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DE RUEHSO #0269/01 1541443
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FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC 8258
INFO RUEHBR/AMEMBASSY BRASILIA 9386
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UNCLAS SECTION 01 OF 04 SAO PAULO 000269 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/BSC, WHA/EPSC 
EEB/ESC AND GREG MANUEL 
STATE FOR OES/EGC DREW NELSON 
STATE FOR OES/PCI FOR LARRY SPERLING 
NSC FOR FEARS AND DAVID MCCORMICK 
DOE FOR GWARD, AKARSNER, BBARTON 
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D 
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/DRAMBO 
STATE PASS USTR FOR KATE DUCKWORTH 
TREASURY FOR JHOEK 
 
E.O. 12958: N/A 
TAGS: ENRG EAGR ELTN ETRD TRGY BTIO BR
SUBJECT: BRAZILIAN BIOFUELS: ETHANOL PRODUCTION EXPANDING 
 
REF: A) SAO PAULO 207, B) SAO PAULO 227, C) BRASILIA 656 
 
¶1. (U) SUMMARY:  Soaring petroleum prices and a rapidly growing 
domestic fleet of flex-fuel cars are driving double-digit expansion 
in ethanol production in Brazil.  In the coming year alone, Brazil's 
production of sugarcane-based ethanol is projected to increase 14.8 
percent.  Domestic demand for ethanol is large and growing, 
currently consuming 85 percent of all production.  The other 15 
percent is exported, primarily to the United States.  The ethanol 
private sector in Brazil is increasingly partnering with 
international companies in building production facilities, both in 
and out of Brazil, as well as addressing the internal logistics 
problems that undermine the potential profitability of Brazilian 
ethanol exports. Infrastructure bottlenecks in Brazil, as well as 
various international tariff regimes, will likely continue to pose 
hurdles to the expansion of Brazilian ethanol exports and the 
internationalization of ethanol as a commodity.  END SUMMARY. 
 
--------------------------------------------- ------ 
DOUBLE-DIGIT GROWTH IN SUGAR AND ETHANOL PRODUCTION 
--------------------------------------------- ------ 
 
¶2. (U) According to the USDA's Agricultural Trade Office in Sao 
Paulo (ATO), both sugar and ethanol production is expected to 
increase during the current market year (MY) corresponding to May 
2008 to April 2009.  During this period, land dedicated to sugarcane 
cultivation is projected to expand by 12 percent from 7.19 million 
hectares to 8.05 million, equivalent to approximately 2.3 percent of 
Brazil's arable land.  An increasing percentage of that sugarcane is 
projected to go towards ethanol production instead of sugar (56.5 
percent in MY 2008/2009 vice 54.5 percent in MY 2007/2008).  In 
absolute terms, ethanol production for MY 2008/2009 is projected to 
see a 14.8 percent increase (25.71 billion liters vice 22.39). 
(Note: Sugarcane is currently the sole feedstock for ethanol in 
Brazil.  End Note.) 
 
¶3. (U) Much of Brazil's ethanol production continues to be destined 
for the domestic market, with domestic demand expected to rise 16.2 
percent in MY 2008/2009 (22.05 billion liters vice 18.97).  The 
expanding fleet of flex fuel vehicles, which today account for 90 
percent of new car sales, explains the expanding domestic demand 
(Ref A).  In the month of April, for the first time in 20 years, 
sales of ethanol surpassed gasoline in Brazil. 
Largely due to fuel demand, in 2007, sugar and its derivatives 
passed hydro power as the second largest source of energy in Brazil, 
contributing 16 percent of Brazil's overall energy matrix (compared 
to petroleum at 36.7 percent and hydro at 14.7 percent).  In 2007, 
bioelectricity accounted for three percent of Brazil's electricity 
(1,400 megawatts).  The Brazilian Sugarcane Industry Association 
(UNICA) predicts that given the proper government incentives to tie 
into the main power grid, this number could increase to 11,500 
megawatts by 2015 and 14,400 megawatts by 2021 - equivilant to 20 
percent of Brazil's electricity usage today. 
 
--------------------------------- 
ETHANOL EXPORTS: PRESENT & FUTURE 
--------------------------------- 
 
¶4. (U) For over thirty years, Brazil has been by far the world's 
largest producer of ethanol from sugarcane.  Correspondingly, it has 
been and remains today the world's largest exporter of ethanol. 
According to the Brazilian Secretariat of Foreign Trade (SECEX), 
major export markets for 2007 included the U.S. (841 million 
liters), Holland (793 million liters) and Japan (363 million 
liters).  Exports to Caribbean and Central American countries 
 
SAO PAULO 00000269  002 OF 004 
 
 
(Jamaica, Costa Rica, El Salvador and Trinidad & Tobago) amounted to 
910 million liters.  Virtually all of this volume was then 
re-exported to the United States under the Caribbean Basin 
Initiative (CBI) and CAFTA-DR tariff concessions after going through 
the process of dehydration.  (Note:  These numbers are inconsistent 
with U.S. census data that shows ethanol imports from Brazil of 714 
million liters in 2007.  End Note.) 
 
