Raizen Ethanol Exports Threatened by Cuts to U.S. Mandate

Raizen Energia SA, Brazil’s biggest ethanol exporter, is the sugar-cane processor most at risk from a U.S. plan to cut biofuel mandates, threatening the South American country’s $6.4 billion export market.

The joint venture between oil producer Royal Dutch Shell Plc and Cosan SA Industria & Comercio produced 2.32 billion liters (612.1 million gallons) of ethanol in the 12 months through March. More than half was exported and most of that was shipped to the U.S., according to Salim Morsy, a New York-based analyst with Bloomberg New Energy Finance.

A U.S. Environmental Protection Agency proposal to reduce the amount of biofuels refiners must blend with petroleum-based fuel may curtail demand for Brazilian sugar-cane ethanol next year by as much as 68 percent, Morsy said. That will cut into Raizen Energia’s export revenue, which reached 1.97 billion reais (827.9 million) in fiscal 2013. The company produces at least 40 percent of the ethanol U.S. refiners import from Brazil and will be the Brazilian supplier most affected.

Raizen Energia’s “ethanol trades are built around the export market, and the U.S. specifically,” Morsy said in an interview. The company “could lose its largest margin generator for ethanol.”

Export Prices

The Sao Paulo-based company’s ethanol exports sell at average prices 36 percent higher than it gets from Brazilian distributors, Cosan said in its earnings report for fiscal 2013, which ended in March. Cosan is the energy and infrastructure company whose chairman is Brazilian billionaire Rubens Ometto.

A press official for Raizen Energia, who asked not to be identified because of the company’s policy, declined to comment on the impact of the EPA policies. The closely held company posted gross profit of 1.59 billion reais in fiscal 2013 on sales of 8.47 billion reais, according to the Cosan report.

The EPA proposal last month calls for U.S. refiners in 2014 to use about 2.2 billion gallons (8.3 billion liters) of so-called advanced biofuel, an alternative to standard corn-based ethanol. The agency is soliciting public comments until Jan. 28 before it makes a final decision.

That’s down from the 3.75 billion gallons called for under 2007 legislation designed to cut carbon emissions and reduce dependence on petroleum. This is the first time the EPA has called for reducing the total biofuel blend requirement and may set a precedent for future reductions.

Cosan advanced 0.2 percent to 40.96 reais at the close in Sao Paulo. Shell was little changed in London.

Cane Ethanol

One component of the U.S. blend requirement may be met with Brazilian sugar-cane ethanol, which created a market for as much as 820 million gallons of the fuel this year. That may shrink 68 percent to about 260 million gallons next year, Morsy said. Under the original policies in the EPA’s Renewable Fuel Standard, cane-ethanol mandates were set to increase to as much as 2.5 billion gallons in 2022, according to New Energy Finance forecasts, about 40 percent of Brazil’s current ethanol output.

Ethanol from sugarcane was designated an advanced biofuel in 2010 by the EPA. The decision, along with a drought that slashed the U.S. corn harvest last year, helped Brazil triple exports to the U.S. to 2.05 billion liters last year from 2011, said Martinho Ono, president of ethanol trader Sociedade Corretora de Alcool.

The current mandates call for biofuel use to increase alongside projected growth in gasoline consumption, which hasn’t risen as much as regulators anticipated. Refiners are required this year to use so much ethanol with their gasoline that the mixture is reaching the so-called blend wall, that point at which there’s concern the amount of ethanol in the fuel mixture may damage the engines of U.S. vehicles.

‘Bad News’

“The mandate is definitely bad news for Brazilian ethanol,” Renan Pimenta, an analyst at Intl FCStone Inc. in Campinas, Brazil, said in a telephone interview. “The U.S. has been an outlet for Brazilian ethanol for a few years, and the EPA proposal suggests this outlet will be shut down quite soon.”

With U.S. demand set to wane, Raizen Energia and other Brazilian mills will probably sell more of the fuel locally, Tarcilo Rodrigues, director of ethanol trader Bioagencia, said in a telephone interview.

Increasing the local supply of ethanol may drive down prices by as much as 10 percent, reducing margins for mills, Giovana Araujo, an analyst at Banco Itau BBA, said in a Nov. 19 research note. Anhydrous ethanol, the type blended with gasoline, sold for on average 1.39 reais a liter between Nov. 25 and Nov. 29 in Brazil’s Sao Paulo state, according to the Center for Advanced Studies on Applied Economics, a research center of the University of Sao Paulo.

Sugar Shift

Cane producers may also choose to turn more of their crop into sugar, potentially exacerbating a global surplus of the sweetener. Sugar prices fell to a three-year low of 16 cents a pound in July.

The EPA’s move may not reduce imports as much as expected, said Enrico Biancheri, a director at Biosev SA, Brazil’s biggest cane processor after Raizen Energia. He expects the country’s exports to slip by 300 million liters to 500 million liters in 2014.

“If you think about it, 300 million liters are not a lot compared to our consumption,” he said in an interview. “I think people are overestimating the impact of the EPA mandate.”

Brazil consumed 17.8 billion liters of ethanol last year, data from the country’s oil regulator show, and 300 million liters would be enough for about 6 days.

California Demand

If the EPA proposal is approved, Brazilian exports may shift toward California, where a state incentive program encourages the use of efficiently-produced biofuel, including sugar-cane ethanol, said Ono of Sao Paulo-based Sociedade Corretora de Alcool. The state’s Low Carbon Fuel Standard program may attract more fuel from Brazil than all other U.S. states combined.

While demand for the fuel in California may almost double to 150 million gallons next year, Raizen Energia is poorly positioned to take advantage of the program, Morsy said. The company’s fuel generates as much as 14 percent more carbon over its lifetime than ethanol produced by peers including BP Plc and Copersucar SA.

The U.S. market available to Brazilian mills was initially expected to expand to $6.4 billion based on the 2013 average $2.57 a gallon price of ethanol. The EPA proposal would shrink the market to $668 million next year.

If approved, which looks likely, the proposal may hamper Brazil’s efforts to transform the fuel into a global commodity, said Ono.

The EPA shift “worries us in the sense that ethanol might not become the internationally traded commodity” we envisaged, Ono said in a telephone interview. “All that optimism we had last decade that biofuel would be widely used in many countries -- now that reality seems a lot more distant.”

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