Wow! The storm is over! Recent years have confirmed, once again, that the sugar and ethanol industry (or, as the modernites would say, the sugar-based energy industry is not for anyone other than the strongest. Huge volatility. Vertiginous decreases. Accelerated increases. Skin deep emotions. Everything began in the current decade with the dis-covery of a new market for our ethanol: dual-fuel cars, and with the astonishing growth of this new vehicle fleet a new expansion cycle for this industry began.

Numbers that amaze everyone: more than 80 projects actually implemented, brand new, of gigantic size: any number under 3 or 4 million tons/year of crushed sugarcane was (or is) considered small. From 60 or 70 dollars of the initially projected investment per ton of crushed sugarcane to the 100 to 120 dollars actually spent. From a certain disdain of good old sugar to the shine of the new energy, now enriched by the new paradigm of co-generation.

How to foot the bill, given the known lack of own funds of traditional mill owners? Next comes the financial system, with all its liquidity, keen on making loans: banks, trading companies, funds with a variety of names, all heavily engaged in financing this process. Since nothing lasts forever, Black September came about, with the greatest disillusion ever, since the thirties.

In a short period, we went down the road from total euphoria to the most absolute desolation. What a headache! Many lessons learned. Many still to be learned. Thousands  of pages to be written to describe this painful process. What is the balance, apart from the bankruptcies already accounted for?

Since there also never is a malady that does not end, sugar once again showed its strength, alongside the continuous expansion of the domestic ethanol market. All of this in the context of a still uncertain regulatory environment for co-generation, especially in retrofits, not to mention the inexistence  of strong foreign markets for ethanol as fuel: the outrageous growth of investment and production costs; the extraordinary foreign exchange appreciation; the difficult financial restructurings.

With that (or, if one should prefer, in spite of that), what we witness is one of the quickest, most impressive and consistent industry-wide consolidation processes ever to have taken place in the country, in an industry that just recently was one of the most widespread, traditional and family-owned of all industries. Nowadays, it is difficult to not react with some irony in light of optimistic forecasts for the short and medium term.

There is no way to ignore the forecast of lack of product. In the sugar market, notwithstanding the increase in the harvest of India, Brazil will not be able to supply the entire quantity needed to meet demand. Reforms in the sugar industry in the European Union, set for 2013, will result in a further strong reduction in Brazil’s production.

Rumors – viewed by industry specialists as realistic – about the beginning of deregulation of this industry in India will also have a strong adverse impact on the availability of sugarcane, due to the elimination (or decrease) of sustainability prices, whether federal or at the state level. Given the lack of new projects in Brazil, apart from the few currently in the process of being implemented, it will not be easy to ignore a bullish outlook for the product.

In ethanol, we see an unusual situation: the increase in the domestic market at the height of the harvest season. Such prices, however, significantly reduce the proportion of dual-fuel cars that are actually consuming the product: perhaps no more than 60%. One should bear in mind that ethanol exports, this year, are extremely low, close to 1.5 million cubic meters, with no chance of picking up in the short term.

The changes brought about in commercial performance by the recent consolidation are quite clear. We cannot forget, however, that domestic gasoline prices are at much higher levels in comparison with international levels, currently providing us excellent protection for ethanol. So, when will a new expansion cycle take place? First of all, it is essential that we reduce our costs.

In a scenario of 120 or 140 dollars per ton of crushed sugarcane as the parameter for new investments, the sugar and ethanol prices needed to make such projects viable are a Summer night’s dream. Our costs also lost a major share in the propagated competitive advantage we had in the past, but the problem is even bigger: we began believing in our discourse that the production increase of the two commodities could only take place in Brazil.

This is not true: the Americans currently produce double our ethanol production, at lower costs than ours. India can increase its sugar production at lower costs than those necessary for us to make our exports viable. Furthermore, in the competitive world of commodities, there is only one truth about price formation: it tends to equal the marginal production costs. So, what now?

In the past – I refer to the seventies and eighties –, only a major joint effort by the government and the productive sector was capable of modernizing and making our industrial sector competitive. The game played was called technology. We are doing very little, very little indeed, in this regard. But we know how much is being done abroad. Let’s hope there is still time for us to re-cover and to again lead and be competitive.