Thursday, September 20, 2007

cheap Brazilian energy (revisited)

Among the most frustrating things that our Congress does to us: the $.54/gallon tariff on Brazilian sugar-based ethanol. (And this, especially in light of the $.51/gallon subsidy taken from taxpayers and given to corporations which produce corn-based ethanol.) In the wisdom of our legislators, it's better to be more dependent on foreign oil from the Middle East than to trade with Brazil.

Last Monday's WSJ had an interesting article on U.S. attempts to get into Brazil's market:

RIBEIRÃO PRETO, Brazil -- Nowadays, plenty of investors want to talk to Cícero Junqueira Franco. Together with two sons and numerous cousins, he controls a great deal of something the world wants: ethanol.

Mr. Junqueira Franco, a founder of Companhia Açucareira Vale do Rosário, a steam-belching mill that crunches sugar cane into sugar and ethanol, has received offers from several suitors. These include a $775 million bid for his company from New York-based commodities giant Bunge Ltd. But Mr. Junqueira Franco, whose family arrived in Brazil in the 1700s and still owns prime tracts of sugar-cane land in São Paulo state, says he'll never sell.

"Why would I?" asks the 75-year-old Mr. Junqueira Franco, his shirt partly untucked and face flushed after a big lunch with his family.

Thanks to high oil prices and worries over global warming, multinational companies are straining to find ways into Brazil's booming market for biofuels -- renewable fuels made from crops such as corn and sugar cane. The U.S. and other countries hope to substitute as much as 15% of domestic gasoline for ethanol over the next decade. With ample land, low production costs and ethanol-production experience, Brazil is viewed by many as the country best able to sate world demand.

A clutch of potential investors have descended here, including commodities giants, hedge-funds and energy companies. Even the founders of Google Inc. came to have a look. But the global millions are colliding with an earthy reality: families like Mr. Junqueira Franco's that have controlled Brazil's sugar-cane wealth for decades, even centuries. Many don't want to sell; others are asking sky-high prices for operations riddled with problems.

The standoff is preventing some big foreign players from getting into Brazil's promising ethanol market through acquisitions, forcing them to develop their own projects from scratch. Yet resistance to outsiders could affect how quickly larger amounts of cheap Brazilian ethanol can begin flowing into the world's auto fleet. Big companies, which have better access to credit and capital, could also help consolidate, modernize and expand Brazil's ethanol industry...

Many family-owned mills appear to be troubled. The domestic sugar and ethanol industry is informally managed and highly fragmented, making it less than ideal for outside investment. Often, millers don't have reliable accounting books and are plagued by tax disputes and debt, Mr. Bajaj and other investors say. Such issues can be difficult to resolve in Brazil's slow-moving legal system.

Labor and environmental pitfalls also loom for outsiders. Most sugar cane is still cut by hand -- grueling work that has enriched mill owners for centuries, but could expose international companies to liabilities...

Brazil's millers face some political pressure not to sell. If foreigners or large companies gain leverage, Brazil's traditional sugar-producing regions stand to reap less from an ethanol boom...

Despite the many hurdles, foreign biofuels companies like ADM believe that getting into Brazil is still a must. U.S. corn ethanol, which is less efficient to make, has been competitive with gasoline due to a 51-cent tax credit on each gallon.

By contrast, Brazil's sugarcane ethanol can comfortably compete with costly oil -- even if oil trades in the low-$40-per-barrel range...Although a stiff import tariff of more than 50 cents per gallon currently makes Brazilian ethanol costly to import to the U.S., Brazilian ethanol could dominate other markets in Asia or Europe...

Some foreign investors have decided to create new cane plantations, or "green fields," far from areas of São Paulo state where Brazil's powerful sugar-cane families dominate...

But it's a lengthy process, taking at least six years before the ethanol is flowing fully. That makes green-field projects unattractive for many investors...


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