Cs - Global Eth MKT

11 July 2014
Global
Equity Research
Global Ethanol Markets

Connections Series
Demand Looks Set to Accelerate
The Credit Suisse Connections Series

leverages our exceptional breadth of
macro and micro research to deliver
incisive cross-sector and cross-border
thematic insights for our clients.
Research Analysts
Edward Westlake
212 325 6751
edward.westlake@credit-suisse.com
Patrick Jobin
212 325 0843
patrick.jobin@credit-suisse.com
Mathew Waugh
44 20 7888 0194
mathew.waugh@credit-suisse.com
Viccenzo Paternostro
55 11 3701 6043
viccenzo.paternostro@credit-suisse.com
Christopher S. Parkinson
212 538 6286
christopher.parkinson@credit-suisse.com
John P. McNulty, CFA
212 325 4385
john.mcnulty@credit-suisse.com
Robert Moskow
212 538 3095
robert.moskow@credit-suisse.com
Chris Counihan
44 20 7883 7618
chris.counihan@credit-suisse.com
Maheep Mandloi
212 325 2345
maheep.mandloi@credit-suisse.com
Bottom Line: In this Connections Series, our global team argues ethanol
demand is about to accelerate. Even in the US, the growing availability of
flex fuel vehicles could lead to calls for higher ethanol blends later in the
decade, assuming longer term corn prices are favorable versus gasoline and
that infrastructure investments are made. Right now, US ethanol macro
conditions are tastier than a corn dog at the Iowa State Fair (August 7-17th).
Corn prices are low and gasoline prices are elevated. In the US, this
following wind could push GPRE higher over the next few months (we raise
our target to $40/sh). Celanese is attractively priced with longer term ethanol
potential. In Europe, we believe rising enzyme sales and the BioAg JV is
already priced into Novozymes shares. Our preferred enzyme play is DSM
(Outperform $57/sh TP). In Brazil, our preferred name is Sao Martinho
SMTO3, but improvement is policy dependent.
Global ethanol demand to grow at CAGR of c5% over the next decade
to reach 35bn gal by 2022: After a review of ethanol policies across major
countries, we expect global demand to grow to 35bn gal in 2022 from ~23bn
gal in 2013 due to higher flex fuel vehicle (FFV) adoption in US & Brazil and
higher ethanol blending mandates across RoW. We could be conservative.
US Has Potential to Grow Ethanol Demand: As flex fuel vehicles increase
in the auto fleet, the US could accept more ethanol (on paper up to a
substantial 30bn gals vs 13.3bn today). 2nd gen economics are not
competitive with 1st gen yet trial data over the next 12 months remains key
to assessing the 2G competitive position. It is likely any near term upside
ethanol demand surprise in the US would be supplied from corn.
Rising Global Demand Could Lead to Higher Corn Prices Later in the
Decade: Ethanol demand is set to rise and supply could come from a
number of sources sugar cane, beets, corn, fossil fuels (Celanese), 2nd
gen technology. If global demand rises too fast, then the pull on corn could
accelerate. Ethanol plant construction would be the lead indicator.
RINS, Were Still Expecting the EPA to Bow to Blend Wall Reality:
Without changes to auto warranties the 10% blend wall is real. The current
RINS price of $50cts/gal implies the EPA mandate will create stress. Without
stress, RINS should price closer to 0-20 cts/gal (depending on corn prices).
More Ethanol, Just What the Global Gasoline Market Needs: Engine
efficiency is improving, natural gas vehicles are taking share, the global
content of crude is become more gasoline (naphtha) rich and ethanol
production is rising. It is hard to get overly bullish on gasoline margins.
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST
CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do
business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a
conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in
making their investment decision.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS
BEYOND INFORMATION
Client-Driven Solutions, Insights, and Access
11 July 2014
Focus Charts
Exhibit 2: Overall and 2G ethanol production forecast
22
22
Brazil
35
15
10
0.0
0.1
0.1
0.2
0.4
Total Ethanol Demand
1.5
2.6
4.7
2022E
2012
2011
2010
ROW
0.0
1.0
2021E
2022E
2020E
2018E
2016E
2014E
2012
2010
2008
2006
2004
2002
2000
US
25
24
32
20
23
2020E
7 8
22
2019E
6
4 4 5
10
25
30
29
28
2018E
13
15
23
17
20
10
22 22 22
27
26
2017E
20
30
2016E
25
28
26 27
24 25
35
2015E
30
29 30
2014E
35
40
35
32
Annual ethanol demand - billion gallons
40
2013
Exhibit 1: Global ethanol demand forecast
2G ethanol production forecast
Source: Thomson Reuters, Company data, Credit Suisse estimates
Exhibit 3: US ethanol demand forecasts with some FFVs
Exhibit 4: Brazil ethanol demand forecasts
6.0
4.9
4.7
5.4
4.0
2.0
Effective blend ratio (RHS)
Source: Thomson Reuters
2020E
6.0
2022E
2021E
2020E
2019E
2018E
2017E
2016E
2015E
2014E
2013
US total ethanol demand (LHS)
8.0
7%
2012
6.0
2019E
9%
8.0
7.0
7.6
6.6
7.3
6.3
2018E
9.6%
11%
11.3%11.6%
10.8%
10.3%10.4%
9.9% 10.2%10.2%
7.9
2017E
13%
2016E
14.4%
2015E
11
9
13.5
12.9%
12
10
13.0 13.1 13.0 13.1 13.1
2010
13
12.7
9.3
10.0
2014E
14
15%
13.9 14.1
12.0
2013E
15
12.6
12.0 12.3
11.4 11.7
11.2
10.9
10.5 10.7
2012
15.4
14.0
2011
16
17%
Brazil Ethanol/Gasoline demand, bn gal
16.9
17
Anhydrous
Hydrous
Gasoline
Source: EIA
Exhibit 6: leading to higher US Ethanol exports
Exhibit 5: US Corn and ethanol prices have declined

$9.0
$4.50
$8.0
$4.00
$7.0
$3.50
$6.0
$3.00
$5.0
$2.50
$4.0
$2.00
140
120
100
mm gal per month
US Ethanol demand, bb gallons per year
18
Ethanol as % of total motor gasoline demand
Source: EIA, Credit Suisse estimates
80
60
40
20
(20)
$3.0
$2.0
Jan-10
Jan-11
Jan-12
Corn US2, $/bu (LHS)
Jan-13
Ethanol NY Harbor, $/gal (RHS)
Source: Company data, Credit Suisse estimates
Jan-14
$1.50
(40)
$1.00
(60)
Jan-10 Jul-10 Jan-11 Jul-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13
US Ethanol net exports
11 July 2014
Global Investment Ideas

In this report, we review the global ethanol market. We outline the investment thesis for
relevant stocks based on our updated ethanol forecasts. We show potential prices for
RINS in the US depending on the mandate decisions taken by the EPA. We highlight the
negative impact which rising natural gas vehicles, ethanol, the rising naphtha content of
crude and energy efficiency could have on the gasoline market over time. We discuss the
outlook for US corn prices (they could stay low for a while).
Equity Impacts By Region

US Ethanol Producers
GPRE (N, TP $40): Large scale ethanol producer with diversification opportunities
Ed Westlake
Right now, US ethanol macro conditions are tastier than a corn dog at the Iowa State Fair
(which you can visit August 7-17th). Corn prices are low and gasoline prices are elevated,
a condition that could remain for a while. In a separate note, as a result of marking to
market the corn price outlook, we increase our GRPE Target Price to $40 and increase
our 2014/15/16 EPS estimates to $3.95/$4.32/$2.60 from $2.98/$1.88/$1.89. While the
collapse in corn drives the current excitement, GPRE has used self-help (corn oil, potential
algae investments) to structurally improve the value extracted from a bushel of corn.
GPRE has also diversified to more stable businesses protecting the base equity value.
Depending on global adoption of ethanol, US producers have earned the right to now add
capacity. We believe the high corn prices over the last two years are behind us given (1)
healthy growing conditions leading to improved yields, (2) increased acreage, and (3)
easing global supply/demand constraints. Our DCF value of the current assets is around
$35/sh. This is based on strong margins through 2017 and then mid-cycle thereafter. Our
target price includes some optionality for bio-algae, growth in the agri business and
potential for capacity growth in ethanol. We retain our Neutral rating due to the inherent
volatility in the crush environment (our mid-cycle EBITDA margin is lower than today) but
acknowledge the high probability of an overshoot to the upside. The table overleaf
illustrates the strong sensitivity of GPREs equity value to the crush spread.
Patrick Jobin
Exhibit 7: Comparing ethanol EBITDA/gal
Exhibit 8: Comparing EV/gal

$2.50
$1.20
$2.12
$1.00
$2.00
$2.00
$1.91
$0.60
$0.40
$0.20
GPRE Terminal EBITDA

$0.22/gal
$0.00
-$0.20
EV $/gallon
Ethanol EBITDA $/gal
$0.80
$2.19
$1.50
$1.29
$1.00
-$0.40
Q1
Q3
2010
Q1
Q3
2011
Q1
Q3
2012
Futures
GPRE (Ethanol + Corn Oil)
REX^
Q1
Q3
2013
Q1
Q3E Q1E Q3E

2014
$0.46
$0.50
2015
Spot Implied EBITDA/gal

VLO
BIOF*
$0.00
Current
Target
GPRE

Note: GPRE actual data till Q1'14, CS forecast thereafter, includes
ethanol & corn oil business; ^REX fiscal year ends Jan 31; *BIOF's
plants were acquired by GPRE in Nov'13
GPRE- Hankinson
BIOF
REX
Recent Transactions New Build
11 July 2014
Exhibit 9: GPRE value per share is highly sensitive to ethanol profitability (EBITDA/gal)
and valuation multiple (EV/EBITDA)
Value per share

EV/EBITDA
$ 40.08
4.0x
$ 0.10
$ 4.9
Ethanol
$ 0.20
$ 14.2
EBITDA/gal
$ 0.30
$ 23.5
$ 0.40
$ 32.9
$ 0.50
$ 42.2
5.0x
$ 8.5
$ 20.1
$ 31.8
$ 43.5
$ 55.2
6.0x
$ 12.1
$ 26.1
$ 40.1
$ 54.1
$ 68.1
7.0x
$ 15.7
$ 32.0
$ 48.3
$ 64.7
$ 81.0
GPRE NOTE
ADM (N, TP $50): Ethanol outlook is good; cautious on Agricultural Services
Robert Moskow
The environment for US ethanol now looks favourable to producers for at least the next 12
months; however, we continue to view the US ethanol industry as vulnerable to volatility in
grain prices, fuel demand, and low barriers to entry. Export demand is strong and
inventories remain tight, albeit less so than three months ago. Seasonal imports from
Brazil this year have been very minimal owing to greater domestic demand which helped
to sustain excellent industry margins year-to-date. When margins are high it is not
uncommon to see incremental production come on-line, but our sources suggest that
capacity looks limited and smaller producers often find it difficult to sustain the increased
output. Ethanol is currently among the cheapest fuels globally and those economics will
continue to drive worldwide demand. The pending decision from the EPA to reduce the
RFS remains an overhang.
We are neutral on ADM because we think the stock already implies a big step-up in
earnings and the market fully appreciates the ethanol upside. In addition, while grain
commercialization has improved since 1Q, we are concerned that Agricultural Services will
struggle to achieve its normal earnings range as farmers have increased their negotiating
power by expanding on-farm storage and improving their balance sheets.
Latin America Ethanol Producers

