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Brazil Ethanol Market - Part 1

By: Denise Palmer

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For over three decades, Brazil has been a global leader in the production and use of sugarcane based ethanol or ethyl alcohol, a fuel additive that has reduces country's petroleum consumption.

For over three decades, Brazil has been a global leader in the production and use of sugarcane based ethanol or ethyl alcohol, a fuel additive that has reduces country's petroleum consumption. Two years after the first global energy crisis in 1973, the Brazilian government introduced its ethanol initiative to decrease dependence on world energy supplies. At its height in the mid-1980s, more than three quarters of the 800,000 cars produced in Brazil each year ran on ethanol. However, by 1990, a decline in the supply of sugar based fuel brought the sale of ethanol-powered cars to nearly drop to zero. Since their launch, "flexible-fuel" cars have helped re-ignite ethanol production in Brazil. Today, more than half of all cars in the country are "flexible-fuel" cars. At the same time, ethanol production efficiency has tripled since 1975.

The oil crisis of the 1970s led the Brazilian government to address the strain high prices were placing on its fragile economy. Brazil, the largest and most populous country in South America, was importing 80% of its oil and 40% of its foreign exchange was used to pay for that imported oil. In 1975, General Ernesto Geisel, then-president of Brazil, ordered the country's gasoline supply mixed with 10% ethanol. The level was raised to 25% over the next five years, which was intended to maintain a constant Brazilian gasoline supply for an ever-increasing demand. The government assisted the shift by giving sugar companies subsidized loans to build ethanol plants, as well as guaranteeing prices for their ethanol products. Already the world's biggest producer and exporter of sugar, farmers reaped the benefits of this new demand.

The 1979 Iranian crisis and related oil price shock accelerated Brazil's conversion of its gasoline supply and automobile fleet. Under the Proalcool Program, sugar companies were ordered to increase production and the state-run oil company, Petrobras, was required to make 'lcool (ethanol) available at its fuel stations. The growth in hydrous ethanol, which uses a blend of 94-95% ethanol to 5-6% water, rapidly increased during the 1980s, with consumption peaking in 1989.

Automobile manufacturers were given tax breaks to produce cars that ran on hydrous ethanol, and, by 1980, every automobile company in Brazil was following this lead. By the mid-1980s, three quarters of the cars manufactured in Brazil were capable of running on sugarcane based hydrous ethanol. However, the drop in oil prices throughout the 1980s and 1990s made it uneconomic for the Brazilian government to continue its hydrous ethanol program. Both production and consumption of ethanol were basically flat for much of the mid-1980s to the mid-1990s. After 1995, both production and consumption of ethanol began falling quickly. The Brazilian government's dedication to the ethanol industry declined and incentives given by the government wore off, causing ethanol fueled vehicle production to decline in the late 1980s to early 1990s. As oil prices decreased in the 1990s, the consumer acceptance of ethanol fueled cars greatly decreased and purchases of gasoline fueled automobiles returned to previous levels.

The second wave of ethanol fuel production and consumption in the Brazilian market began in the 1990s when the use of anhydrous ethanol started to rise. Anhydrous ethanol is a type of fuel which is more easily combined with gasoline for automobile fuel. The consumption of hydrous ethanol has grown steadily since the 1990s, peaking in 2003.

The start of the new millennium brought with it increased oil prices, which in turn sparked a resurgence of Brazil's drive toward energy independence, including a revival of its ethanol program. Although it previously used a hydrous ethanol blend, Brazil shifted toward the aforementioned anhydrous ethanol, which is used in a ratio of ethanol to gasoline of 20-24:80-76. Brazil introduced its current generation of ethanol-powered cars in 2003, the same year in which hydrous ethanol consumption peaked. Named flex fuel vehicles (FFVs), these automobiles run on gasoline, ethanol, or any blend of the two. When the car is filled at the pump, an internal system analyses the mix of the two fuel types and adjusts accordingly. The first such vehicles were introduced by Volkswagen in 2003, and by 2004, they accounted for more than 17% of the Brazilian auto market. In 2005, their sales increased even further, accounting for approximately 54% of all new car sales.

The combination of high sales of flex-fuel vehicles and high oil prices further caused Brazil to increase its ethanol production to accommodate an anticipated auto industry demand. In 2005, it produced approximately 285,000 barrels of ethanol per day, an increase from the approximate 200,000 barrels per day in 2002. In 2005, 102 million barrels of ethanol were produced, of which 84 million barrels of ethanol were consumed. The surplus was exported, making Brazil the world's largest ethanol supplier.

Yet even with this positive balance of trade and production, ethanol accounted for only 13.6% of Brazil's total transportation fuel consumption in 2005. The consumption of 84 million barrels of ethanol was 13.6% of total oil equivalent consumption of 620 million per year. More than 535 million barrels of other fuels, including gasoline and diesel fuel were consumed. The remaining 86% of Brazil's transportation fuel demand is met by petroleum, and increasingly that petroleum is coming from domestic Brazilian sources. Exemplifying the importance of domestic oil production and exploration, the very declaration of Brazil's energy independence came during the inauguration of a new oil platform that is claimed to create higher domestic oil production than consumption for the first time in Brazil's history.

Role of the Sugar Industry

Rising ethanol demand in global markets is driving the growth of Brazil's sugar/ethanol complex with new investments in infrastructure and technology. The recent rise in crude oil prices, paired with a global effort for renewable energy development and a growing domestic demand for ethanol have been the key factors driving the recent expansion of Brazil's sugar and ethanol industries. As ethanol in Brazil is made from sugarcane, sugar industry developments are now increasingly linked to policy initiatives in ethanol markets. Sugar represents a particularly important component of Brazil's economy, with the sugar/ethanol industry contributing 2% to national GDP. The value of production in 2006 reached $8 billion, which represents 17% of the country's agricultural output. The sugar sector generates 21% of total exports and employs 1 million people, or 2% of the labor force.

Brazil's total sugarcane production, equivalent to 31% of the global production in 2006, reached 423 million tons. Brazil is also the largest raw and refined sugar producer, accounting for 20% of the global sugar production. Growing global interest in Brazil's ethanol sector and developments in the sugar industry significantly affect country's sugar production which reached 28.7 million tons in 2006. Brazil exported 18.3 million tons of sugar, accounting for 41% of the world's sugar exports. Brazilian ethanol exports in 2006 of 1 billion gallons represented 52% of the world's ethanol market.

Article Source: http://depositarticles.com/

To read Part 2 immediately, visit here: About the Publisher: This report is published by Energy Business Reports, an energy industry think tank and leading source for energy industry information and research products. To read more about this topic, see "Cellulose Ethanol Market Potential".

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