Sugar’s 47% Jump Tempts Refiner Away From Ethanol in Brazil

Alexandre Grendene Bartelle, a Brazilian investor with stakes in two ethanol refineries, said he may upgrade the plants to also produce sugar because soaring demand for the renewable fuel hasn’t led to surging profits.

Grendene and his partners are studying whether to add sugar lines to the refineries and doubling their processing capacity to about 4 million tons of cane within two years, he said in a telephone interview. That would be about the maximum size that a Brazilian mill could be expanded to.

Sugar, which trades freely, has increased 47 percent from a year ago. Ethanol prices, which are linked to the state-set cost of gasoline, sometimes can’t even cover production costs, Grendene said. In the past year, developers announced just two new ethanol projects, compared with 48 between 2007 and 2008, according to data compiled by London-based research company Bloomberg New Energy Finance.

“Many mills haven’t been profitable over the last two years” following two poor harvests, said Grendene, chairman and founder of the shoe company bearing his name. “This isn’t a marvelous business. It’s a complicated one.”

Grendene co-founded Grendene SA in 1971 and took it public in 2004, attracting supermodel Gisele Bundchen and actresses Sharon Stone and Claudia Schiffer to advertise its sandals. He’s also involved in a steel venture with Votorantim Group.

Below Cost

It costs about 95 Brazilian centavos (60 cents) to produce a liter of ethanol, and mills often have to sell below the market price to fulfill their contracts, Grendene said.

The average wholesale price of ethanol at the mill was about 91 centavos in 2010 compared with 76 centavos in 2009 and 72 centavos the year before, according to Piracicaba, Brazil- based research institute Centro de Estudos Avancados em Economia Aplicada, known as Cepea.

Sugar was making mills 58 percent more money than ethanol last week, and it’s generally been the more profitable product for more than two years, according to Cepea.

Brazil is expected to produce 25.5 billion liters of ethanol in the current harvest season, up 0.5 percent from last season, the Sao Paulo-based trade association Uniao da Industria de Cana-de-Acucar said April 1.

“This increase in ethanol supply for domestic use is lower than the expected growth in demand, given accelerated sales of flex vehicles,” according to the statement.

Switching Fuels

About 42 percent of Brazil’s cars can run on either gasoline or pure ethanol, and they make up 85 percent of new automobile sales, according to the country’s automaker trade group Associacao Nacional dos Fabricantes de Veiculos Automotores. The flex-fuel cars are driving up consumption of the sugar cane-based fuel.

Greater demand for ethanol hasn’t translated into more investments in production capacity to meet the growing market, according to Adriano Pires, director of the Rio de Janeiro-based research company Centro Brasileiro de Infra Estrutura.

One reason is that the fuel competes at the pump with gasoline, the cost of which is controlled by the government through the state-controlled energy company Petroleo Brasileiro SA (PETR4), known as Petrobras, Pires said.

Drivers tend to switch to gas when ethanol prices at the pump exceeds 70 percent of the price of the petroleum-based fuel because gas contains more energy, he said. So ethanol prices rarely surpass that level, capping potential revenue for mills, he said.

‘Risky Business’

“Ethanol is a risky business,” in Brazil, according to Adriano Pires, director of the Rio de Janeiro-based research company Centro Brasileiro de Infra Estrutura. “Mills have to sell a product that competes with gasoline while having to cope with bad harvests.”

“A regulated gasoline price, in certain market situations, doesn’t help. And we are in such a market situation right now,” Christoph Berg, managing director of Ratzeburg, Germany-based commodity analyst F.O. Licht, Christoph Berg. “It’s difficult to fight against gasoline prices, but mills have managed in the past.”

Wholesale gasoline prices in Brazil are set by Petrobras, and rarely change. The last major change was in 2005, when the state-run company raised the price it charges distributors to 1.05 reais a liter, Pires said.

Over the same period, production costs for ethanol have risen by about 40 percent, Arnaldo Luiz Correa, an analyst at Archer Consulting in Sao Paulo, said yesterday.

“I’ve been involved in Brazil’s ethanol industry for 18 years and some of those years were good but most were bad,” Grendene said. The government-dictated gasoline price has been a “major disincentive to construction of new projects.”

Grendene owns 50 percent of the Da Mata mill, in Sao Paulo state, and 40 percent of the Iaco mill, in Mato Grosso do Sul.

To contact the reporter on this story: Stephan Nielsen in Sao Paulo at snielsen8@bloomberg.net

To contact the editor responsible for this story: Reed Landberg at landberg@bloomberg.net

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