Brazil Ethanol at Record High, Price May Rise Again in 2012, Archer Says

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  • Posted on April 15, 2011


    A seasonal shortfall that boosted Brazilian ethanol prices to a record this week may be worse next year as producers face higher demand than they can meet, said analysts including Arnaldo Luiz Correa at Archer Consulting.

    Anhydrous ethanol that’s mixed with gasoline traded at 2.63 reais ($1.67) a liter for the week ended April 13 in Sao Paulo. That’s up 25 percent from the prior week and more than double the level in January, according to data compiled by Bloomberg.

    Ethanol prices typically rise at the start of year between harvests when sugar cane mills are closed. Supplies wane in that period from December to April. In the past two years, that shortfall has been exacerbated by inadequate investment in production capacity, and will likely mean even higher prices after next year’s harvest, the analyst at the Sao Paulo-based consultant said in an interview today.

    “I’m quite sure we are going to have the same problem with prices at the end of this year and by the beginning of next year,” he said, adding that Brazil “is producing today what it should have been producing two years ago.”

    Capital investments in Brazil’s sugar cane industry totaled $6.2 billion in 2010, compared with $10.3 billion in 2008, according to data compiled by London-based Bloomberg New Energy Finance. Most of last year’s spending went toward consolidation, as producers acquired existing mills, rather than building new production facilities, New Energy Finance said. Cane companies refine the plant into sugar or ethanol.

    Record Prices

    The prices this year are the highest since Centro de Estudos Avancados em Economia Aplicada began tracking it in 2002. Underinvestment in new ethanol capacity after the 2008 credit crisis means that the record high prices this year may be not a seasonal problem but a structural one, said Mirian Bacchi, a researcher with the Piracicaba, Brazil-based consulting company.

    “Investment is needed in new mills,” Jacqueline Bierhals, manager at Sao Paulo based research agency Informa Economics FNP, said over the telephone. “A lot more is necessary,” or ethanol prices will become more volatile, especially at the end of each harvest season, she said.

    Demand for ethanol is increasing, in part, because of flex- fuel cars, which can run on either pure ethanol or standard gasoline that’s blended with 25 percent ethanol.

    About 42 percent of cars on Brazil’s roads are flex-fuel and they comprise 85 percent of new automobile sales, according to the country’s automaker trade group Associacao Nacional dos Fabricantes de Veiculos Automotores.

    Assuming “conservative growth rates” for fuel consumption and an increasing fleet of flex-fuel cars, Brazil will need 50 billion liters of annual ethanol production in the 2017 to 2018 crop to meet domestic demand, according to Archer Consulting’s Correa. That’s almost double the 25.4 billion liters produced during the last harvest, according to the country’s sugar trade group Uniao da Industria de Cana de Acucar.

    “At today’s investment rates, it’s highly unlikely those production levels will be met,” Correa said.

    To contact the reporter on this story: Stephan Nielsen in Sao Paulo at snielsen8@bloomberg.net

    To contact the editor responsible for this story: Reed Landberg at landberg@bloomberg.net

    Bloomberg/AC



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