Brazilian Ethanol Bounces Back

By Aaron Levitt | October 11, 2010 AAA

With the global economy beginning to gain steam, albeit slightly, oil has resumed its march back to the $90 level. With energy prices rising, alternative and renewable energy sources are back in the spotlight. The broad proxy for the market, PowerShares WilderHill Clean Energy (NYSE: PBW), has bounced back over the past few weeks, moving in tandem with oil prices. While new solar and wind energy projects seem to be functioning okay despite European austerity measures, biofuels are in a quagmire. With rising food costs and the fate of the various blenders' credits at hand, the U.S. corn ethanol sector continues to disappoint. However, a developing market is quickly becoming a go-to destination for ethanol production.


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Sugar Sugar

While China's renewable energy ambitions are well known, Brazil is emerging as a leading biofuels producer. Unlike American ethanol, which is corn-based, Brazil's ethanol is 100% made from sugarcane. The nation's vast sugarcane fields and early adoption of flex-fuel vehicles have helped the sector see tremendous increases in a short time. Currently, there are about 11 million flex-fuel automobiles in Brazil, with the nation adding 2 million to 3 million new vehicles each year. Auto makers have noticed this growth. Models such as the Fiat Siena Tetra - which can run on natural gas, petrol, moisturized alcohol and Brazilian gasoline - have been designed exclusively for the nation.

While Brazil consumes much of its ethanol production, it exports nearly 10% to developed nations including the United States. Analysts estimate that the U.S. will require 136 billion gallons of ethanol by 2022, and Europe will guzzle 18 billion liters in 10 years. Most of this demand will come from imported ethanol rather than domestic supplies. Brazil has been moving forward in increasing its production with the goal of adding to its export number. Most recently, the Brazilian Innovation Agency (FINEP) and Brazil's National Development Bank (BNDES) have created a $540 million fund to help finance bio-fuel and ethanol production in the nation. More than $20 billion in private investment has entered into the sector, and 100 sugarcane mills were established over the past few years.

The Right Way To Play Ethanol

Without the food-versus-fuel hindrance that plagues America's corn ethanol industry, Brazil's bio-fuel sector will be the go-to choice for nations drifting away from traditional fossil fuels. Just as investors have plenty of choice for investment in the American corn ethanol sector like Archer Daniels Midland (NYSE: ADM) or Pacific Ethanol (Nasdaq: PEIX), there are opportunities in Brazil as well.

A recent deal between two energy giants could be the shape of things to come with regard to domestic ethanol production and distribution. Cosan (NYSE: CZZ) is the largest producer of sugar ethanol in Brazil. The company recently partnered with Royal Dutch Shell (NYSE: RDS-A) on an ethanol joint venture. The partnership will span 23 ethanol plants and nearly 4,400 service stations. Shell also owns 15% of advanced bio-fuel start-up Codexis (Nasdaq: CDXS), which it has pledged in the deal as well. As the dominant forces in production and distribution, investors wanting to participate in sugarcane ethanol's growth can play the pair.

In the first quarter of 2010, ag commodity producer Bunge (NYSE: BG) added five new sugarcane mills to its three existing mills in Brazil. The company is poised to take advantage of Brazil's 9% annual growth rate for ethanol demand.

Finally, as hated as it is, BP (NYSE: BP), through as partnership with Tropical BioEnergia SA, produces 435 million liters of ethanol per year in Brazil.

Bottom Line

As oil prices resume their march upward, alternative energy technologies are back in the spotlight. However, with the fate of the blender's credit and higher food costs plaguing the corn ethanol industry, Brazilian sugarcane is beginning to take the lead. Investors wanting to play the growth in bio-fuels may want to steer clear of the corn producers and look at those firms operating in Brazil. (For related reading, see The Biofuels Debate Heats Up.)

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