SMTO3 (N, TP R$34): The most efficient S&E producer in Brazil
Viccenzo Paternostro
So Martinho is likely to benefit from a booming ethanol market in Brazil, but demand will
come only if price parity (gasoline vs. ethanol) favors the use of ethanol by flex-fuel cars, a
scenario that is not the case today because of gasoline price controls. The trigger for the
sector in Brazil would be either government incentives for the ethanol market (change in
ethanol mix into gasoline from 25% to 27.5%, tax incentives and cheap financing) or a
structural change in Petrobras's gasoline price policy. So Martinho has one of the lowest
production costs in Brazil, an excellent asset base (land, industry, and logistics facilities),
and a highly skilled management team and, as a consequence, is one of the few
companies within the S&E sector which generates cash in the current unfavorable
scenario for sugar and ethanol prices. Although SMTO has one of the most efficient S&E
production rates in Brazil, current unfavorable sugar prices, and risks to ethanol
profitability in the long term due to the lack of a government policy for fuel prices justify our
NEUTRAL rating on the name. We still think inflation risks limit further gasoline price hikes,
even though gasoline price parity between the domestic and international markets remains
high.
11 July 2014
Inflation Risks vs. Petrobras's Balance Sheet Dilemma to Set the Tone. As
Petrobras's refinery currently runs at full capacity, the company has to import both diesel
and gasoline, paying international prices and selling the fuel in the domestic market at a
loss. This is definitely not sustainable and, under normal market conditions, the company
would simply have to increase prices to recover its competitiveness. However, we do not
expect the government to allow Petrobras to increase gasoline and diesel prices in the
short term because of inflation risks. Inflation is currently above the top of the target range
(6.5%) and, as gasoline represents ~3.9% of the IPCA inflation index, any gasoline price
hike would put more pressure on inflation. We think such a hike is unlikely in the short
term, especially before the presidential election. We believe this dilemma is likely to be
resolved after the election (Oct-Nov/14) and a potential gasoline price hike will benefit
ethanol producers. As SMTO is a pure S&E producer and generates cash even under the
current unfavorable scenario, the company would be the most benefitted by an ethanol
price hike.
Our R$30 target price is not assuming any ethanol price increase and does not
incorporate the company's recently announced acquisition. A 5% hike in ethanol price
would end up raising our TP by 15% and a preliminary analysis indicates that this
acquisition adds ~R$5/share to SMTO's TP.
US Chemicals
Celanese (Outperform, $71 TP)
John McNulty
We rate the shares of Celanese Outperform as its diversified platforms should see solid
growth in the near to medium term. Within the Consumer businesses, the accelerating
trend towards lighter weight auto vehicles should promote robust volumes. Current auto
penetration stands at ~2kg per vehicle for existing Celanese applications with incremental
opportunities estimated at an additional 4-6kg per vehicle. Within the more industrial
businesses, CE is likely to benefit from continued access to cheap methanol (relative to
global peers) that will help its acetic acid platform an expiring contract that is expected to
add $100m of annual costs could also be offset by a cost cutting program that we believe
may be announced on the 3Q call. In addition, the stock trades at a meaningful discount to
the peers and is one of the cheapest names in our coverage suggesting a lot of the
upside potential is yet to be priced in. Our current 8x target 2015 trading multiple is a 20%
discount to where the group currently trades suggesting both multiple expansion and
higher earnings estimates can further drive growth in the story. Regarding ethanol, we
view the story about their carbon-based ethanol technology (using coal/nat gas/oil to
produce low costs ethanol) as a longer dated source of value (somewhat of a free option
at this stage). That said mgmt. has indicated that they will be back to investors with an
update on the platform and their alliance with Petro China in 3Q which could generate
more interest/value in the stock.
Europe Chemicals
Novozymes (U/P, TPDKr210): 2nd Generation (2G) ethanol enzyme opportunities are
already priced-in
Mathew Waugh
Novozymes is a global industrial enzyme leader and is levered to the potential growth of
ethanol markets. We believe the initial operating data from trial facilities suggests 2nd
generation (2G) ethanol technology (i.e ethanol from plant waste) is making continued
progress towards commercial viability and the recently finalised BioAg alliance with
Monsanto supports an accelerated growth trajectory in agricultural microbes. We estimate
the combined 2G/BioAg pipeline adds DKr35/share of risk-weighted optionality to our
DKr175/share "core" Novozymes valuation. However, we remain Underperform as
probability analysis suggests that 88% of future scenarios warrant downside to the current
share price.
11 July 2014
'Core' Novozymes (DKr175/share): We value the 'core' Novozymes business (ex

2G/BioAg) at DKr175/share. This is based on 1) a 2014E EV/EBITDA of 15.4x, and 2)
a 2014E EBITDA of DKr3.6bn ex 2G/BioAg.
2G optionality (DKr20/share): This is based on 1) a $2bn 2G enzyme market by
2022E, 2) Novozymes having 35% market share, and 3) $30cent/gallon enzyme costs.
BioAg optionality (DKr15/share): NVZ recently finalised the BioAg alliance with
Monsanto. We believe this supports 25% CAGR in BioAg, driven by: 1) the accessible
market rising from 50mn to 200mn acres, 2) an accelerated portfolio expansion, and 3)
a global leading/integrated platform.
Probability analysis: We stress test our base case to calculate probabilities of share
price outcomes over 900 scenarios. We note that only 12% of outcomes indicate
upside to the current share price, with a risk-weighted mean of DKr224/share and a
range of DKr150-379/share.
NOVOZYMES NOTE
DSM (O/P, TP 57): 2G enzyme production/JV with POET in 2G = free option.
Chris Counihan
Core Business: We estimate the implied EBITDA multiple of DSMs core Nutrition
business is c9x EBITDA - this is a 10-15% discount to comparable nutrition peers. We
believe both earnings risk and valuation risk is low given the improving outlook for DSM
Nutrition (pricing/volume led).
Free Option Value: We believe there are free options surrounding the DSM investment
case. These include: 1) POET (2G ethanol), we currently ascribe no value with the
Liberty plant starting up in Q2 we estimate this adds 2.5/share; and; 2) Caprolactam
divestment we estimate adds ~5/share.
2G or not 2G, is POET the answer? We estimate the potential market revenue for
2G enzymes at $2bn by 2022. Our 2G market forecasts suggest POET can obtain a
~17% market share over this period (assumes Project Liberty/POET's asset
contribution only).
Project Liberty (POET): We believe Project Liberty has the potential to: 1) generate
300mn revenues over the next 5-8 years, 2) further licensing revenue potential
outside of Liberty (gain share), and 3) secure DSM's position as a global 2G enzyme
producer (c17% market share). Importantly, our risk weighted DCF suggests this
provides c2.5/share value accretion.
Valuation: Our 57/share target price represents the average of our SOTP 56 and
our DCF 58. Our target price implies a FY14 Nutrition EBITDA multiple of 9.2x.
DSM NOTE
11 July 2014
Global Ethanol Demand Summary