¶5. (U) Despite the negative perceptions in some international 
quarters about the role of biofuels in contributing to food 
inflation (Ref B), concerns about the environmental impact of 
ethanol production, and allegations of precarious working conditions 
of sugarcane workers (septel) - Brazilian sugar and ethanol 
producers see growth potential in the export market, apart from the 
rising domestic demand.  ATO projects that Brazil will export 3.9 
billion liters in MY 2008/2009, a 13 percent increase over MY 
2007/2008.  Other interlocutors also see high oil prices further 
supporting ethanol exports to the U.S. - both direct and through the 
CBI countries.  The Brazil Renewable Energy Company (Brenco) told 
Econoff that conservative analysts believe ethanol will remain 
competitive in the international market vis-`-vis gasoline at least 
as long as petroleum costs exceed USD 70 to 80 per barrel. 
 
¶6. (U) Brazilian exporters believe there is significant 
international market potential in the blending of ethanol with 
gasoline, particularly the E10 blend (90 percent gasoline and 10 
percent ethanol) and possibly as much as E25 (75 percent gasoline 
and 25 percent ethanol).  Brenco is largely basing their business 
model on exporting ethanol as a partial fuel substitute.  Even in 
countries that do not have a significant number of flex-fuel cars, 
ethanol can be blended up to a certain level with gasoline and run 
in standard gasoline engines without the need to overhaul the 
downstream infrastructure or modify vehicle engines. 
 
¶7. (SBU) Brazilian industry experts are concentrating particularly 
on the U.S. market, largely because they believe that the U.S. will 
not be able to reach Congressional and Executive branch mandates for 
ethanol or biodiesel production of 36 billion gallons by 2022. 
According to Plinio Nastari (editor of the leading ethanol industry 
newsletter), and Roberto Gianetti da Fonseca (associated with 
Ethanol Trading SA and the Federation of Industries of the State of 
Sao Paulo, FIESP), U.S. domestic production will peak at 15 billion 
gallons given current technology.  Some Brazilian ethanol exporters, 
and especially Gianetti da Fonseca, argue for a change in U.S. 
policy that would allow for tariff-free access to the U.S. market 
for E85 blends to fuel the growing U.S. fleet of flex fuel vehicles. 
 (Comment: While most ConGen contacts are critical of the ethanol 
tariff, the sentiment is not universal. Miguel Dabdoub, coordinator 
for the Biodiesel Brazil Project out of the University of Sao 
Paulo's Laboratory for Clean Technology Development, argues that the 
tariff is necessary for a period of time as a mechanism to build up 
domestic support among the U.S. population and as part of a larger 
strategy to make ethanol an acceptable alternative globally. 
Interlocutors at FIESP have also stated that an immediate removal of 
the tariff would hurt supply in Brazil as more companies would seek 
to immediately export to the U.S.  Similarly, while many 
interlocutors at MRE and in Congress urge the immediate removal of 
the tariff, the Ministry of Agriculture does not urge this point. 
End Comment.) 
 
--------------------------- 
INFRASTRUCTURE BOTTLENECKS 
--------------------------- 
 
¶8. (U) Like in most other sectors of the Brazilian economy, the 
 
SAO PAULO 00000269  003 OF 004 
 
 
ethanol industry suffers from inadequate infrastructure, the 
so-called 'Custo Brasil' - costs other than those related to 
production which significantly increase total cost and affect 
competitiveness.  Custo Brasil is seen along the ethanol production 
line - from storage to transportation to port handling - and 
represents an on-going bottleneck in increasing Brazilian ethanol 
exports.  Starting in the countryside at sugar distilleries, ethanol 
destined for domestic consumption moves by truck (only occasionally 
by rail or pipeline) to regional distribution centers, then onward 
to secondary distribution centers, and finally to gas stations. 
Ethanol producers hold stocks at the distributors' convenience, thus 
imposing storage costs on mills.  Many of the roads utilized to 
transport ethanol, especially secondary or local roads, are in poor 
condition.  Highways in the main producing areas are often very 
good, but tolls are expensive.  Most of the existing sugar-ethanol 
transportation routes are essentially unchanged from twenty years 
ago.  According to calculations of Weber Amaral of the Brazilian 
Center for Biofuels, internal logistics account for 35 percent of 
ethanol's total cost. 
 
