene

First FFV motorcycle

Bio-Chemestry BioPlastic

Source: UNICA, FT - Elaborated by Ethanol Trading

On sale from March 2009

Consumer decision of fuel – gasoline or ethanol

300 cc – Delphi Automotive // Amazonas MotocicletasEspeciais



Exporting the Brazil Ethanol Experience

Regulatory FrameworkRegulatory Framework

AgricultureIndustrial

&Processing

ManagementDistribution

&Marketing

Markets&

Consumers

World Ethanol and Sugarcane Production in 2007

Source: F.O. Licht, UNICA, FAO, Elaborated by Ethanol Trading-

Potential for Sugarcane Ethanol Production

Brazil is increasing exports of its sugarcane based Ethanol Experience For the entire BioEnergy value chain: from “crop to cars”!

Market and regulation must be secured to promote production in other parts of the world.

There is a huge potencial to increasesugarcane based ethanol productionaround the world.

Areas that could grow sugarcane for ethanol

Ethanol SugarcaneMi Gallons Tonns

US 6,508 Corn 27,750,600

Brazil 5,026 Sugarcane 514,079,729

EU 569 Beetroot / Wheat 60,000

China 487 Corn / Cassava / Wheat 106,316,000

Canada 212 Corn / Wheat -

India 106 Sugarcane 355,520,000Thailand 79 Cassava / Sugarcane 64,365,682

Colombia 75 Sugarcane 40,000,000

Central America 40 Sugarcane 27,340,800

Australia 26 Sugarcane 36,000,000

Pakistan 9 Sugarcane 54,752,000

Paraguay 5 Sugarcane 3,400,000

Others 16 328,080,167Total 13,158 1,557,664,978

Country Main Feedstocks Used



Thous. gl US$ Thous. gl US$ gl US$

USA 214,716 350,556,380 341,119 640,505,150 59% 83%

CBI 212,599 320,760,783 287,704 486,357,557 35% 52%

EUROPEAN UNI. 142,671 239,789,664 262,720 448,726,908 84% 87%

AFRICA 39,449 64,897,751 21,746 39,071,157 -45% -40%

SOUTH AMERICA 3,766 7,132,346 4,189 7,754,886 11% 9%

ASIA 86,353 142,789,907 67,838 109,346,872 -21% -23%

OTHERS 22,370 36,214,843 15,517 29,918,850 -31% -17%

TOTAL 721,924 1,162,141,674 1,000,832 1,761,681,380 39% 52%

JAN-SEPT 2007 JAN-SEPT 2008 % Change 08/07

BRAZIL EXPORTS

Foreign Markets: Brazil Ethanol Exports

Source: SECEX - Elaborated by Ethanol Trading

Share of Brazil ExportsJan – Sep 2008

63%

1 Bi Gallons exported in 2008 (Sep) – 39 % more than same period of2007.

When compared to 2007, maingrowth was direct exports to US

(59%) and to European Union (84%) CBI – Hydrous ethanol; indirect

exports to US

US Summer &Brazilian Harvesting Season



Foreign Markets: Brazil Ethanol ExportsMonthly Brazil Ethanol Exports

Jan 2006 – Sep 2008 (gallons)

Monthly Shares Brazil Ethanol ExportsJan 2006 – Sep 2008 (%)

US

CBI

Rest of the World

Total Brazil

CBI

US




Main Foreign Market: US Ethanol Imports

US Ethanol Imports (‘000 gallons)

Brazil

CBI

Brazil

Jamaica

Trinidad Tobago

El Salvador

Costa RicaCanada China

Virgin Islands

Share of US Imports – Country of Origin

US Total Ethanol Imports

From Jan 1993 to Jul 2008 (thousand gl)

Summer 2006MTBE substituition

Summer 08Floods inMid-West &Corn @ U$$8,00/ bushel

Due to US$ 0,54/galimport tariff:

Brazil’s direct exports tothe US market are spotand market windows.

Or Brazilian hydrous isdehydrated in CBIcountries.

Source: DoE - Elaborated by Ethanol Trading



What lies ahead: logistics!

Share per Ports of Brazil’s Ethanol Exports

Brazil needs to solve its internal logistics problems:

To the port: currently ethanol is mainly trucked to ports

Ethanol dedicated pipeline to ports: many projects under discussions; 3 only to the port of Santos!

also important to increase rail freight to port

Ports: Almost 70% of Brazil’s Ethanol Exports are through Santos – already on the limit. Demurrage is an issue!

Logistics in foreign markets: Brazilian companies are starting to invest in terminals overseas to be able to getcloser to final clients.




What lies ahead: technology!

Production

of Ethanol

Cogeneration

Sugarcane Crop varieties: increase yields, reduce water usage, reducefeedstock costs – Brazilian companies are investing in sugarcane genetics

Cellulosic technology, enzimatic or acid hydrolises, will allow fast increasein ethanol production with higher environmental and economic benefits (alsoend the food vs. fuel discussion).

Sugarcane Bagasse will help to bridge Brazil’s energy projected gap

Retrofit and greenfield: increase investments in cogeneration

Technology developments driving this industry: High pressure boilers Reduction of steam waste on operations Bagasse and straw (top)

Gasefication of vinasse (future)



90% Gasoline blended with 10% Ethanol

Ethanol as an additive to gasoline

Mandatory Market by Government Legislation

and Regulation

Compulsory and Firm Demand

100 % Auto Fleet in the Region/State

Existing Gas Station Pump Terminals

15% Gasoline blended with 85% Ethanol

Ethanol as a substitute to gasoline

Voluntary Market / Fuel Switchers

Price Oriented and Volatile Demand

Only Flex Fuel Vehicles – FFV’s

Required new Pumps on Gas Stations

US could import Brazil Ethanol tariff free only for the E85 market.

Dyed ethanol – not to mix with E10 market (special RIN)

There are more than 6 million FFV vehicles in the US, but only 1,800 pumps of E85 in the entire country

E85 market does not compete with, mandatory, E10. Would help to achieve RFS targets and to promote ethanolconsumption in the US.

What lies ahead: market access!

E10 E85

Two Products: Two Markets



Energy Security is not Energy Independency,

Energy Security is Energy Diversity!

Documents

Trends in Brazil's Ethanol Industry - Ethanol Trading BF2008