In this joint department report we study the main ethanol markets and also provide a
bottom-up ethanol demand model.
Global ethanol demand increased from 7.7bn gallons in 2005 to 23bn gal in 2013 (CAGR
of 15%) primarily due to (i) demand from Renewable Fuel Standard (RFS) in the US, albeit
with some regulatory uncertainty, and (ii) Brazil's 20%-25% ethanol blending mandate.
Ethanol demand had stagnated in the past few years primarily due to higher corn prices,
weak acceptance of higher blends and lack of infrastructure. We expect growth in US to
be capped by the 10% ethanol blend wall in the near term, and Brazil to maintain a 20%25% mandate (subject to cane and sugar production/prices). However, in the long term
flex fuel vehicles penetration in both countries and gradual increase in blending should
increase ethanol demand. This will be driven primarily by the economic viability of ethanol
as a transportation fuel, especially in an elevated oil price environment. We also expect
demand from RoW to grow as they target higher ethanol blends for lower emissions, better
octane and diversification from oil. We forecast global ethanol demand to increase to 35bn
gal by 2022.
Figure 10: Ethanol Demand Forecast - c35bn gallon ethanol demand globally by 2022
40
35
35
30
25
20
20
23
28
29 30
17
13
15
10
5
22 22 22
26 27
24 25
32
10
0
2000
2002
2004
2006
2008
2010
US
2012
Brazil
2014E
2016E
2018E
2020E
2022E
ROW
US ethanol demand limited by E10 till E15 infrastructure builds out: The US has
now reached the 10% blend wall and there are a number of growing concerns surrounding
the ability to move toward E15 given, i) engine compatibility, ii) warrantee issues, and iii)
available infrastructure. We believe a number of the short-mid term concerns are
warranted and we forecast the US to remain at the E10 blend ceiling for the next 6 years.
As the newer E15 complaint fleet & infrastructure grows through this decade, in the long
term we believe there remains enough political will/socioeconomic impetus to move
towards higher ethanol blends (E15) even though the current EPA stance seems to
concede to the near term challenges of higher blends. We also expect demand from flex
fuel vehicles to grow due to more customer education and ethanol prices trading at
discounts to gasoline (energy adjusted), akin to the Brazilian model. We forecast US
ethanol demand to increase from ~13bn gal in 2013 (or 9.9% of gasoline demand) to
~14.1bn gal by 2020 and 16.9bn gal by 2022.
Brazil: The Brazilian fleet has been expanding 6% per year since 2004, the flexfuel/ethanol fleet has been expanding at a faster pace (~29% CAGR 200412), while the
gasoline fleet has been expanding by only 1% per year. Today, Brazil has ~33 million
vehicles (52% gasoline). In 2017, we estimate Brazil will have ~38mn vehicles. In our
11 July 2014
view, future fleet growth will be based on flex-fuel vehicles since they provide an
interesting option for the consumer to choose the most economical way to fuel the car. We
believe the flex-fuel fleet will grow 11% per year from 2013 to 2017 (~25mn vehicles in
2015) and that the gasoline-only fleet will decrease 5% per year in the same period.
RoW: We build a bottom-up view of RoW ethanol consumption based on risk weighted
targets by country; we forecast RoW ethanol consumption moving from c4bn gallons p.a.
today to 10bn by 2022. Dependent upon, 1) Europe reaching an average 7.5% blend rate
(vs. 10% target), 2) India reaching c10% blend rate (vs. 20% target) and 3) China reaching
c2bn gallons by 2022.
2G ethanol technology still needs to improve. The growth outlook in 2G ethanol,
which by definition uses non-food cellulosic material (not starches or direct fermentable
sugars), has slowed as the technology still needs to reduce capital costs and improve
productivity. To date only one ethanol plant has started production, Beta Renewable's
cellulosic ethanol plant in Italy. We are tracking more than 3 other plants which expect to
start pilot commercial scale plants in the near term. We expect pilot plants to ramp-up over
the next few years and enter commercial large scale adoption as the technologies get
validated. We expect global 2G ethanol volumes to increase to ~0.15 mm gal by 2017 & 5
bn gal by 2022 from negligible volumes today, perhaps cannibalizing 1G demand to some
extent, but highly dependent on cost curve improvements.
Decline in US corn prices has improved crush spreads: Corn prices have declined
from ~$8/bu in 2012 and $7.5/bu in early 2013 to $4/bu today. This helped ethanol
producers capture higher margins. Spot crush spreads (Ethanol ASP less corn, electricity
and natural gas costs plus co-product revenues) increased from breakeven levels of
$0.50/gal in 2012/early 2013 to ~$0.83/gal in 3Q13, $1.40/gal in 4Q13 and $1.61/gal in
1Q14. Note this does not include any other production/material/SG&A costs or higher cost
of corn basis. This is one of the best environments for ethanol producers over the past few
years, and is expected to remain favorable due to a healthy corn harvest (~165
bushels/acre yields per USDA vs. drought stricken yields of ~123 bushels/acre in 2012).
With the continued productivity gains in yields driven by farmer & seed productivity, the
long-term prospects for inexpensive and accessible corn in the US market remains
favorable.
Lower corn prices have improved demand for US exports: The decline in corn prices
have resulted in gradual growth in US ethanol exports since 3Q13. The lower cost US
ethanol has seen strong demand from Canada, Philippines, UAE, India, South America
and Europe. In addition to domestic ethanol demand of 13 bn gal, US ethanol producers
expect ~1 bn gal of ethanol demand in 2014. Lower corn/ethanol prices in US will help
position Ethanol competitively against gasoline. US corn ethanol is at 30% discount to
gasoline today.
11 July 2014
$9.0
$0.36
$8.0
$0.31
$7.0
$0.26
$6.0
$0.21
$5.0
$0.16
$4.0
$0.11
$3.0
$0.06
$2.0
Jan-10
Sugar price, $/lb
Corn price, $/bu
Exhibit 11: Corn & Sugar Prices
$0.01
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
May-12
Corn US2, $/bu (LHS)
Sep-12
Jan-13
May-13
Sep-13
Jan-14
May-14
Raw Sugar, $/lb (RHS)
Source: Thomson Reuters
RIN prices not yet resolved. One of the most important questions we get is on the
sustainable value of RINS in US. Without changes to auto warranties EPA will limit ethanol
mandates around the 10% blendwall, leading to adequate RIN supply which can be
carried over to 2015 and future years. As a result, RINS price should trade at their
theoretical price (the difference between ethanol prices and energy equivalent gasoline
prices). The current RIN price of $50cts/gal implies the EPA mandate will create stress.
Without stress, the RINS should be closer to 0-20cts/gal (depending on corn prices).
Exhibit 13: RIN Prices and Theoretical Future Value Range
Spread, $/gal
($/gal)
$4.5
$1.60
$4.0
$1.40
$3.5
$1.20
$3.0
$1.00
RINs, $/GEE
$2.5
$2.0
$1.5
$0.80
D4 RIN soyoil@$40c/lb
$0.60
$0.40
D4 RIN soyoil@$35c/lb
$0.20
$1.0
D6 RIN - corn@ $5/bu
$0.00
$0.5
-$0.20
Jan-10
Mar-10
May-10
Jul-10
Oct-10
Dec-10
Feb-11
Apr-11
Jul-11
Sep-11
Nov-11
Jan-12
Apr-12
Jun-12
Aug-12
Oct-12
Jan-13
Mar-13
May-13
Jul-13
Oct-13
Dec-13
Feb-14
Apr-14
$0.0
Crush Spread, $/gal
Gasoline RBOB NYH, $/gal
Ethanol NYH, $/gal
Source: Thomson Reuters, Credit Suisse

Note: Crush Spread = (Ethanol + DDGS) (Corn + Electricity + Gas)
D6 RIN - corn@ $4/bu
-$0.40
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
$/gal
Exhibit 12: Ethanol vs Gasoline Prices and the Crush
Biodiesel RINs (D4)

D6 RIN - Corn@$4/bu
D4 RIN - SoyOil@$40c/lb
Ethanol RINs (D6)

D6 RIN - Corn@$5/bu
D4 RIN - SoyOil@$35c/lb
Source: Thomson Reuters, STARFUELS, Credit Suisse

Note: D6 RIN assumes breakeven IRR at DDGS $150/MT, gas
$5/MMBtu
11 July 2014
US Ethanol Market
Under former US President George W. Bush, the Renewable Fuels Standard (RFS) was
renewed in December 2007. Under this directive, US fuel companies are set minimum
limits on the amount of conventional ethanol that is required to be blended into gasoline
each year until 2022. The legislation also sets requirements on the production on
advanced biofuels (fuels that meet more stringent greenhouse gas thresholds than
conventional corn ethanol). The advanced category also includes a subcategory for
second-generation (cellulosic) biofuels.
Figure 14 below details the full amount of ethanol production mandated by the EPA under
this Renewable Fuels Standard.
Advanced biofuel production has fallen short of the requirement, as few technologies exist
in the US to produce advanced ethanol from conventional corn. The EPA cut the 2014
mandate from 18bn gallons to 15.2bn due to blend wall issues and lack of production for
advanced ethanol.
The EPA is also in the process of finalizing 2014 standards and is likely to propose a more
manageable ethanol requirement due to the near-term challenges blending more than
10%. While policy support is never guaranteed and the policy backdrop (e.g. abundant
lower carbon shale gas / food vs fuel) is complicated, we believe the EPA and policy
makers broadly will ultimately continue with the underlying policy directive of increasing
ethanol consumption (both 1G & 2G) to reduce greenhouse emissions, increase energy
independence, and support the farming heartland.
Figure 14: Renewable Fuel Standards: Mandated US Ethanol Consumption (bn gallons)
Year
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
First generation
biofuel
requirement
9.0
10.5
12.0
12.6
13.2
13.8
13.0
15.0
15.0
15.0
15.0
15.0
15.0
15.0
15.0
Total Advanced
biofuel
requirement
n/a
0.60
0.95
1.35
2.00
2.75
2.20
5.50
7.25
9.00
11.00
13.00
15.00
18.00
21.00
Total renewable
Actual first
fuel requirement generation ethanol
blending
9.00
9.00
11.10
10.60
12.95
13.23
13.95
13.90
15.20
13.55*
16.55
13.3
15.20
20.50
22.25
24.00
26.00
28.00
30.00
33.00
36.00
Source: EPA; *2012 actual production based on annualized number for the first 32 weeks of the year, 2014
mandate revised in Nov'13
Data from the Renewable Fuels Association also shows that conventional ethanol capacity
is already very close to the 15 billion gallon per annum target that the EPA has established
as the requirement for 2015 to 2022. This suggests the scope for first-generation capacity
growth in the industry is extremely limited unless additional capacity is built (which, in the
current crush environment, is likely being considered).
10
11 July 2014
Figure 15: US Ethanol Production Capacity

Total Ethanol Plants
Production Capacity(mgy)
Plants Under Construction
Capacity Under Construction/Expanding (mgy)
States with Ethanol Plants
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
81
3,644
16
754
18
95
4,336
31
1778
20
110
5,493
76
5635.5
21
139
7,888
61
5536
21
170
10,569
24
2066
26
189
11,877
15
1432
26
204
13,508
10
522
29
209
14,907
2
140
29
Source: RFA, Credit Suisse research; mgy = millions of gallons a year
11
11 July 2014
Facing the Blend Wall

The shortfall in the ethanol legislation is that it appears to set a mandatory supply
of ethanol that is in excess of the plausible level of demand for ethanol, absent a
significant, and immediate, introduction of 15% ethanol blends. Ethanol can be
blended with gasoline up to a maximum level of 10% (this constitutes the so-called E10
fuel, or what is often called the blendwall). We have now reached the 10% blend wall
further increases in blending require a move to E15.
Figure 16: Ethanol blend Ratio
Figure 17: Ethanol Production
10.4%
10.2%
1,000
Blendwall E10
950
Thousand barrels per day
10.0%
Blend rate %
9.8%
9.6%
9.4%
9.2%
9.0%
8.8%
900
850
800
750
8.6%
Jun-14
Mar-14
Dec-13
Jun-13
Sep-13
Mar-13
Dec-12
Jun-12
Sep-12
Mar-12
Dec-11
Jun-11
Sep-11
Mar-11
Dec-10
Jun-10
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Sep-10
700
8.4%
Source: EIA
Looking ahead, US gasoline consumption is projected to decline over the next two
decades as more efficient engines are adopted. The wave of low cost shale gas that is
driving increased adoption of natural gas vehicles could also reduce growth in the gasoline
pool that is the market for bio-fuel demand. This indicates that the ethanol market will
decline so long as public opposition, and lack of infrastructure for E15, prevents its
widespread adoption (both cellulosic ethanol and corn ethanol).
Breaking the Blend Wall mid/long term

In October 2010, following a review of engine efficiency and performance using higher
ethanol blends, the EPA granted a waiver to allow up to 15% (E15) blends to be sold for
cars and trucks with a model year of 2007 or later. In January 2011 the waiver was
expanded to authorize use of E15 to include model year 2001 through 2006 passenger
vehicles. The EPA decided not to grant a waiver for E15 use in any motorcycles, heavyduty vehicles, or non-road engines (such as boats) because the testing data did not
support such a waiver.
The waiver has been unpopular in various circles. In December 2010 several groups,
including the Alliance of Automobile Manufacturers and the American Petroleum Institute,
filed suit against the EPA. The suit has not been successful: the federal appeals court
rejected the claim and ruled that the groups did not have legal standing to challenge the
EPA's decision to issue the waiver for E15.
However there is a growing discord with the move to higher ethanol blends citing 1) engine
damage/warrantee issues, 2) lack of infrastructure and 3) uncompetitive economics. In
response to these issues the DOE issued a series of white papers designed to address
these issues and seek stakeholder feed-back. We review the key arguments set out in the
responses and conclude:
12
11 July 2014
On a short-mid term timeframe (to 2019) we believe that the 10% ethanol blend
ceiling will remain a barrier to higher blending, this is premised upon; 1) lack of
incentives to build out higher blend pump infrastructure for independent fuel retailers
to limit availability, 2) lack of definitive testing mean engine compatibility issues will
remain at the forefront holding back consumer demand, and 3) lack of price
transparency on ethanol content. We forecast 10% ethanol blending to 2019 as
negative sentiment dominates the market.
On a long term basis we believe there remains the political will/socioeconomic

impetus to drive the greater use of ethanol, given 1) RFS legislation was always
intended to build out an advanced fuels platform, 2) lower soft commodities
environment should create competitive economics, and 3) move to lower carbon and
alternative fuels Post 2017 we forecast c0.5% blend increases p.a. as pump
infrastructure is built out and the number of flex fuel vehicles on the road
negates engine/warrantee issues.
Figure 18: US Ethanol Demand We assume relatively low Flex Fuel penetration relative
to the number of Flex Fuel Vehicles (FFV) on the road due to infrastructure constraints
16.9
15.4
Ethanol demand, bb gallons per year
16
14
12.7
13.0
13.1
13.0
13.1
13.1
13.5
14.4%
14.1
13.9
12.9%
12%
10
11.3%
6
4
2
9.6%
9.9%
10.2%
10.2%
10.3%
10.4%
0.15
0.20
0.23
0.27
0.40
0.56
2012
2013
2014E
2015E
2016E
2017E
11%
11.6%
10.8%
1.10
14%
13%
12
15%
10%
1.82
2.14
2.52
2019E
2020E
2021E
3.17
9%
8%
Ethanol as % of total motor gasoline demand
18
7%
Total Ethanol Demand, bb gal
2018E
of which ethanol demand for FFV, bb gal
2022E
Effective blend ratio (RHS)
13
11 July 2014
Hurdles to Long Term E15 in the US

