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Eduardo Pereira de Carvalho

Sugarcane industry specialist


A fantastic outlook

Since our topic is energy, I shall take as a reference a study recently conducted by BP on the energy outlook for 2030. We have 20 years ahead of us, which is nothing. In two or three sugarcane cycles from now, we will have a world population estimated at 7.2 billion inhabitants, a 24% growth in comparison with the present time.

The GDP of OECD (Organization for Economic Cooperation and Development) countries last year reached US$ 40 trillion, whereas that of non-OECD countries was US$ 30 trillion, totaling US$ 70 trillion. For 2030, BP estimates that the GDP of the rich countries will increase to US$ 60 trillion and that of the non-rich countries from US$ 30 trillion to US$ 90 trillion, resulting in a total of US$ 150 trillion, a 115% increase in world GDP, provided no catastrophe takes place.

The big challenge will be to meet the needs for better living conditions for these billions of inhabitants, a desire common to us all. But, much more than us, it is the rural inhabitant of China, or India or Africa who desires this. And how are we going to do this in a sustainable and safe manner? This is a big challenge, because energy is not just another product or something to be taken lightly.

Energy is the blood that flows in the veins of economies. Everything depends on energy. Hence, energy, from the perspective of the economy, ranks much higher on the importance scale than we economists nowadays admit.  

To this day, the classification of energy, in the context of economic theory, is an unaccomplished task. This is because nobody can separate its essentialness for our life, and this has been so ever since Man decided to create energy sources, way back in ancient Egypt.

When one creates artificial forms of energy, of sourcing energy, one starts developing a different society, and society, since the 18th Century, has been completely different than anything that had existed before then. The production of biofuels, and here we are talking mainly (but not only) about ethanol, is expected to exceed 6.5 million barrels/day of oil equivalent.

Last year, this figure was at 1.8 million barrels/day of oil equivalent in relation to biofuels consumption, including ethanol, which makes up the most part. This may happen if the public support policies for such energy alternatives continue, if oil prices continue at the same levels as in recent years, and if technological innovations we all see occurring continue at the required pace. Projections continue to show that the United States and Brazil will continue being the absolute leaders in the production of biofuels in 2030.

Most of these fuels that will be consumed in 2030 will still be of first generation. After 2020, 40% in consumption demand growth for liquid fuels will occur in biofuels. Last year, this figure was at 13%; it will increase to 40% in 2020 and to 60% in 2030. Never before in economic history was there an opportunity of such magnitude. Never before was there anything so safe and certain. Never before did one hear about conditions related to demand of this nature, which presents itself as an opportunity for business.

Those who cannot see this as a unique opportunity in history will forgo great opportunities: to become wealthy (if private investors); to generate jobs and income (if governments); to create well-being (for all).

But why have we stopped to grow? Why did production stagnate? Notwithstanding the fantastic outlook for sugar markets, Brazil, last year, exported 53% of all sugar marketed in the world, i.e., 28 million tons. In 1975, 1.2 million tons were exported. Even given the prices, any price curve shows where the prices for sugar or ethanol are at. Make your choice. Have we ever seen prices like these before?

All this notwithstanding, we are in a crisis, and production increases are stagnated. What did we see happening in recent years after the 2008/2009 crisis? A dramatic and very high concentration process of this industry in Brazil, although it continues to be an industry optimized through its rural base, which is so important that it allows non-aggregated units to be efficient in agricultural management.

This concentration was a very important characteristic to improve the financial situation. According to Itaú-BBA data, the relation between net debt and EBITDA, in 2006, in the 2006-07 harvest, was 1.23%, a very low figure; in the year 2007-08, this indicator increased to 7.1%, scaring any banker. In the 2008-2009 harvest, this relation decreased to 5.5% and to 3.78% in the following harvest.

In the latter, Itaú, based on a sample of more than 80 clients in the industry, – so, a significant sample – estimates a debt/EBITDA ratio of 2.2%, a significant improvement of the financial situation, allowing entrepreneurs and bankers good nights of sleep.

So for all sakes, why do we have all this stagnation? I think there is an important element in all this – the exchange rate. In 2002, the Real experienced its biggest possible devaluation since it was created in 1994, but then underwent a strong valuation. This valuation of the Real will only continue, because the Brazilian economy’s relative position in comparison with the rest of the world tends to improve because we enjoy better conditions than most of our partners in the world, and hence, this reflects in an important flow of funds to Brazil.  

However, the future scares me even more, when we start extracting all those 30 or 40 billion barrels from the pre-salt layer reservoirs.  Let’s hope we will not experience the Dutch phenomenon here in Brazil, because this results in, and is associated with, an outrageous increase in costs, of 5.5 cents per pound of crude sugar in the port of Santos This was the figure I saw when I joined UNICA in 2000, and I also remember a liter of ethanol at R$ 0.14, as all of you do too.

So then, today’s situation is not profitable. Or is it? Yes, for sure there is a significant number of mills that will not be compensated no matter what the price is, because they are broke. We know that. And they are broke in today’s world, in which, unlike the past, one cannot remain in such a situation.

I lack elements to assess what that represents, but I know there is quite a number of mills for which the only solution is a tremendous injection of capital. Such funds have to come from outside the unit, there has to be some kind of process in this direction, and this is somewhat reflected in the “idle capacity” of 120 million tons of sugarcane that is out there for processing, but there is no sugarcane because the first thing to do when one runs short on cash is to cut investments in sugarcane.

Today, we are watching the end of a cycle of three years, like in 2000, at the end of the 1997-99 cycle. However, in this period, we lost 25% of the cane harvested in 2000 and now we will lose only 10 or 12%.

Therefore, the first problem to solve is to fine-tune the industry overall, since it is in quite good shape. We are making money, and in fact, in a long time one hasn’t seen so much money, regardless of how high our costs are.

What we need is a different “atmosphere”, which is lousy, and therefore, for an economist, this makes it all a little complicated. An economist looks at the numbers, analyzes them, and concludes that the business should be running well, but it isn’t because of the “atmosphere”. Things aren’t well, but it is difficult to know exactly why. The government does not feel well. Prices have never been so high and this bothers the government.

The private sector gets upset by the government’s reaction, engaged in bringing about an absurd regulation proposed by the ANP (National Oil Agency) to authorize investments in ethanol – which actually looks like a return to the days of the IAA (Sugar and Ethanol Institute). It is an aberration, a step backwards, but I believe there are elements that are even worse than that.

There are institutional threats that scare capital, inhibiting investments in ethanol, and we tend to forget there is a benefit ethanol derives from the difference in the CIDE rate, which is also true for the CIDE rate on gasoline. In São Paulo there is a tremendous gain on ethanol under the ICMS tax system that makes the State the only one in which hydrated ethanol still competes with gasoline.

We know this gasoline price situation is not as constant as some people state, making us think there already is an important policy benefiting ethanol – the mandatory mixture law that is part of our system. As long as the private sector and the government fight we must get our act together, because we are dealing with a product for which public policies are relevant.

If we want a healthy, sustainable and safe environment for liquid energy, whose only economically and environmentally viable solution until now is ethanol from sugarcane, we must know how to talk to each other. Otherwise, there is no solution.