Grupo de Economia da Energia

Ethanol: from promise to problem

In biofuels, ethanol on 16/05/2011 at 00:30

By Luciano Losekann

Until recently, the Brazilian government highlighted the country as a world’s top ethanol exporter. Accordingly, in 2007, the Brazilian government published a study indicating the possibility of Brazil using  ethanol to meet 5% of global gasoline consumption and, with more advanced techniques, such portion could reach 10% in 2025 [1], with a production of 205 billion liters of ethanol in the country.

Four years later, perspective is completely different. The recent scenario of ethanol in Brazil is characterized by difficulties in supplying the fuel, high prices and need to import the product.

In April, prices of hydrous ethanol and anhydrous ethanol in power plants in São Paulo showed the maximum value ever of the past 10 years. On average, the price of hydrous ethanol at gas station reached 40% over the same period in 2010. As the price of anhydrous ethanol mixed with gasoline tripled during the same period, the price of gasoline was also affected, increasing 15%.

Evolution of the weekly prices of hydrous and anhydrous ethanol (R$/liter) – from April/08 to May/11

Price to producer in the State of São Paulo

Source: CEPEA/ESALQ/USP

Because of this pricing dynamics, for the first time since 2003, when the flex-fuel vehicles were introduced, the hydrous ethanol consumption decreased in 2010 (-8% compared to 2009). As a result, demand for gasoline, which gained competitiveness in relation to ethanol, increased 17% last year.

Evolution of the annual gasoline and hydrous ethanol consumption – billion liters

Note: Gasoline data refer to the gasoline C and considers the content of anhydrous ethanol in its mixture.

Source: ANP

Several factors contributed to this drastic change of scenery. The global financial crisis and the continuous appreciation of the Real undermined the projects for exporting Brazilian ethanol, affecting the long-term supply dynamics.

However, this article addresses appraisal of conjunctural factors causing increasing of price of ethanol.  By evaluating the data made available by the National Food Supply Company (CONAB), there is an evolution of the availability of sugarcane for ethanol production, as well as the anhydrous and hydrous ethanol production.

The weather conditions were not favorable for the 2010/2011 sugarcane crop. The growth of sugarcane production in relation the previous crop (2009/2010) was 3.1%. This value that is substantially lower than the average of the previous five years (9.5%). However, the main problem in the availability of sugarcane for ethanol production is due to increased allocation of sugarcane for the sugar production. Motivated by the high international price of sugar in the worldwide market, the allocation of sugarcane for this purpose increased by 7.8%, while the allocation for ethanol decreased 0.5% in relation to the previous crop (2009/2010).

Interestingly, the CONAB perspectives for next crop are not good regarding the ethanol market. The growth of sugarcane production will be limited, and sugar market will once again be prioritized, reducing the amount of cane allocated to ethanol production.

Evolution of production and allocation of the sugarcane crop – million tonnes

 Crop

Sugarcane Production

Allocation

Sugar

Ethanol

2009/2010

604

266

338

2010/2011

624

287

336

2011/2012*

642

309

333

* Forecast made available in the first study for the 2011/2012 Crop

Source: CONAB

Although the allocation of sugarcane for ethanol production has been decreased in 2010/2011 crop, the total ethanol production increased. The anhydrous ethanol production, driven by sales of gasoline, accounted for most of that growth. The perspective for the next crop is to reduce total production and hydrous ethanol.

Hydrous and anhydrous ethanol production from sugarcane crops – million litters

Crop

Anhydrous

Hydrous

Total

2009/2010

6.950

18.812

25.681

2010/2011

8.017

19.579

27.595

2011/2012*

8.708

18.382

27.090

* Forecast made available in the first study for the 2011/2012 Crop

Source: CONAB

The expansion of flex-fuel cars created a context for the ethanol consumption quite different from what occurred when the fuel served only cars that used this fuel. Initially, the possibility of substituting gasoline by ethanol would remove the problem of security of supply, which was the reason to extinguish ethanol vehicle from the late 1980s.

Thus, the sugarcane producers, while respecting the technical limits, can arbitrate between sugar and ethanol markets according to prices. When the sugar market is more attractive, as it has occurred in the last two years, allocation of sugarcane to produce sugar increases. The lower supply of hydrous ethanol implies higher prices and substituting gasoline for ethanol.

However, the problem of security of supply is not removed, only moved to the supply of gasoline. A consumption increasing 17%, as happened with gasoline in 2010, creates significant logistical problems. To meet such demand, 3 million barrels of gasoline were imported (Brazil rarely imported this product in recent years).

It is interesting to note that the government holds important instrument of interference in the ethanol market that is the definition of percentage of mixing anhydrous ethanol and gasoline. Despite the critical situation of supply of ethanol in the last year, mixture was kept at its maximum value of 25%. Should percentage be lowered in advance, it could avoid high pressure on prices, particularly of anhydrous ethanol.

The government’s decision to submit the regulation of the ethanol market to ANP suggests that this should not be coordinated anymore as a commodity and that any concern about continuity of supply of ethanol should be pursued.

The beginning of the 2011/12 sugarcane crop has contributed to lower price of ethanol in recent days. However, CONAB’s predictions indicate that this is not sufficient to rule out problems in the next off-season, especially if prices of sugar remain high. Therefore, it is important that the government uses not only new arrangement for coordination, but also the existing mechanism, in particular, the administration of the content of anhydrous ethanol in gasoline.


[1] BBC Brasil “5% of gasoline may substitute Ethanol by 2025, says government”. News: 03/22/2007. Available at http://oglobo.globo.com (accessed on 05/13/2011).

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