We assess the hurdles which must be overcome in order to move toward a >10% blend
rate (ethanol to gasoline) in the US automotive market. In the short term, unless
automotive warranties change, then the blend wall is real. Over time, flex fuel vehicles
could create a potential blend market of 30bn gals (from 13.3bn gals today). This would
require appropriate support for investments in fuel pumps and ethanol distribution
infrastructure.
Engine compatibility:
We believe the primary hurdle which is likely to impede the move to greater than 10%
blends in the short term is a ruling on the engine compatibility of E15.
Background: Higher blend ethanol is considered a new fuel and as such is subject to the
Clean Air Act which prohibits introduction unless the EPA grant's a waiver demonstrating
that the fuel will not cause vehicles to fail to meet emissions standards. E10 received the
waiver in 1978 and in 2010 the EPA granted a partial waiver for the use of E15 in vehicle
models after 2000 (excluding non-automotive vehicles and appliances). However there
has been a growing case put forward to suggest that the initial studies were flawed and
that the use of E15 may harm approved vehicle engines.
Argument for Compatibility: The Department of Energy carried out 2 years of research
prior to the waiver being granted. A review of the literature suggests the following:
The testing was rigorous with 86 vehicles tested over 120,000 miles using industry
standard test-cycles there is little argument surrounding the quality of the research
from the anti-ethanol lobby.
The study was government funded and therefore should lack bias.
However the focus of the research was on the emissions impact of E15 blends not the
impact on the physical function of the engine. The EPA cleared E15 on an emissions
basis but insufficient research looked at the impact on engine function.
Argument for Engine Malfunction: The CRC (Co-Coordinating Research Council) which
is funded by the American Petroleum Institute have subsequently published a report
claiming E15 causes Engine malfunction in 2 of the 8 engines they tested. A review of the
literature suggests a number of issues with the research, in our view:
The CRC used a methodology which tested 8 engines on E20 fuel in order to establish
which would fail based on emissions, diagnostics, valves, compression and leakage. If the
engine failed on E20 then an equivalent engine was then tested on E15. If that engine
failed another was then tested on E0. We have the following issues with the
study/methodology:
Funding by the API creates a test bias,
We question the severity of the pass criteria given 1) one of the engines failed using
every fuel including E0, and 2) Testing was not carried out on E10 blends therefore we
cannot conclude if E15 is any worse than E10 (which is currently successfully used in
the majority of the US fleet).
We also question 1) the repeatability of the second hand vehicles used, 2) the lack of
statistical significance given the low sample number (8 models, 28 engines in total),
and 3) lack of peer review process.
The outcome of the CRC was failure in 2 of the 8 models tested due to issues with cylinder
leakage/valve issues attributed to greater corrosivity and lower lubricating properties.
Credit Suisse View: In our view, both testing methodologies have flaws and neither
provides an appropriate level of proof regarding the safe use of E15. We believe that the
14
11 July 2014
DOE testing satisfies the waiver requirement and as such this will likely hold. However
given the growing concern over Engine Damage it will likely be warrantee issues and
insurance problems which hold back the use of higher blends in non-flex fuel vehicles
(fully approved for up to E85 use).
Higher blend vehicle availability:

If we rule out the use of E15 in ordinary vehicles the argument is that flex fuel vehicles can
pick up the slack. We highlight that in May 2011 the Open Fuel Standard Act (OFS) was
introduced to Congress. The bill (currently in congress) would require that 30% of
automobiles made in 2015, 50% in 2016 and onward to be manufactured and warranted to
operate on non-petroleum-based fuels, which include existing technologies such as flexfuel, natural gas, hydrogen, biodiesel, plug-in electric and fuel cell. Given the limited
complexity involved with producing flex-fuel vehicles (and low cost), several auto makers
have already been selling vehicles capable of running on higher blends of ethanol.
There are currently c14mn FFVs on the road in the US however only c0.6mn are using
E85 ethanol blend due to lack of pump infrastructure/consumer demand. c50% of new
vehicle models are FFV and the production cost is only c$100-300 higher.
If all of these vehicles switched from E10 to E85 this would add an incremental 6bn
gallons of ethanol demand immediately and an additional 17bn gallons by 2022
which would bring total demand to 30bn gallon (just short of the 36bn gallon mandate).
However E85 is receiving little traction at the pump due to 1) perceived lower fuel
efficiency (ethanol has c20% less energy per gallon therefore must trade at >20%
discount to gasoline to be cost competitive currently at 30% discount), and 2) lack of
infrastructure to support dispensing higher blend fuels.
Figure 19: Estimated number of Flex Fuel Vehicles (FFV) and potential ethanol
consumption under different blend scenarios
Number of FFV
on Road (mn)
2013
2016E
2022E
14
21
45
% of current
Ethanol
Ethanol
Ethanol
fleet
Consumption if Consumption if Consumption if
(E85)
(E15)
(E35)
6%
6
0.4
1.9
8%
8
0.5
2.7
18%
17
1.2
5.8
Infrastructure for higher blends

Given that the increasing penetration of FFV creates the potential to blend higher levels of
ethanol. We believe the greatest hurdle towards long term goals will be the installation of
the necessary infrastructure to dispense higher blend ethanol. Specifically we highlight:
There are currently only c3000 E85 or E15 dispensing pumps in the US this severely
limits the ability to higher blend fuels,
We estimate that to reach the 2016 mandate as it stands would require the installation
of 90k FF pumps (12% of total) estimated cost of c$1bn
We estimate that to reach the 2022 mandate would require the installation of 260k flex
fuel pumps (36% of total) estimated cost of c$2.6bn
15
11 July 2014
Figure 20: Flexible gas pumps required to meet 1G and Cellulosic (2G) Mandate
Flex Gas Pumps Required
% of total pumps
3,000
87,044
259,945
0.4%
12%
36%
2013
2016E
2022E
Source: Credit Suisse estimates
We highlight that c90% of gas stations are independent with integrated oils owning only
1% of the market. Approximately 50% are branded or affiliated with integrated oil
companies. Key hurdles facing the installation of sufficient infrastructure:
Integrated oil companies have no desire to facilitate further ethanol blending and have
some influence over affiliated fuel retailers.
There are few incentives (some tax breaks in certain states) in place to upgrade your
fuel station as an independent owner and given the c$10-20k outlay we do not believe
this will change without firmer incentives in place.
The chicken and the egg station owners do not want to upgrade until the demand is
there, the demand will not materialize unless the supply increases.
We note the Obama Administration set the goal of installing 10,000 blender pumps
nationwide by 2015. These pumps can dispense multiple blends including E85, E50, E30
and E20 that can be used by E85 vehicles.
The USDA issued a rule in May 2011 to include flexible fuel pumps in the Rural Energy for
America Program (REAP). This ruling provided financial assistance, via grants and loan
guarantees, to fuel station owners to install E85 and blender pumps.
Chicago have also introduced an ordinance which seeks to require all self service stations
in the city to make available E15 gasoline in a bid to reduce fuel prices, additional
consumer choice and reduce greenhouse emissions. The proposal is under consideration
by the Committee on finance for Chicago.
However we believe further incentives are required in order to facilitate the uptake
of higher blend fuel pumps at gas stations in the US.
Competitive pricing required to drive LT economics

Higher ethanol blends and more options for US consumers will likely alter the
pricing dynamics of ethanol.
There is a secondary, yet very important, implication of ultimately introducing higher (and
varying) blends of ethanol. Blenders currently charge essentially the same amount for E10
that 100% gasoline would sell for, taking the difference between less-expensive ethanol
and gasoline as a margin. But in theory consumers should require a 29% lower price for
E85 ethanol than gasoline given the lower energy content (reducing fuel efficiency) in
ethanol. Brazilian consumers already make these purchasing decisions and effectively
purchase less ethanol if the price exceeds ~70% of gasoline.
In the US, the consumer has had few opportunities to price discriminate based on the level
of ethanol present in purchased fuel. If higher ethanol blends are introduced (E15, E20,
E85 etc), and if consumers are given more choices by using mixing pumps, there will be
increased attention about the impact of ethanol on fuel pricing.
Ethanols discount to gasoline would need to be sustained at current levels to
compete with pure gasoline.
16
11 July 2014
Figure 21: Energy Content of Ethanol

BTUs per Gallon
Gasoline
Ethanol (E10)
Ethanol (E15)
Ethanol (E85)
Ethanol (E100)
114,500
110,660
108,740
81,800
76,100
Energy Content Difference

Relative to Gasoline
0%
(3)%
(5)%
(29)%
(34)%
Source: US Department of Energy, Credit Suisse research
Figure 22: Ethanol discount to gasoline

$4.50
40%
$4.00
20%
$3.50
0%
$3.00
-20%
$2.50
-40%
$2.00
-60%
$1.50
Jan-00
Feb-00
Mar-00
Apr-00
May-00
Jun-00
Jul-00
Aug-00
Sep-00
Oct-00
Nov-00
Dec-00
Jan-01
Mar-01
Apr-01
May-01
Jun-01
Jul-01
Aug-01
Sep-01
Oct-01
Nov-01
Dec-01
Jan-02
Mar-02
Apr-02
May-02
Jun-02
Jul-02
Aug-02
Sep-02
Oct-02
Nov-02
Dec-02
Jan-03
Mar-03
Apr-03
Ethanol discount to gasoline %
60%
Ethanol discount to gasoline
Gasoline price (RHS)
Ethanol price (RHS)
Source: Thomson Reuters, Credit Suisse estimates
17
Figure 23: Short/Mid Term Arguments surrounding US ethanol industry as highlighted in rebuttals to the DOE white paper on blend wall/compatibility issues
Pro-RFS Arguments short/Mid Term
Anti-RFS Arguments - Short/Mid Term
Credit Suisse View - Short/Mid Term
Misfueling mitigation requires strict labeling
No physical barriers to E15 mean misfueling is a big risk - as with

unleaded gasoline
Misfueling will be an issue but this is not

prohibitive
Credit Suisse
View
Neutral
EPA has the right to continue cutting/adjusting the mandate in n.a.

