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Marcos Sawaya Jank

President of Unica


The Delusion of grandeur with inferiority complex

There is a famous phrase by Roberto Campos that says that Brazil experiences a curious mixture of delusions of grandeur with an inferiority complex. When abroad, Brazilians praise Brazil in all ways possible, but when they are here it seems their favorite pastime is to badmouth Brazil.

When we look at our industry, we see that mixture: we are great, we have high hopes, but things just don’t move ahead. Brazil is growing 4% to 5% per year, while the developed world is in a deep recession; in the best scenario, Europe will face five terrible recession years, or of very little growth, and the U.S.A., tremendous debt.

Sugar consumption grows 4% per year in developing countries. Some years ago, many said sugar was doomed because of artificial sweeteners. On the other hand, the “flex” fuel fleet grows 10% per year, annually putting 3 million cars on the streets. The U.S. market is opening up much faster than we had anticipated; tariffs tend to zero.

We were able to get ethanol classified as advancedbiofuel, within a U.S. mandate for 140 billion liters, of which 80 billion for advanced biofuels, whereas the Brazilian production this year will be 27 billion. The only advanced commercial biofuel in the world today is called sugarcane ethanol. Today, 40 countries have a mandate for mixing ethanol; just a short time ago there were only 2 or 3.

Brazil has some of the best conditions to increase production – land, water, climate, but we are only using 1.5% of our tillable land for ethanol, so, without much effort, we could easily reach 7,500 to 12,000 liters per hectare. My question then is: where is the problem?

I only see opportunities. The problems lie in making adjustments to private and public policies, in the atmosphere that has arisen, it lies in the individuals, in the people, and not in sugarcane. We are faced with a fantastic outlook for sugar, consecutive years of very good prices, and uncountable new products that will use saccharose and ethanol.

I hope we can increase ethanol exports from 7% to 70% at some point in time, like one is doing today with sugar. The best that could happen would be to do with ethanol what historically we did with sugar, and, at the same time, meet the needs of the flexible (flex) fuel car fleet. It would be great if our ethanol could become a global commodity.

President Lula travelled the world trying to convince people to do what Brazil did, and this could happen if the world starts mixing ethanol to gasoline, and at the same time, here in Brazil, we can cater to the needs of the flex fuel market. Few people understand what a 10% mixture to gasoline represents for the world. It is something unthinkable, but it is not far from actually happening. We need this target.

The fact is that this target is for the next few years, whereas the short-term problem is that the flex fuel vehicle fleet’s growth has been much higher than the production growth of hydrated ethanol, in addition to ethanol cost increases that resulted in the loss of competitiveness vis-à-vis gasoline.

We are producing 600 million tons of sugarcane, 150 million we lost to crop shortfalls, but which will naturally return with plantation recovery. There are 200 million tons for use in the expansion of our industrial park, so that brings us to 950 million. The missing 400 million correspond to new greenfield projects. These additional 400 million cannot be used for hydrated ethanol in the flex car fleet, competing with price-listed gasoline, otherwise we will face problems.

The new greenfield projects cost US$ 150 per ton and would not be justified under these conditions. Therefore, this would require more productive dialogue with the government, ignoring exclusions: ethanol or sugar, the domestic or foreign market. We need to think of sugarcane so as to meet all these requirements.

The policy must be public and private. We have homework to do and not only the government needs to go about equating taxes, with more transparency in the price setting policy for gasoline in the long-term, the criterion for changing this price, and in terms of the CIDE contribution’s variation.

We don’t want the gasoline price to increase, since it already is one of the highest in the world due to the tax burden, and such increase would have inflationary impact. We want ICMS tax equity among the States. We want a solution for the interstate ICMS tax rates. When will there be an IPI tax rate benefiting flex fuel engines that pollute less and are more energy efficient? These are the said public policies that could be conceived in talks with public authorities. On our side, we must reduce costs.

As commodity producers, we lack control over prices, we are constantly on a moving walkway, walking at an increasingly faster pace so as not to fall. That is our mission: to control and increasingly reduce costs, improve varieties, work on the entire set of initiatives that caused our costs to increase in recent years. We must make new greenfield projects feasible.

We have the opportunity to go on using the flex technology, this truly national creation of 2003 by the automotive industry. We are at a peak stage of the flex fuel car age. In September, the flex fleet comprised 50% of the total fleet, so we should be commemorating this, launching 130 new greenfield projects so as to make flex reach maturity. If we fail to accomplish this, going over to anhydrous fuel will be inevitable; gasoline and the international market will demand anhydrous fuel.

Based on what we have learned in the United States and the European Union, the international market will pay a differential for anhydrous fuel. California, for example, is already paying a US$ 0.72 per gallon premium on Brazilian anhydrous fuel. What can we not do? For example, we must avoid the ethanol adjustment cost burdening sugar. Taxing sugar is a policy destined to fail. Just look at Argentina to see what the taxation of commodities did to a country rich in fertile land, destroyed by a public policy of taxes on agriculture.

We can also not control the export of ethanol. We go around telling the world that Brazil is its ethanol supplier, but now we will have to control ethanol exports through interventionist measures. The bad atmosphere created in March and April came about due to the fear of an ethanol shortage – which did not occur, the system functioned well, but there was a price increase and inflationary pressure that disappeared after two or three weeks.

At UNICA we worked relentlessly. I have constantly traveled to Brasília, spoken with many ministers, members of parliament, with many government bodies – by the way,  more than 10 have a saying in this industry. We have undertaken a number of initiatives, including monitoring the situation of producers, distributors, and the government, twice a month.

Another measure was a considerable increase in the production of anhydrous fuel, even when there is a harvest with crop shortfalls such as the one that occurred in order to warrant supply for the mixing with gasoline. We implemented a system to pre-contract ethanol, providing supply more stability: for each gasoline purchase, companies will have to submit proof of the corresponding contract for 25% of anhydrous ethanol that is mixed with gasoline.

For the first time, we are looking ahead to secure supply and less price volatility, seeking to diminish inflationary pressures. Now we are starting to talk about growth. We can go forward with the growth issue in a more steadfast manner. We can have an industry-wide proposal, for example, going to Brasília along with the machine and equipment industry.

What will be negotiated is in the best interest of all segments, so it is important we go together, because,yes, we are talking about 150 new plants, and this is interesting for the suppliers and the machine and equipment manufacturers. This has nothing to do with the topic supply, but rather with growth, not only of the plants, but of the entire industry. We want sustainable growth, which is why we are willing to talk about this.

The government, no doubt, will want us to commit to supplying, so this will be a key subject. Charles Handy, an Irish philosopher, said that “if there is something fascinating about the future, it is precisely our capability of molding it”, and I think this is the case when we talk about growth in our industry, it is the chance we have to build our future.

For those who see crises rather than opportunities, I finish with a phrase by our dear Guimarães Rosa: “life is like that, it gets hot, it gets cold, it tightens and then it loosens, it gets calm and then it gets agitated. What it really wants from us is courage”.