Co-authorship: Peterson Felipe Arias Santos, Economic Analyst at Pecege

The introduction of flex-fuel vehicles on the Brazilian market in 2003 represented an important incentive for investment and the expansion of installed capacity in the sugar-energy sector in the country. The great success of this type of engine is evidenced, for example, in the fact that, in the first half of 2022, of the 853,126 licenses, 81.8% of the vehicles were flex-fuel.

The possibility of free substitution between ethanol and gasoline created, on the demand side, a direct dependence of the price of the former on the price of the latter. On the supply side, in turn, the large potential market for ethanol encouraged the creation of new industrial plants, including by reducing the previously existing risk in view of the almost exclusive dependence on the global sugar market.
 

Considering the evolution of investments in the sector in the long term, Figure 1 shows the evolution of the installed sugarcane crushing capacity in Brazil, since the 2005-2006 harvest, as well as the effective production of cane and the level of use, understood as the reason between the two.

Sugarcane crushing capacity reached a peak in the 2010-2011 harvest, falling progressively thereafter, due to the closure of some mills, but remaining relatively constant from the 2014-2015 cycle. in the 2011-2012 harvest, close to the peak of installed capacity, such that the Level of Use of Installed Capacity would have been below 70%. Similar to the installed capacity itself, the utilization level would have been more stable between the 2013 2014 and 2020 2021 harvests, ranging between 83% and 88%.

Figure 2 presents the decomposition of the variation in the Level of Use of Installed Capacity of the sugarcane industry , thus allowing to observe the relative contribution of productivity, the harvested area and the increase of the milling capacity in the increase or reduction of the idleness of the industry.

After the introduction of flex-fuel vehicles, the increase in investments in industrial capacity was not accompanied by gains in productivity and harvested area in the same proportion, resulting in increased idleness, as shown in Figure 2. In the 2010s, in particular , from 2015 onwards, the combination of reduced harvested area with stagnation of agricultural productivity was fundamental for the industry to remain idle, even with the observed disinvestment. In the 21/22 and 22/23 harvests, the scenario presented in Figure 2 tends to remain as 1) agricultural productivity was reduced due to climatic adversities and 2) high grain prices – particularly the combination of soybeans and corn – have attracted independent producers, who end up migrating crops when the sugarcane fields are reformed.

In addition to the gap between the potential processing capacity and the effective crushing of sugarcane, another relevant aspect in this sector concerns industrial downtime . It is equivalent to the time that the industry is stopped due to lack of raw material, climatic unavailability or problems in the industrial plant itself, reflecting the downtime or unavailability of industrial plant equipment. This aspect can be seen in Figure 3. It is important to note that industrial downtime corresponds only to the downtime during the harvest period and is not influenced by the duration of the harvest itself.

A hypothetical plant that has 5,000 hours of harvest and remains idle for 500 hours will have 10% downtime; in the same way, if in the next cycle, in which the harvest time is reduced to 4,000 hours, and the plant remains stopped for 400 hours, then your downtime will remain constant. In this sense, it is interesting to note that the 2018 2019, 2019 2020 and 2020 2021 harvests, in the two major sugarcane regions, showed a continuous reduction in downtime industrial.

The permanence of a high level of idleness in the industry has direct impacts on the unit production costs, since there is a high representation of fixed costs that end up not being diluted, putting pressure on the activity's margins. The successive harvests considered “short” imply longer off-seasons and the need to readjust the work schedules at the mills, in order to incorporate longer off-seasons.

Finally, it is necessary to reinforce that the idleness currently present in the sugar-energy sector is added to the little evolution, in real terms, of the prices of the sector's products in the long term, as shown in Figure 4. Thus, despite relatively cyclical peaks, the real price of Total Recoverable Sugar, which represents the evolution of the price of the sector's products, remained relatively constant in the long term.

Considering the current level of idleness in the sugarcane industry, there are no opportunities to expand the sugar and ethanol park in the country in the short term, with the probability of growth being reduced via greenfields (new sugar and ethanol plants first generation). An increase of around 13.9% in sugarcane crushing in the country is possible, the average level of idleness between 2016 and 2015, without implying an increase in installed (or processing) capacity. In the short term, the Brazilian sugar-energy sector has a challenge for its growth: to unlock the agricultural productivity of sugarcane. Productivity gains are necessary to catalyze the expansion of the country's sugar and ethanol supply, implying cost reductions and efficiency gains.