Brazil’s sugar cane industry has recently been trumpeting that five of its processing mills have been approved by the US government to sell their ethanol in the US. The fact that the mills are bothering to go through the registration process, which includes filling out forms and allowing an engineering review, is significant, and shows renewables are no longer the pet project of many Americans. With the US perhaps distracted by its pressing economic difficulties, producers in other countries have started to get in on the act.
Doug Haugh, executive vice president of Mansfield Oil Company, a major supplier of alternative fuels in the US, notes that the growth in Brazil’s domestic demand has been more than sufficient to consume all the ethanol the country can produce and at higher values than US ethanol prices.
Even without the tariff, there would be be little to no incentive for them to export to the US. That is, he says, unless one considers the California Low Carbon Fuel Standard, which is the first in the world greenhouse gas standard for transportation fuels, which it describes as follows:
The LCFS will require fuel providers in California to ensure that the mix of fuel they sell into the California market meet, on average, a declining standard for GHG emissions measured in CO2 equivalent gram per unit of fuel energy sold. The standard will be measured on a lifecycle basis in order to include all emissions from fuel consumption and production, including the “upstream” emissions that are major contributors to the global warming impact of transportation fuels.
Brazilian ethanol already has been designated by the EPA as a low carbon, renewable biofuel, so the California market is a perfect place for it. But there must be demand for it, and with a proposition on the state’s ballot this November to rollback some of the state’s efforts on cleaning up its air, it is not certain there will be demand from California.
Again, I ask, why bother? Mr Haugh’s guess:
It seems the Brazilians are counting on demand from California, a removal of the tariff, and an increase in domestic production beyond what they can consume themselves. When all three of those variables may line up is anyone’s guess.
Given that the rest of the US may well follow California and move to roll back its standards, the Brazilians, it seems, are planning a long way ahead. Earlier this year, the EPA finalised a rule to implement the long-term renewable fuels standard of 36bn gallons by 2022 established by Congress.
Yet the US would be hard pressed to fulfil that requirement from its own backyard. And political pressure is building to undue some of these renewable standards.
If the US does stick by its plans, demand for ethanol from Brazil will certainly grow. A new report, Global Biofuels Outlook, 2010-2020: Projecting Market Demand by Country, Region and Globally, by Hart Energy Consulting, says that, despite the recent challenges of financing and debate about overall greenhouse gas, global biofuels demand is still projected to grow by 133 per cent by 2020, primarily driven by government policies and market mandates.
It says Brazil and the US, followed by China, Japan, UK and Germany, are leading the way in global ethanol demand expansion. Frederick Potter, Hart Energy Publishing’s executive vice president, comments further:
With its favorable GHG profile, these countires will primarily look to Brazilian advanced sugarcane, bio-ethanol for supply, especially given the global context of tightening GHG limits – and limited commercial volumes of cellulosic ethanol. Obligated parties in the US will find themselves competing for these volumes as never before. We expect this to lead to continued price appreciation for sugarcane ethanol over the 2011-2020 period.
So maybe the Brazilian mills are right to take the initial steps towards selling into the US market. Joel Velasco, chief representative for North America at UNICA, the Brazilian Sugarcane Industry Association, summed up their philosophy:
What these mills have achieved with the EPA is very significand and relevant. It represents a stamp in the passport for these companies to enter the largest and most relevant ethanol producer and consumer market in the world.
While it is relatively early days for ethanol producers, when compared with Big Oil producers, it seems these small companies already are starting to think like big players – taking a long-term perspective on where demand will be in the years to come.
If the US can just get through its economic malaise without backtracking on all the efforts toward cleaner air, the bet might just be well placed.