Nov each year
EPA has right to adjust on a 1 year forward

basis - court ruling
Pro
RFS always anticipated higher blends
Fuel demand is in decline - not anticipated in original mandate
2007 mandate always required higher than

E10
Neutral
E15 rigorously tested by DOE
EPA is rushing ethanol to market and putting consumers at risk
Anti
Oil companies delaying infrastructure
Oils cannot get the ethanol to market as do not own the stations 90% of gas stationed are independent, integrated oils own only 1%
and c50% of stations are branded - therefore not oil holding
infrastructure back
DOE testing was insufficient given the

focus on catalyst only
Oil industry not directly responsible for lack
of infrastructure but negative sentiment
does impact market
E15 is most tested fuel in EPA history
CRC study showed that E15 damaged 2 or 8 engines tested engines Both CRC and DOE studies are flawed further testing should be done
Neutral
Anti
Oil industry funded research claiming engine damage (by CRC) DOE study originally approving E15 was on catalyst system only
tested only 3 cars -US department of Energy questions the
validity of the study
Both CRC and DOE studies are flawed further testing should be done
Anti
RINS are cost neutral to the oil industry - traded between oil
players only - net neutral
RINS only neutral if physical demand can meet mandate
Mandate can be adjusted on an annual

basis to ensure compliance is possible
Neutral
Pre-2001 vehicles have not been tested with E15 - so no

proven risk
CRC study shows risk on E15
Duty to prove no impact on consumer
Anti
E15 cost is $0-3000 per pump upgrade
Upgrade cost for E85 is $20,000-$80,000 (total investment cost of

$0.8bn to $3bn) - average gas station PBT is only $34,000
Dependent on existing infrastructure however given correct incentives this

should not be a hurdle
Neutral
n.a.
Neutral
Significant Upgrade costs for gas stations - Underwriter Laboratories n.a.

have not listed a pump which is compatible with >E10 (legally)
Neutral
Underwriters Laboratories require testing with E15 - but 95% of Underwriters cannot certify installed equipment for E15 even if the
pumps sold in US (eg by Gilbarco, Dresser Wayne) are certified model is technically okay
for E15 or E25
Tanks have been E15 tested and certified also for a long time
Ford and GM have 2012/13 model vehicles which can use E15 Most warrantees only cover up to E10
Can except liability for fuel station owners
Cannot give liability relief for misfueling concerns as tort law dictates Tort law dictates liability cannot be waived
accountability for dangerous products - violates 10th amendment
Total
Pro
Anti
Anti/Neutralhigher blends
11 July 2014
18
Industry moving toward E15 approved as

little upgrade cost
Figure 24: Longer Term Arguments surrounding US ethanol industry as highlighted in rebuttals to the DOE white paper on blend wall/compatibility issues
Pro-RFS Arguments - Long Term
Anti-RFS Arguments - Long Term
Credit Suisse View - Long Term
Credit Suisse View
Lower Carbon/Emissions
High water use
Higher ethanol blends support emissions targets
Pro
Reduce oil dependency
US can become energy secure by 2025 given new

technology (shale)
Ethanol should eventually create a more

competitive market dynamic
Pro
Anti-arguments are self-serving by oil lobby
Not anti-ethanol - but E10 is the limit
Greater choice to customer creates better market

dynamic
Pro
Cutting mandate impacts private sector

investment - bad precedent
Mandating ethanol means no free market
Cutting the Mandate will destroy confidence in

future investment for innovation
Pro
Original intention was to create 2G long term
Energy Landscape has changes since 2007
Energy Security, carbon emissions and market

forces arguments still valid for ethanol
Pro
Increasing competition in liquid fuels to drive

free market economics (anti OPEC)
Mandating ethanol means no free market
Facilitate the infrastructure and the consumer

should choose
Pro
Flex fuel vehicles cost just $100 more to

manufacture
Flex fuel vehicle production could decline given consumer Increasing numbers of flex fuel vehicles on the road
sentiment and fuel economy
Pro
50% of new vehicles are flex-fuel - so E10

blend due to warrantee is temporary only
All car manufacturers have warned against the use of E15

for the majority of vehicles
With 15mn FFV on the road using E10 this could

add up to 5bn gallons of ethanol use if
infrastructure was in place for E85
Pro
Ethanol displaces need for octane enhancing

additives
n.a.
Agree
Pro
Mis-fueling has not been an issue with diesel
Mis-fueling has been an issue with diesel
Mis-fueling is an issue with diesel but this has not

stopped diesel
Pro
E85 in flex fuel vehicles could allow to fulfill

mandate
Cellulosic ethanol is lowest carbon liquid fuel in

the world (even natural gas) - supported by
tightening regulation
E85 costs consumer more on an energy adjusted basis

Yes given the increasing penetration of FFV E85
(20-30% less miles per gallon) - E85 not available on a
use could meet mandate but cost competitive
widespread basis - E85 has been rejected by the consumer
depends on dynamics
n.a.
Neutral
Pro
Total Long term View
Pro-higher blends

11 July 2014
19
11 July 2014
Brazil Flex Fuel Vehicles Drive

Growth
To analyze the dynamics of ethanol demand in Brazil it is important to understand the fleet
composition and the two main demand components. Ethanol demand in Brazil can be
divided into: (i) anhydrous ethanol (99% ethanol content; this is the ethanol blended with
the gasoline). This blend can range from 20% to 25% and is set by the government. Every
time consumers fill up with gasoline, they are in fact buying 75% gasoline and 25%
ethanol. This ethanol demand is rather inelastic. (ii) Hydrous ethanol (95% ethanol, 5%
water): This is the ethanol used by flex-fuel vehicles. Flex-fuel vehicles (launched in 2003)
use technology that allows the car to run on either gasoline or hydrous ethanol.
Consumers can use any of the two fuels at any time, depending on which makes more
economic sense. In general terms, if hydrous ethanol is being sold at any price below 70%
the price of gasoline at the pump, consumer will use ethanol. The ratio is based on the
energy efficiency of the two fuels. This means that hydrous demand is much more elastic
depending on the price ratio at the pump.
To forecast total ethanol consumption, we must understand (i) how the fleet (pure gasoline
vs. flex) is evolving, (ii) the current gasoline/ethanol price parity, and (iii) the percentage of
flex cars running on gasoline or ethanol.
Figure 25: Fleet Breakdown: Gasoline vs. Flex/Ethanol
Mn Cars/ % of Total Fleet
Light Vehicles Fleet (Mn units)
Gasoline
80% 79% 81%
Flex / Ethanol
70%
63%
60% 60%
56%
51%
49%
37%
40% 40%
44%
46%
54%
58%
42%
61%
39%
65%
35%
68%
32%
30%
20% 21% 19%
2004
2006
2008
2010
2012E
2014E
2016E
While the Brazilian fleet has been expanding 6% per year since 2004, the flex-fuel/ethanol
fleet has been expanding at a faster pace (~29% CAGR 200412), while the gasoline fleet
has been expanding by only 1% per year. Today, Brazil has ~33 million vehicles (52%
gasoline). In 2017, we estimate Brazil will have ~38mn vehicles. In our view future fleet
growth will be based on flex-fuel vehicles since they provide an interesting option for the
consumer to choose the most economical way to fuel the car. We believe the flex-fuel fleet
will grow 11% per year from 2013 to 2017 (~25mn vehicles in 2015) and that the gasolineonly fleet will decrease 5% per year in the same period.
The strong growth in the flex-fuel fleet has translated into a robust domestic market for
ethanol from 2004 to 2009 when ethanol prices were well below the 70% price parity with
gasoline. Hydrous ethanol consumption soared (~22% CAGR from 2004 to 2010). In 2010,
Brazilians consumed 15bn liters of hydrous ethanol and 7.5bn liters of anhydrous ethanol
20
11 July 2014
(25% of gasoline volume). From 2010 to 2012, sugar prices peaked at 30 cents/lb, which
encouraged Brazilian producers to shift ethanol production to sugar, and ethanol prices
increased, making price parity (ethanol/gasoline) favor gasoline consumption and leading
the government to change the percentage of anhydrous ethanol mixed into gasoline from
25% to 20%. Thus, consumption of hydrous ethanol dropped from 15bn liters in 2010 to
10bn liters in 2012.
We believe the hydrous ethanol market could reach 16bn liters in 2017. As a consequence
of the growth in the flex-fuel fleet, hydrous ethanol consumption is poised to grow 51% in
five years, increasing 9% per year from 2012 to 2017. Gasoline and anhydrous ethanol
consumption is expected to increase 3% per year in the same period. Due to poor weather
conditions, we forecast a reduction in sugarcane crushed of 3% (579Mt) in 2014/15 and a
56% of sugarcane allocated to ethanol production.
Figure 26: Ethanol and Gasoline Consumption
billion liters
50
Anhydrous
Hydrous
Gasoline
45
40
40
15
12
14
16
13
35
35
30
25
44
41
43
45
42
30
23
24
24
24
25
25
20
16
15
13
10
5
15
11
9
5
10
0
2004
2006
2008
2010
2012
2014E
2016E
Source: Unica, ANP, Credit Suisse estimates
The effect the flex fuel fleet will have on ethanol demand is not easy to calculate and can
change dramatically. If prices are high the consumer shifts away from hydrous ethanol to
gasoline in flex-fuel vehicle. As we can see in the chart below, consumption of hydrous
ethanol is very sensitive to ethanol and gasoline prices. Flex-fuel vehicle owners use
gasoline rather than ethanol in the intercrop season because of higher hydrous ethanol
prices. Average prices in the intercrop season increased 17% in 2009/10 and 11% in
2010/11, while average monthly volumes sold decreased 32% in 2009/10 and 28% in
2010/11. Ethanol sales decrease sharply when ethanol price/gasoline price > 70% (as
seen in Jan/10 and Jan/11).
21
11 July 2014
Figure 27: Ethanol Price and Ethanol Consumption in SP State

million cubic meters
0.9
Ethanol Volume
Price Parity
10
Max. Price Parity
0.8
0.7
0.6
0.5
0.4
0.3
0.2
Jan-08
0
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
May-12
Sep-12
Jan-13
Source: Unica, ANP, Credit Suisse estimates
In 2013, government took some measures to help Petrobras that also benefit ethanol
producers, out of which we can highlight (i) allow Petrobras to increase pump and refinery
price of gasoline at the beginning and at the end of the year, that would ultimately increase
hydrous ethanol competitiveness over gasoline; (ii) increase in the mix of ethanol blended
into gasoline from 20% to 25% percent in May; (iii) tax break (PIS/Cofins) on sales to try to
boost ethanol consumption; (iv) loans of R$4bn for sugarcane crop renewal, aiming to
improve yields (t/ha) to rates of 5.5% per year.
The government can still provide further incentives to improve the profitability of ethanol:
(i) increase anhydrous blend mix in gasoline from current 20-25% to 27.5-30%; (ii) the
return of CIDE tax that would add R$0.16/l of gasoline price in the pump, improving the
competitiveness of hydrous ethanol; (iii) infrastructure investments to reduce logistic costs;
(iv) incentives for bioelectricity by creating an energy auction dedicated for energy from
biomass with long-term contracts and with subsidized prices and (v) transparency in longterm gasoline pricing policy in order to encourage producers to invest in capacity
expansion. In our view the uncertainty regarding gasoline price (which is a cap for ethanol
prices) is the main reason for the reduction of Greenfield projects.
On advanced ethanol production in Brazil, supply is expected to increase in short and long
term on the back of high investments in the sector. Fibria and Suzano, for example, have
already been investing in this segment through partnerships. GranBio, a biotechnology
company, is about to start up its first plant of cellulosic ethanol and has other 4 projects in
the pipeline. The company intends to keep seeking for new partners and investing in
second generation ethanol production in order to reach an annual production of ~1bn liters
by 2021.
22
11 July 2014
Ethanol Demand in the RoW

