•    HOME   
•    NEWS   
•    BUSINESS   
•    INTERNATIONAL   
•    TECH   
•    SPORTS   
•    LIFE & TIMES   
•    OPINION   
•    MY JAKARTA   
•    BLOGS   
•    EYEWITNESS   

Sao Paulo, Brazil. By most measures, this should be a golden age for sugarcane ethanol in Brazil.

Yet, despite high prices for the biofuel and a massive expansion in the domestic fleet of cars that use it, the nation’s ethanol industry is struggling with stagnant investment, insufficient supply growth and a government that can’t seem to figure out whether to treat it as a friend or a foe.

Efforts to resolve the impasse were front and center at a major Brazil ethanol summit that started on Monday.

The event brings together government officials, global energy executives and members of the Unica ethanol industry group, which is hosting the event.

The atmosphere may get tense. Government officials have criticized ethanol producers for what they describe as a failure to invest and plan — and, thereby, a failure to prevent cyclical ethanol shortages that prompted a near-revolt among consumers at the pump this year.

Meanwhile, producers have pointed their finger back at the state, arguing that supply growth remains stagnant because of uneven taxes, the government’s vague talk of future regulation and a lack of incentives to invest.

“As long as there is no clarity about the policy for fuels, there is a risk for investments,” said Plinio Nastari, the president of Sao Paulo-based Datagro consultants.

Indeed, investments are currently on ice. After a boom that saw 117 ethanol mills built since 2005 to cope with soaring demand, there are no plans for new mills after five come online later this season, Unica says.

The demand exists. As Brazil’s economy booms, the domestic auto fleet is expanding at a torrid 20 percent annual pace.

Meanwhile, the percentage of vehicles that are flex-fuel — which can run on any mixture of gasoline or ethanol — is expected to rise to 86 percent by 2020 from its current level of 45 percent.

Unless the ethanol industry starts growing at a faster pace, Unica estimates that there can be an annual cane deficit of 400 million metric tons by 2020-21, compared with current production levels of 650 million tons.

Despite the challenges, foreign interest in the sector remains high. Multinational companies including Royal Dutch Shell, Noble Group and Glencore have poured billions of dollars into the sector over the past year, although they have focused more on acquiring existing mills than expanding production.

Barriers to growth can be due in part to the uncomfortable mix of pro-business policies and state intervention that has marked Brazilian governments over the past decade.

On one hand, the government has given incentives for the growth of the flex-fuel fleet through tax breaks, but Brazil also tightly regulates gasoline prices, which have stayed broadly steady at the pump since 2005.

That has placed a virtual cap on ethanol prices, since Brazilian consumers tend to switch to gasoline if ethanol prices at the pump are broadly similar.

A rapid rise in ethanol prices earlier this year prompted widespread anger among consumers and a wave of media attention, which in turn prompted the government to act.

It changed ethanol’s status to a strategic fuel, not a mere agricultural good, meaning the National Petroleum Agency will oversee the market from production through distribution.

It’s still unclear what that will mean in practice. Greater regulation could mean fewer market distortions or it could result in the government setting production targets, for example.

“Regulation could be a positive development,” said Marcus Jank, Unica’s chief. “We’re waiting to see what will happen.”

An added problem: costs are rising despite the virtual ceiling on prices. According to Datagro, the sector’s average production costs are now equivalent to a FOB raw sugar price of 17.5 cents per pound from 5.5 cents in 2002.

After growing at an annual average rate of 10 percent since 2000, cane output in Brazil rose by no more than 3.3 percent per year starting in 2008, when the global financial crisis hit hard several companies that had leveraged to expand, according to data from Unica.

 

Reuters