BIOFUELS BRAZILIAN MARKET: CHALLENGES AND OPPORTUNITIES

Armando Guedes Coelho

October/2008

OVERVIEW

21st Century: Diversification of Energy Sources

Source: Nakcenovic, Grbler and MaConald, 1998

Energy Supply 2006

Brazil

World

206.5 million tones of oil equivalent per year

10,878.5 million tones of oil equivalent per year

Source: BP Statistical World Energy

Consumption of Oil and its Products Brazil (2007)

2000 103 boe/day
Naphtha 8,93% Diesel Oil 40%

LPGas 8,73% Gasoline 16,75%

Fuel Oil 8,84%

Ethanol 16,75%

Reasons for the use of Biofuels Environmental Gains carbon sequestration lower emission in the consumption Renewability short cycle of production man-controlled process Social Aspects generation of jobs deconcentration of income

Energy Balance

Energy contained in the fuel / Fossil energy used to produce it

ETHANOL

Sugar Cane

Wheat

Sugar Beet

Corn

Palm Oil

Vegetable Soybean Oil Leftovers

Rapeseed

Souce: World Watch Institute

THE ETHANOL ISSUE

Evolution of World Production of Ethanol

50 45 40 35
Billion liters Others India EU China

30 25 20 15 10 5 0 2000 2001 2002 2003 2004 2005 2006

Brazil

USA

For the purposes of comparison, the sum of the productions of the USA and Brazil represents about 600,000 bpd of ethanol.
Source: F.O. LICHT, UNICA., CARD. Preparation: Icone, Unica

Projection of World Production of Ethanol

Approximately 2 millions barrels per day

Source: Iowa stat and FO Licht

Evolution of Exportation of Ethanol

6,0 5,5 5,0 4,5 4,0

Others
C. Rica- Jamaica Saudi Arabia China South Africa USA EU

Billion liters

3,5 3,0 2,5 2,0 1,5 1,0 0,5 0,0 2001

Brazil 60,000 bpd

2002

2003

2004

2005

2006

Source: F. O. Licht, USITC, EUROSTAT and MDIC. Preparation: Icone, nica Note: e=estimation (data from Brazil and the USA were updated, South Africa was projected based on preliminary data from 2006; for other countries, exports were based on previous years). For the European Union, only the off-block commerce was taken into account.

Price of Anhydrous Ethanol in Brazil and in the USA and International Price of Oil

European Union ethanol prices

Oil prices EUA ethanol prices

BRAZIL ethanol prices

Feb07

Source: LMC, Oct/2007

Productivity and Cost of Ethanol 2005

Productivity (liters per hectares)

Cost of Production (U$S cents per liter)

Sugar Cane Sugar Beet EU Source: IEA/2005
USA Australia Thailand Brazil 0

Cane India

Corn USA

Cassava Wheat Thailand EU

Europe China

Wheat / Sugar Beet Corn Corn Cane Cane Cane

20 40 60 80

1 hectare = 2,47105 acres

Source: F.O. Llicht

Ethanol and Sugar Cane: Growth of Production in Brazil

90 7

(liters/hectare)

70

sugar cane
60 (ton/hectare) 4

50

40
6 8 8 0 8 4 2 6 2 4 6 0 2 /9 0 4 /7 /8 /8 /9 95 97 77 79 87 89 93 01 75 81 83 85 91 03 05 99 /0 /9 /9 /9 /0 /0 /7 /8 /8 /8 /0 6

For the purposes of memorization, in 2006 we produced 80 liters of ethanol, per ton of sugar cane. Since 1976 there has been a growth of about 33% in ethanol productivity.
1 hectare = 2,47105 acres
Source: UNICA

Mil liters/hectare

80
ton/hectare

Ethanol

Evolution of Supply and Demand for Ethanol in Brazil

Production Consumption Exportation

Tax Burden of Fuels Rio de Janeiro

R$ 2,504
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
38% 47% 14% 61% 8% 8% 18% 33% 13% 26%

R$ 1,625

R$ 1,851

25%

35%

49%
9%

8% 4% 14%

GASOLINE
PRODUCT

ETHANOL
CIDE

DIESEL
PIS/COFINS ICMS

MARGINS + COSTS

Baseline price: average price in Rio de Janeiro from Mar 9th to 15th, 2008 (Source ANP/SINDICOM)

Brazil: Proper soil and climate for production of sugar cane without irrigation

High Medium Low Improper Totally improper

Source: UNICAMP

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
ja n / 0 3 a p r/ 0 3 ju l/ 0 3 o ct/ 0 3 ja n / 0 4 a p r/ 0 4
Flex Ethanol Gasoline

ju l/ 0 4 o ct/ 0 4 ja n / 0 5 a p r/ 0 5 ju l/ 0 5 o ct/ 0 5 ja n / 0 6 a p r/ 0 6 ju l/ 0 6 o ct/ 0 6 ja n / 0 7 fe b / 0 7 ju l/ 0 7

Source: ANFAVEA and Unica

Sales of automobiles and light vehicles Otto cycle

Evolution of the Brazilian Automotive Market

Projection of the Brazilian Automotive Market

Estimated fleet of automobiles and light vehicles Otto Cycle
35

30

Total

Flex

25

Million units

20

15

10

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Source: Copersucar and Unica

Estimation of employment in the production of sugar cane So Paulo State

2006/07 2010/11 2015/16 2020/21 Production sugar cane (million t) Area with mechanical harvesting (%) Number of emplooyees 299 370 457 544

40%

70%

100%

100%

260.4

200.8

127.8

146.1

Note: estimation based on current use of hand labor. It does not include employees involved in the management of the production. Preparation: Unica.