We build a bottom-up estimate for ethanol consumption for major countries where we
forecast 5 bn gallons ethanol blending by 2016 (Europe, China and Canada significant
contributors). In the long term we forecast 9bn gallons ethanol blending by 2022 with
significant growth from China (target 10% by 2020 we assume 50% risk weighted),
Europe (target 10% blending from c4% today) and India (20% blend target we assume
25% risk weighted).
Significant mandates:
Europe: The EU currently has a 5.75% blend mandate in place and is scheduled to
move to 10% by 2020. There are however new proposals which could change the
2020 target but add large incentives for the use of advanced biofuels produced from
non-food sources (eg 2G). We highlight:
o
An impetus on reducing the impact of land use for fuel production, and
A commitment to 2nd and 3rd generation biofuels
The proposal calls for improved biomass policy to maximize the resource efficient use
of biomass in order to deliver robust and verifiable greenhouse gas savings and to
allow for fair competition between the various uses of biomass resources in the
construction sector, paper and pulp industries and biochemical and energy
production.
Given the level of uncertainty we ascribe a 50% probability to the 10% target by
2022.
China: The country has a 10% biofuels blend mandate by 2020. We highlight that
some Chinese provinces now require 10% ethanol blends (including Heilongjiang,
Jilin, Liaoning, Anhui, and Henan). However, the country had just 5 ethanol plants in
operation as of 2013. Nevertheless, there has been significant drive toward ethanol
consumption in China especially to address the pressing pollution concerns we
ascribe a 50% probability by 2022.
India: has an E5 blend mandate in place and is scheduled to move to E10 as soon as
production is in place. Recent newsflow suggests that the government is trying to
increase sugar import tariffs and ethanol blend rates to bolster domestic sugar
producers. The country has a long term goal (2017) of 20% for all biofuels given the
low (c1-2%) current blend rate and lack of infrastructure for production & blending it
seems unlikely the country will reach these targets. 25% probability by 2020.
Canada: RFS for 5% ethanol (mid term) and 2% biodiesel. The is currently ongoing
dispute with the Canadian Truckers Alliance over the recent 2% biodiesel blend
mandate, however Canada is currently blending at or above the 5% ethanol target.
Exhibit 28: Global ethanol blend targets (ex US and Brazil) in billion gallons except percentages
Region
Ethanol
Consumptio
n 2012
0.1
0.5
0.7
Gasoline
by 2016
Probability
of success
(mid term)
75%
100%
100%
Ethanol
by 2016
4.8
12.6
33.0
Blend
Target
(mid-term)
2%
5%
2%
0.1
0.6
0.5
Blend Probability
Target of success
(long term) (long term)
4.6
4%
75%
13.8
5%
100%
41.7
10%
50%
Columbia
Europe
0.1
1.4
0.6
45.0
10%
5%
90%
90%
0.1
2.0
0.4
40.5
10%
10%
95%
50%
0.0
2.0
India
Other
0.5
0.9
9.7
117.7
10%
3%
25%
50%
0.2
1.8
18.2
138.7
20%
4%
25%
60%
0.9
2.9
RoW Total
4.3
223.4
3.5%
68%
5.3
257.9
6.0%
57%
8.8
Australia
Canada
China
Gasoline
by 2022
Ethanol
by 2022
0.1
0.7
2.1
23
11 July 2014
Ethanol versus Corn Economics

New Norm for Corn Should Benefit Ethanol Margins
Following significant growth in corn production during the "ag boom" of '07-'13 on the back
of acreage expansion and improving yields, we believe we are entering a more
"normalized" period over the next few years. The US is now ~2 years off peak corn
planting levels, but we still believe farmers will continue to shed acreage next season,
albeit at a much more moderated pace (we see '15/'16 acreage in the 88mm to 90mm
acre range). Following a near record '13/'14 production year of corn (roughly 13.9 bln bu),
the US has crept its way back to a more "normalized" stock:use ratio (10% to 15%), which
we believe will be the new "norm" for the next few years.
$4
85
Source: USDA, Credit Suisse Ag Science Team
79 79
78
76
75
'15/16E
'14/15E
'13/14
70
'00/01
'13/14
'12/13
'11/12
'10/11
'09/10
Farm Price ($/bu)
'14/15E
Stocks:Use Ratio
'08/09
'07/08
'06/07
'05/06
'04/05
'03/04
'02/03
'01/02
'00/01
$0
80
'12/13
$1
0%
80
'11/12
$2
5%
86 86
'10/11
$3
91-92
88-90
88
81 82
'09/10
10%
90
95
92
'08/09
15%
$5
94
'07/08
$6
97
95
'06/07
$7
20%
Acres (mm)
100
'05/06
$8
'04/05
25%
Exhibit 30: US Corn Planted Acreage (MMs of Acres)
'03/04
$/bu
'02/03
Stocks:Use %
'01/02
Exhibit 29: US Corn Stocks:Use Ratio & Price Per Bushel
Source: USDA, Credit Suisse Ag Science Team
With a significant degree of early planting and near perfect weather in key corn growing
states through early July, the current growing season is poised to deliver a potentially
record crop, which should ultimately lead to further soft commodity declines (corn $4/bu).
Assuming Mother Nature doesnt throw a curve ball during the remainder of the '14/'15
growing season, the US is set to remain a low-cost starch/sugar producer, with the US
ethanol producers standing to benefit significantly. Below we highlight the recent dramatic
fall in corn prices (Exhibit 31) driven by improving yield/productivity expectations off of still
(Exhibit 32) near record corn acreage (Exhibit 30).
Exhibit 31: Corn Prices Plummet on Bumper Crop Fear
2012 Drought
bu/ac
200
2013 Weather Concerns
600
550
500
450
400
2014 Bumper Crop Fear
Corn Active Contract ($cents/bu)
Source: Bloomberg
Jun-14
Mar-14
Dec-13
Sep-13
Jun-13
Mar-13
Dec-12
Sep-12
Jun-12
Mar-12
Dec-11
Sep-11
Jun-11
Mar-11
Dec-10
350
180
160
140
120
100
80
60
40
20
0
2012 Drought
'00/01
'01/02
'02/03
'03/04
'04/05
'05/06
'06/07
'07/08
'08/09
'09/10
'10/11
'11/12
'12/13
'13/14
'14/15
'15/16
'16/17
'17/18
'18/19
'19/20
'20/21
'21/22
'22/23
'23/24
650
Exhibit 32: US Corn Yields Improving
Source: USDA (WASDE & Long-Term Forecasts)
24
11 July 2014
Current Negative View on Corn a Near Term Positive for Ethanol:

Due to recent significant precipitation and moderate weather across the corn belt, we
recently adjusted potential yields in several "key" corn belt states, generating a stateweighted aggregate yield of ~167 bu/ac (assumes "normal" weather for the balance of the
growing season). Specifically, we are hearing that adequate rainfall has alleviated most
sub-soil moisture concerns we highlighted following our farm tours in May (details here).
With roughly 91.6mm corn acres planted (USDA estimate), we now estimate a stock:use
ratio of ~13% and an average corn farm price of $3.70/bu to $4.30/bu over the next year.
LT Growth in Ethanol Consumption Could Dramatically Improve Corn Demand:

As a rule of thumb, every bushel of corn can produce 2.7 to 2.8 gallons of
ethanol. Therefore ~14 billion gallons of ethanol production requires ~5bln bushels of corn
or ~36% of our estimated production this season (5-year average of 35.3%). On a longterm basis, if we take the view that the US could produce up to 30 billion gallons of
ethanol, it would require an incremental 5.7 bln bushels of corn (this scenario would
require ~10.7bln bushels for ethanol use). As it's unrealistic that the US could add the
30mm-40mm acres (note: the high end of the range implies acreage additions in lower
yielding areas) required to produce the necessary bushels, productivity per acre would
need to increase significantly.
Exhibit 33: 2014/15 Expected Corn Demand by End Mkt
Bushels (mm)
16,000
Exports
13%
Food, Seed &
Industrial
10%
Exhibit 34: US Ethanol Production & Corn Consumption

% Harvested
USDA LT Forecast
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
14,000
Feed and
Residual
39%
12,000
10,000
8,000
6,000
4,000
2,000
Ethanol & by
Products
38%
Source: USDA
'00/01
'01/02
'02/03
'03/04
'04/05
'05/06
'06/07
'07/08
'08/09
'09/10
'10/11
'11/12
'12/13
'13/14
'14/15
'15/16
'16/17
'17/18
'18/19
'19/20
'20/21
'21/22
'22/23
'23/24
Demand
Ethanol
Ethanol % of Demand
Source: USDA (WASDE & Long-Term Forecasts)
Arguably the US agricultural complex could meet the challenge with cost-competitive corn
driven by continuously compounding yields by 3.5% to 4.0% over the next 10 years (all
else equal), which in our view is relatively unrealistic as well. However, given continuously
improving genetics (~1%+ yield benefit per annum in developed ag markets), new
biotechnology products, precision farming benefits and greater use of pivot irrigation, we
could always be proven wrong. But then again, Mother Nature will always have her say.
Longer Term: Corn Prices Could Rise, But Ethanol