¶9. (U) Ethanol destined for export faces additional bottlenecks upon 
reaching port.  There is a limited amount of port storage dedicated 
to ethanol, forcing exporters to rent space in multi-use chemical 
terminals.  This limitation of storage capacity represents a 
significant restraining factor on any increases in ethanol exports. 
The same obstacle exists in the contracting of vessels.  As there is 
no well-developed large scale international market for ethanol, 
exporters rely on multi-use chemical tankers.  This involves 
substantial additional costs since storage facilities and tanks must 
be bid away from other potential users, and be thoroughly cleaned 
before and after use. 
 
--------------- 
INDUSTRY TRENDS 
--------------- 
 
¶10. (U) These existing obstacles do not seem likely to discourage 
expansion in the sector as Brazil still produces the cheapest 
ethanol in the world (22 cents a liter compared to 30 cents for U.S. 
corn-based and 53 cents for European beetroot ethanol).  Several 
major private sector initiatives aim to substantially increase 
Brazil's export capacity and reduce transportation costs.  Brenco 
outlined to Econoffs a plan to vertically integrate the entire 
process in order to control their costs and get their product to 
market. 
 
¶11. (U) COSAN, Brazil's biggest sugar and ethanol producer, recently 
announced USD 826 million-deal with Esso (Exxon Mobil Corp.) to 
purchase all of its 1,500 gas stations in Brazil.  According to 
COSAN, this deal will make them the world's first fully integrated 
renewable energy company.  In April, BP announced a joint venture 
with Santelisa Vale (the second largest sugarcane crusher), to build 
and operate two ethanol refineries.  This partnership makes BP the 
first petroleum company to buy a commanding role in the ethanol 
market and positions the new company, Tropical Bioenergia, to 
compete with COSAN for the position of Brazil's leading sustainable 
renewable fuels supplier of ethanol.  Petrobras has also publicly 
announced the intention to begin construction of a USD 315 million 
ethanol pipeline in 2009 connecting mills in five states with 
maritime terminals.  (Note:  Petrobras enjoys a substantial 
advantage in building any pipeline, since the new line would be 
built along rights-of-way where current petroleum and mixed-use 
pipelines are located.  End Note.) 
 
¶12. (U) Many companies that are not making the headlines for the 
 
SAO PAULO 00000269  004.2 OF 004 
 
 
marriage of petroleum and biofuels are looking to ramp up their 
investments in infrastructure in an effort to address existing 
bottlenecks.  In addition to Petrobras, industry leaders such as 
Crystalsev, Copersucar, and Brenco have all announced export-driven 
projects to build pipelines to move ethanol from producing regions 
to port.  Brenco's plan calls for a USD one billion investment to 
build 10 additional refineries and a 700 mile six-terminal pipeline 
to link its inland refineries with the Port of Santos.  This 
pipeline could potentially halve transportation costs for ethanol to 
move from inland distilleries to port.  The timeframe to build such 
pipelines depends largely on the growth of worldwide ethanol demand 
as well as access to credit. 
 
¶13. (U) Port infrastructure remains a contentious subject.  While 
there are several billion-dollar private port projects on the table, 
all are being held up until the Supreme Court rules on the legality 
of private companies building and operating ports to move their own 
goods.  Until this issue is resolved, private port investment, 
including for the ethanol industry, is moving ahead cautiously. 
Coimex, a Brazilian logistics company that is among those wishing to 
build a private port, is for the time-being looking to build a 
liquid terminal for ethanol storage in the Port of Santos.  Mining 
and logistics company Vale (formerly CVRD) - which already uses its 
extensive railroad, port, and maritime terminals to provide services 
for Brazilian agriculture - is likewise planning the construction of 
a maritime terminal in Vitoria in partnership with Oiltanking. 
 
------- 
COMMENT 
------- 
 
¶14. (U) High oil prics and growing numbers of flex-fuel cars will 
signficantly increase domestic demand for ethanol.  Ths can be 
expected to continue to drive Brazil's xpanded sugarcane 
cultivation and ethanol producion, and any increase in foreign 
demand will addfurther pressure to expand production.  Ethanol 
exports face several significant hurdles including dmestic 
Brazilian infrastructure that inhibits inreased exports as well as 
potential fallout in sme quarters over the linkage between biofuels 
an food inflation (Ref C).  Other environmental and labor concerns 
are additional obstacles which could impede the growth of Brazilian 
ethanol exports.  To the extent that Brazil's private sector can be 
considered a bellwether, a series of recent investment announcements 
indicate that industry leaders believe that the future of ethanol 
domestically and for export is bright.  END COMMENT. 
 
¶15. (U) This cable has been coordinated with and cleared by Embassy 
Brasilia and coordinated with the Agricultural Trade Office in Sao 
Paulo.