Great Issues About Ethanol

what volume of ethanol do we want to produce? what would be the logistic system for

transportation and distribution of ethanol? what is the market we want to achieve? human resources? technology? environmental and social relations? ethanol chemistry? by-products? partnerships?

Comments

The production of ethanol from sugar cane is the most competitive: greater productivity, lower cost and with very positive energy and environmental balances; reduced or no competition or with food supply. It represents a window of economic opportunity for emerging countries with agricultural-climatic conditions and plenty of hand labor, and rely with the best opportunity to expand biofuels without affecting the prices of food and ration, by the incorporation of new (agricultural and industrial) technologies and increased integration farming cattle raising. Main short-term challenges: ethanol as a global commodity (including the use of future markets) and bioelectricity. The great challenge will consist in the development of new technologies for the production of biofuels, particularly in the case of ethanol, in the use of celluloses as raw material.

1952-First tests using ethanol-gasoline blended fuel

THE BIODIESEL ISSUE

World Production 2004/2005

MAIN OIL SEEDS
OTHERS; 4% SUNFLOWER; 6% PEANUT; 9% COTTON; 11%

SOYBEAN; 59% RAPESEED; 11%

MAIN PROTEIC BRAINS

OTHERS; 6% SUNFLOWER; 5% PEANUT; 3% COTTON; 7%

MAIN VEGETABLE OILS

PALM; 28%

OTHERS; 9% SUNFLOWER; 8% PEANUT; 5% COTTON; 4%

RAPESEED; 11% SOYBEAN; 69%

SOYBEAN; 32%

RAPESEED; 11%

Source: USDA - United States Department of Agriculture

Projection of World Production of Biodiesel

Production of biodiesel in the world: - 2007: 260,000 bpd - 2012: 810,000 bpd
Source: ERB

Projection of World Consumption of Biodiesel

Billion liters

Others Malaysia USA Indonesia

Consumption of biodiesel in the EU in 2012 will be around 275,000 bpd.

Production of Biodiesel In the European Union

Nowadays the European Union leads the world production of biodiesels, despite the relatively lack of arable lands in those countries.
Installed Capacity of Production of Biodiesel - 2007 (mil ton)

Annual Production of Biodiesel (x 1,000 ton)

3000 2500 2000 1500 1000 500 0 2006 2005 2004 2003 2002

Others Germany 37% 42% Italy 13% France 8%

Germany

France

Italy

Others

Source: European Biodiesel Board

the European consumption was approximately 8 million bpd diesel oil and the total production of biodiesel was 100 thousand bpd, in 2006. In 2012 it will be 275,000 bpd.

Systematic View of the Production of Biodiesel

OIL SECTOR

FUEL INDUSTRY PRODUCTION OF BIODIESEL

The production of biodiesel integrates two totally distinct productive chains (oil and agriculture)

VEGETABLE OIL INDUSTRY

ACRICULTURAL SECTOR

COORDINATION PROBLEMS

Biodiesel in Brazil

he Government and the private sector have a lot to do so that the success of the ethanol is repeated with the biodiesel.

he great issue in the biodiesel area in Brazil is the cost-effectiveness of its production, as well as its competition with other industries which also consume vegetable oils (e.g. food)

RODUCTION - Involves a great number of producers - Needs the organization of sustainable productive chains

LOGISTICS - It is necessary to develop an efficient system of transportation and distribution of the product

CONSUMPTION - Urban public transport

The Brazilian Biodiesel Program

2% Mandatory
Actual Market 1 billion liters/year

5% Mandatory
Potential Market 2.4 billion liters/year 40,000 bpd equivalent in diesel

Jan/2005

Jan/2008

Jul/2008

Jan/2013

2% Authorized
Potential Market 800 million liters/year

3% Mandatory
Potential Market 1.5 billion liters/year

Regional Demands for Biodiesel 2008

90 million liters/year 140 million liters/year

Scenario 2008: 1 billion liters/year Participation in the national consumption of diesel in 2004 North Northest Center-South

770 million liters/year

Costs of Production of Biodiesel

Main Variables: Costs of vegetable oils (80% of the costs of production) The raw material (vegetable oils) represent an average of 80% of the total costs of production. The alcohols (methanol/ethanol) represent around 10% of the total costs of production. Finally, the remaining 10% are the margin of industrial aggregation (operational cost).

Taxes Over Diesel Brazil X Germany

100% 80% 60% 40% 20% 0% DIESEL BRAZIL DIESEL GERMANY TAXES
Germany March/2005

24,70%

45,00%

75,30%

55,00%

PRODUCT + MARGINS + COSTS

The price of the Brazilian diesel and its taxation makes the production of biodiesel in Brazil less competitive.

Final Comments
Biofuels will expand in the world due to consumers pressure (global warming) and interest of governments (public policies). The great challenge will consist in the development of new technologies for the production of biofuels, particularly in the case of ethanol, in the use of celluloses as raw material. The relaxation of the tributary system may represent a fundamental cost reduction for the production of biodiesel. Relaxation of the tributary system alone is not enought to make the biodiesel competitive, but it is fundamental for its competitiveness. It is likely, not to say almost certain, that the price of biofuels in the world market will follow the price of oil.

Charles Darwin (1809-1892)

It is not the strongest of the species that survives, nor the most intelligent; it is the one that is the most adaptable to change

Thank you !
Contact: abastecimento@ibp.org.br