Demand in the US Would Have to Surge
Our base case for ethanol demand is an increase of around 11bn gals over the next 7 or
so years. Some of this increase in demand will be met by Brazilian sugarcane ethanol,
some from RoW sugar based ethanol, some from fossil fuel based ethanol processes (e.g.
Celanese from coal or natural gas, or from municipal waste), some from US corn, and a
smaller contribution from 2nd generation ethanol technology using non-food based sugars.
25
11 July 2014
In our base case scenario, where the adoption of ethanol as a fuel in US FFV vehicles is
relatively slow, then there appears enough supply runway from Brazil, from starches
outside Brazil, and later in the decade from fossil and 2G sources.
If US corn ethanol producers decide to add to capacity for export markets, there could be
price competition in the short term due to infrastructure constraints and mandate
progression. However, in the longer term, there does appear room for more corn ethanol
in the global gasoline pool, assuming the economics are favorable.
If consumers in the US do create stronger demand for ethanol in their flex fuel vehicles,
the pull on corn could be substantially higher.
Exhibit 35: Various Supply Sources for Our Ethanol Demand Projections
Ethanol production & demand, billion gallons
40
35
30
25
20
15
10
5
0
2000
2002
2004
2006
2008
2010
2012
2014E
2016E
2018E
2020E
US (corn)
Brazil (cane)
ROW (starch)
ROW (fossil)
2G
Global Ethanol Demand
2022E
Exhibit 36: Overall Ethanol Blending In Global Gasoline Pool Still Room to Grow
360
8.4%
340
330
7.6%
7.2%
8.0%
349.7
8.0%
337.6
7.5%
332.4
7.0%
319.6
310
8.5%
8.2%
343.4
7.3%
7.1%
320
300
7.7%
7.8%
323.4
327.7
7.0%
6.5%
313.7
308.7
303.4
9.0%
6.0%
303.9
290
Global Ethanol Blend Ratio
Global Gasoline Demand, bn gals
350
8.5%
5.5%
280
5.0%
2010
2011
2012
2013
2014E
2015E
Global Gasoline Demand, bn gals
2016E
2017E
2018E
2019E
2020E
Global Ethanol Blend Ratio
26
11 July 2014
Exhibit 37: Its not just sugar based ethanol coal and natural gas can be ethanol
building blocks also
Its not just sugars from

cane and corn; gas and coal
can be ethanol feedstocks
Source: Celanese
Exhibit 38: Indonesia and China Have Strong Interest in fossil based ethanol production
Source: Celanese
On a long-term basis, if we take the view that the US would need to produce 30bn gals of
global ethanol supply (ie high FFV penetration and strong global demand), the US
agricultural complex could meet the challenge with cost-competitive corn driven by adding
30-40 million acres and increased yields.
27
11 July 2014
More Ethanol, Just What Gasoline

Markets Need
Although gasoline markets in the OECD face the pressure of improving efficiency gains
and slowing growth in the overall vehicle fleet, there is lots of potential transport demand in
emerging markets. Gasoline growth in China is almost 10% pa. As the BP Statistical
Review suggests, there could be decent growth in the gasoline and diesel pool (and
overall oil demand) through 2025 and beyond. This includes a view of efficiency gains.
Exhibit 39: Global Transport Demand Is Still Set to Rise, Driven by the Non-OECD (notably China and India)
Source: BP Statistical Review
Exhibit 40: Transport Demand Rises Despite Assumed Efficiency Trends
28
11 July 2014
Exhibit 41: Efficiency Gains, Biofuels and Natural Gas Will Attack Some of the Transport Market Growth, Particularly
Post 2020
The challenge for gasoline margins for global refiners, is that the growth in ethanol (circa
1.2mbd by 2022 (versus 2013 levels) and the growth in gasoline molecules (e.g. naphtha)
from the shale revolution is set to expand at a fair clip. Add in the fact that the usual end
petrochemical markets for naphtha are being eroded by the advent of cheap ethane and
propane from the shale revolution, and a scenario of depressed gasoline margins
becomes more likely.
In order to avoid these depressed margins, refiners would need to take out more material
from global crude production and upgrade it into diesel by building hydrocrackers (to
replace gasoline oriented FCCs). As we outlined in our recent Unbearable Lightness of
Condensate Report tracking the changes in the supply of light molecules against enduser demand and refinery configuration changes will be important not only for US refiners
but also for the petrochemical cost curve.
Exhibit 42: Rising Ethanol Demand Offsets Gasoline
We calculate that naphtha,

US ethane, US propane and
ethanol could account for
87% of demand growth for
light molecules through
2020 (before considering
other sources).
Exhibit 43: Rising Naphtha Content of Global Crude
Demand Growth from Crude Oil

35
30
25
20
22000
21000
20000
13
15
26 27
24 25
29 30
Estimated Naphtha Content of Global Crude
35
17
20
10
22 22 22
23
28
32
6
4 4 5
7 8
KBD
40
10
19000
18000
17000
16000
US
Brazil
ROW
2022E
2020E
2018E
2016E
2014E
2012
2010
2008
2006
2004
2002
2000
15000
2004
2006
2008
2010
2012
2014
2016
2018
Estimated Naphtha Content of Global Crude
29
11 July 2014
2nd Gen Ethanol Progress Report

The second generation or "2G" ethanol process refers to the manufacture of ethanol from
"cellulosic" plant waste rather than the current 1G process which uses the edible crop
(typically corn in the US and sugarcane in LatAm). Ethanol is predominantly used to blend
into gasoline/petrol replacing the oil-based component of automotive fuel. The
socioeconomic arguments surrounding the use of ethanol and 2G technology revolve
around energy security, food vs fuel and related party interests.
Second generation "2G" ethanol technology is entering the first phase of
commercialisation and represents a large market opportunity which could 1) ease the
pressure on arable land for global food production, 2) enhance the useful farming yield
(both crop and waste are utilised), and 3) reduce the global reliance on oil-derived fuels.
The leading 2G production process uses an enzymatic-based step to break down the
cellulosic plant waste. This demands more complex and greater volumes of enzymes per
gallon vs 1G, creating a large market opportunity for enzyme producers such as
Novozymes. Capital costs are also significantly higher.
Economics : The Key Hurdle

A key hurdle in the successful commercialisation of 2G will surround technology uptake.
This relies on competitive plant economics vs 1G processing or alternate project funding.
The exhibit below shows the comparable operating and capital costs associated with 1G
and 2G technology. We note:
2G facilities have 2-5x higher plant costs vs the first generation technology
this comes as a function of a greater number of processing stages increasing the
complexity of the facility, plus the design incorporates an onsite power plant to
produce electricity from the waste lignin from the process.
2G cash cost potentially half of 1G this is due to lower feedstock costs (waste vs
edible crop) but partially offset by lower co-product income and higher enzyme costs
(process requires more expensive and greater volumes of enzymes).
Figure 44: 1G and 2G plant economics ($/gallon)

1G
Low
2G
Mid
High
$2.00
$5.38
$7.17
$8.97
$ 2.14
$ 0.60
$0.04
($0.75)
$ 0.36
$ 0.29
$0.54
($0.11)
$ 0.72
$ 0.58
$0.63
($0.16)
$ 1.08
$ 0.88
$0.72
($0.21)
$ 2.03
$ 1.08
(47.0)%
$ 1.77
(13.0)%
$ 2.46
21.0%
$/gallon
Capital Intensity
Operating costs:
Feedstock Costs
Non-Enzyme Costs
Enzyme Costs
Coproducts (revenue)
Cash Costs
Discount/Premium to 1G
Source: Credit Suisse estimates for 1G, Novozymes/beta Renewables data for 2G low to high range
highlights the expected cost range once technical refinements have been made (end 2014/15). Co-products
for 1G are distillers grains and for 2G electricity generation.
Figure 45 highlights the Internal Rate of Return based on the plant economics outlined in
Figure 44. We note that 2G plant economics only become favourable under the low cost
scenario and approach our estimated IRR project hurdle rate of 20% for investment.
30
11 July 2014
Without subsidies, we believe the mid-high cost scenarios would not attract significant
investment.
Figure 45: Calculated IRR based on ethanol plant economics
IRR
1G
No Subsidy
15%
Low
2G
Mid
High
17%
5%
-11%
Source: Credit Suisse estimates based on 25-year cash flow period, 1% maintenance capex to IC, 35%
tax rate (unlevered)
Figure 46 highlights the IRR sensitivity to capital cost and enzyme cost in the absence of
subsidies. Novozymes believe that they can reduce long-run enzyme costs to 30 cents per
gallon. We believe that at this cost level the capital cost would still need to push towards
the low end ($5/gallon) and the plant would need to operate in a low to mid cost feedstock
area. There is much work to do.
Capital Cost
$/gal
Figure 46: IRR for 2G ethanol project based on $2.50/gal ethanol price
5%
$ 2.5
$ 5.0
$ 7.5
$ 10.0
$ 12.5
$ 0.20
30.5%
14.9%
9.2%
6.0%
3.8%
Enzyme Cost $/gal

$ 0.40
$ 0.50
25.2%
22.6%
12.0%
10.5%
7.0%
5.8%
4.1%
3.1%
2.2%
1.3%
$ 0.30
27.9%
13.5%
8.1%
5.1%
3.0%
$ 0.60
19.9%
9.0%
4.6%
2.1%
0.3%
$ 0.70
17.1%
7.3%
3.3%
1.0%
(0.7)%
Source: Credit Suisse estimates Based on 25-year cash flow model
Figure 47: IRR for 2G ethanol project based on $7.17 (mid-range) capital cost
Enzyme Cost $/gal
Ethanol Price
$/gal (incl.
subsidy)
5%
$ 0.20
$ 0.30
$ 0.40
$ 0.50
$ 0.60
$ 0.70
$ 2.0
3.7%
2.3%
0.7%
(1.0)%
(3.1)%
(5.7)%
$ 2.5
9.7%
8.6%
7.5%
6.3%
5.0%
3.7%
$ 3.0
14.9%
13.9%
12.9%
11.9%
10.8%
9.7%
$ 3.5
19.7%
18.8%
17.8%
16.8%
15.9%
14.9%
$ 4.0
24.4%
23.4%
22.5%
21.6%
20.6%
19.7%
Source: Credit Suisse estimates Based on 25-year cash flow model
We believe that enzyme costs need to fall to c30cents/gallon with a capital intensity
of c$5/gallon in order to create a sustainable 2G investment environment (in the
absence of subsidies).
US Cents/Gallon of Enzyme Usage
Figure 48: Enzyme content per gallon on bioethanol (US cents per gallon)
60
30%
50
25%
40
20%
30
15%
20
10%
10
5%
0%
Historic
Current
1G Ethanol
US cents per gallon (lhs)
Historic
Current
Target
2G Ethanol
% of cash cost of production (rhs)
31
11 July 2014
Companies Mentioned (Price as of 10-Jul-2014)

Archer Daniels Midland Inc. (ADM.N, $47.35)
Celanese Corporation (CE.N, $64.12)
Green Plains Renewable Energy (GPRE.OQ, $35.13)
Koninklijke DSM NV (DSMN.AS, 50.54)
Novozymes (NZYMb.CO, Dkr270.7)
Rex American (REX.N, $78.51)
Sao Martinho (SMTO3.SA, R$39.8)
Valero Energy Corporation (VLO.N, $49.21)
Disclosure Appendix
Important Global Disclosures
Edward Westlake, Mathew Waugh, Patrick Jobin, Viccenzo Paternostro, Robert Moskow, Christopher S. Parkinson and John P. McNulty, CFA each
certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her
personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly
related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for Koninklijke DSM NV (DSMN.AS)
DSMN.AS
Date
30-Aug-12
07-Nov-12
03-May-13
06-Aug-13
17-Jan-14
21-Jan-14
03-Mar-14
06-May-14
Closing Price
()
37.20
40.68
48.94
56.02
56.52
51.00
46.58
52.90
Target Price
()
39.00
40.00
45.00
54.00
55.50
54.00
53.00
57.00
Rating
U*
* Asterisk signifies initiation or assumption of coverage.

U N D ERPERFO RM
N EU T RA L
O U T PERFO RM
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's
total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts stock rating are defined as follows:

Outperform (O) : The stocks total return is expected to outperform the relevant benchmark*over the next 12 months.
Neutral (N) : The stocks total return is expected to be in line with the relevant benchmark* over the next 12 months.
Underperform (U) : The stocks total return is expected to underperform the relevant benchmark* over the next 12 months.
*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stocks total return relative to the analyst's coverage universe which
consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and
Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stocks total
return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outper forms representing the
most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings
are based on a stocks total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian
ratings were based on (1) a stocks absolute total return potential to its current share price and (2) the relative attractiveness of a stocks total return po tential within
an analysts coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and
a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +1015% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stocks total return
relative to the average total return of the relevant country or regional benchmark.
Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications,
including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other
circumstances.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24
months or the analyst expects significant volatility going forward.
Analysts sector weightings are distinct from analysts stock ratings and are based on the analysts expectations for the fundamentals and/or
valuation of the sector* relative to the groups historic fundamentals and/or valuation:
32
11 July 2014
Overweight : The analysts expectation for the sectors fundamentals and/or valuation is favorable over the next 12 months.
Market Weight : The analysts expectation for the sectors fundamentals and/or valuation is neutral over the next 12 months.
Underweight : The analysts expectation for the sectors fundamentals and/or valuation is cautious over the next 12 months.
*An analysts coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cov er multiple sectors.
Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution
Rating
Versus universe (%)
Of which banking clients (%)
Outperform/Buy*
45%
(54% banking clients)
Neutral/Hold*
39%
Underperform/Sell*
13%
Restricted
3%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely
correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are de termined on a relative basis. (Please refer to
definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.
Credit Suisses policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the
market that may have a material impact on the research views or opinions stated herein.
Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer
to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and
analytics/disclaimer/managing_conflicts_disclaimer.html
Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot
be used, by any taxpayer for the purposes of avoiding any penalties.
See the Companies Mentioned section for full company names
The subject company (DSMN.AS) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit
Suisse.
Credit Suisse provided non-investment banking services to the subject company (DSMN.AS) within the past 12 months
Credit Suisse has received compensation for products and services other than investment banking services from the subject company (DSMN.AS)
within the past 12 months
As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (DSMN.AS).
Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.
The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (DSMN.AS) within the past
12 months
Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares;
SVS--Subordinate Voting Shares.
Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not
contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.
For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit
http://www.csfb.com/legal_terms/canada_research_policy.shtml.
The following disclosed European company/ies have estimates that comply with IFRS: (DSMN.AS).
As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.
Principal is not guaranteed in the case of equities because equity prices are variable.
Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.
I, Viccenzo Paternostro, certify that (1) The views expressed in this report solely and exclusively reflect my personal opinions and have been
prepared independently, including with respect to Banco de Investimentos Credit Suisse (Brasil) S.A. or its affiliates ("Credit Suisse"). (2) Part of my
compensation is based on various factors, including the total revenues of Credit Suisse, but no part of my compensation has been, is, or will be
related to the specific recommendations or views expressed in this report. In addition, Credit Suisse declares that: Credit Suisse has provided,
and/or may in the future provide investment banking, brokerage, asset management, commercial banking and other financial services to the subject
company/companies or its affiliates, for which they have received or may receive customary fees and commissions, and which constituted or may
constitute relevant financial or commercial interests in relation to the subject company/companies or the subject securities.
To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important
disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research
33
11 July 2014
analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the
NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a
research analyst account.
Banco de Investments Credit Suisse (Brasil) SA or its affiliates. ........................................................................................ Viccenzo Paternostro
Credit Suisse Securities (Europe) Limited....................................................................................................................................... Mathew Waugh
For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.creditsuisse.com/disclosures or call +1 (877) 291-2683.
34
11 July 2014
References in this report to Credit Suisse include all of the subsidiaries and affiliates of Credit Suisse operating under its investment banking division. For more information on our structure, please use the
following link: https://www.credit-suisse.com/who_we_are/en/This report may contain material that is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of
or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse AG or its affiliates
("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its
content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used
in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates. The information, tools and material presented in this report are provided to you for information
purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to
ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and
services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment
services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or
otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in particular
that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation
as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such
liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future
issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this report. Those communications reflect the different assumptions, views and
analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other communications are brought to the attention of any recipient of this report. Some investments
referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past
performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and
estimates contained in this report reflect a judgment at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial
instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or
income of such securities or financial instruments. Investors in securities such as ADR's, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex
instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any
structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and
volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with
their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience
sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may
exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence,
initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may
prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the
extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or
hyperlinks to CS's own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website
or following such link through this report or CS's website shall be at your own risk. This report is issued and distributed in Europe (except Switzerland) by Credit Suisse Securities (Europe) Limited, One Cabot
Square, London E14 4QJ, England, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. This report is being
distributed in Germany by Credit Suisse Securities (Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). This report is being
distributed in the United States and Canada by Credit Suisse Securities (USA) LLC; in Switzerland by Credit Suisse AG; in Brazil by Banco de Investimentos Credit Suisse (Brasil) S.A or its affiliates; in Mexico
by Banco Credit Suisse (Mxico), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); in Japan by Credit Suisse Securities (Japan)
Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau (Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan
Investment Advisers Association, Type II Financial Instruments Firms Association; elsewhere in Asia/ Pacific by whichever of the following is the appropriately authorised entity in the relevant jurisdiction:
Credit Suisse (Hong Kong) Limited, Credit Suisse Equities (Australia) Limited, Credit Suisse Securities (Thailand) Limited, regulated by the Office of the Securities and Exchange Commission, Thailand,
having registered address at 990 Abdulrahim Place, 27th Floor, Unit 2701, Rama IV Road, Silom, Bangrak, Bangkok 10500, Thailand, Tel. +66 2614 6000, Credit Suisse Securities (Malaysia) Sdn Bhd,
Credit Suisse AG, Singapore Branch, Credit Suisse Securities (India) Private Limited (CIN no. U67120MH1996PTC104392) regulated by the Securities and Exchange Board of India (registration Nos.
INB230970637; INF230970637; INB010970631; INF010970631), having registered address at 9th Floor, Ceejay House, Dr.A.B. Road, Worli, Mumbai - 18, India, T- +91-22 6777 3777, Credit Suisse
Securities (Europe) Limited, Seoul Branch, Credit Suisse AG, Taipei Securities Branch, PT Credit Suisse Securities Indonesia, Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the
relevant authorised affiliate of the above. Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Research
provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. This report has been
prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (each as defined under the Financial Advisers Regulations) only, and is also distributed by
Credit Suisse AG, Singapore branch to overseas investors (as defined under the Financial Advisers Regulations). By virtue of your status as an institutional investor, accredited investor, expert investor or
overseas investor, Credit Suisse AG, Singapore branch is exempted from complying with certain compliance requirements under the Financial Advisers Act, Chapter 110 of Singapore (the "FAA"), the
Financial Advisers Regulations and the relevant Notices and Guidelines issued thereunder, in respect of any financial advisory service which Credit Suisse AG, Singapore branch may provide to you. This
research may not conform to Canadian disclosure requirements. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with
applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements.
Non-U.S. customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. U.S. customers wishing to effect a transaction should do so only
by contacting a representative at Credit Suisse Securities (USA) LLC in the U.S. Please note that this research was originally prepared and issued by CS for distribution to their market professional and
institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment
decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not authorised by
the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority or in respect of which the protections of the Prudential Regulation Authority and
Financial Conduct Authority for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this
report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services
CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related
information solely on an arm's length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any
municipality (including the officials, management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal
advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities
dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal
securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its
affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further
information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers,
directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or
the amount agreed with a customer when setting up an account or at any time after that.
Copyright 2014 CREDIT SUISSE AG and/or its affiliates. All rights reserved.
Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can
be eroded due to changes in redemption amounts. Care is required when investing in such instruments.
When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS
as a seller, you will be requested to pay the purchase price only.
Global Ethanol outlook-v7.doc
35

Cs - Global Eth MKT

Diunggah oleh

Informasi Dokumen

Judul Asli

Hak Cipta

Format Tersedia

Bagikan dokumen Ini

Bagikan atau Tanam Dokumen

Opsi Berbagi

Apakah menurut Anda dokumen ini bermanfaat?

Apakah konten ini tidak pantas?

Hak Cipta:

Format Tersedia

Cs - Global Eth MKT

Diunggah oleh

Hak Cipta:

Format Tersedia

11 July 2014

Global Ethanol Markets

Demand Looks Set to Accelerate

The Credit Suisse Connections Series

CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS

Total Ethanol Demand

Annual ethanol demand - billion gallons

Annual ethanol demand - billion gallons

Exhibit 1: Global ethanol demand forecast

2G ethanol production forecast

Source: Thomson Reuters, Company data, Credit Suisse estimates

Exhibit 3: US ethanol demand forecasts with some FFVs

Exhibit 4: Brazil ethanol demand forecasts

Effective blend ratio (RHS)

Source: Thomson Reuters

US total ethanol demand (LHS)

13.0 13.1 13.0 13.1 13.1

Brazil Ethanol/Gasoline demand, bn gal

Exhibit 6: leading to higher US Ethanol exports

Exhibit 5: US Corn and ethanol prices have declined

mm gal per month

US Ethanol demand, bb gallons per year

Ethanol as % of total motor gasoline demand

Source: EIA, Credit Suisse estimates

Corn US2, $/bu (LHS)

Ethanol NY Harbor, $/gal (RHS)

Source: Company data, Credit Suisse estimates

Global Ethanol Markets

Source: Company data, Credit Suisse estimates

Global Investment Ideas

Equity Impacts By Region

Exhibit 7: Comparing ethanol EBITDA/gal

Exhibit 8: Comparing EV/gal

GPRE Terminal EBITDA

Ethanol EBITDA $/gal

Q3E Q1E Q3E

Spot Implied EBITDA/gal

Source: Company data, Credit Suisse estimates

Global Ethanol Markets

Recent Transactions New Build

Source: Company data, Credit Suisse estimates

Value per share

Source: Company data, Credit Suisse estimates

ADM (N, TP $50): Ethanol outlook is good; cautious on Agricultural Services

Latin America Ethanol Producers

Global Ethanol Markets

Global Ethanol Markets

'Core' Novozymes (DKr175/share): We value the 'core' Novozymes business (ex

Global Ethanol Markets

Global Ethanol Demand Summary

Source: Company data, Credit Suisse estimates

Global Ethanol Markets

Global Ethanol Markets

Sugar price, $/lb

Corn price, $/bu

Exhibit 11: Corn & Sugar Prices

Corn US2, $/bu (LHS)

Raw Sugar, $/lb (RHS)

Source: Thomson Reuters

D6 RIN - corn@ $5/bu

Crush Spread, $/gal

Gasoline RBOB NYH, $/gal

Ethanol NYH, $/gal