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José Carlos Grubisich

President of ETH BioEnergia - Grupo Odebrecht


May we be blessed by God with good ideas

I shall try a little different exercise: to again touch on those fundamental issues we assessed way back when Odebrecht took the decision to enter the industry, to check whether the respective conditions are still valid today. Allow me to anticipate the answer before commenting them, by saying that all essential and structural issues continue fully applicable and, furthermore, that they are even clearer and more evident now than they were back then when we did the assessment. So, let’s analyze them.

There is a lot of pressure for energy security and for seeking to decarbonize the economy. The cost of oil continues to increase, the difficulty to locate new reserves is confirmed, the recent political events in Arab countries increase oil-related volatility and price unpredictability, and the debate on the reduction of CO2 emissions and climate change.

The second issue to emphasize is the Brazilian market. Every industry that has this size of market, with this growth rate, with this outlook for the future, and also with the prospect of opening international markets, cannot be ignored by any business strategy of domestic or international companies.

It is not by chance that so many new companies are coming to the market with a lot of appetite, willing to invest a lot of money in the business.

An important issue in reducing ethanol and sugar production costs, is electric power co-generation using sugarcane bagasse. All ETH units are integrated in this process. The capacity to generate cash in this business essentially changes the competitiveness of sugar and ethanol. Some very important issues are still before us. First, the competitiveness of ethanol vis-à-vis oil, in all scenarios we frequently assess and update.

We can debate the speed and level, but all analyses show a significant increase in the oil price, whereas in all analyses of sugarcane products we see a declining curve trend, on account of rupture in the technological field, due to improvement of productivity resulting from transgenic sugarcane and other varieties, through more sophisticated fermentative processes that will surely change the economics and the profitability of this business.

We are in a transformation industry, in the process of consolidating, in search of operational excellence both in agricultural and industrial activities, seeking to achieve economies of scale, with clear and optimistic trends. We are faced with extraordinary conditions to believe in and invest in the industry. The Brazilian market doubled in size in the last five years and it has the potential to double in size again in the next five years.

All this will depend on our capacity to produce this ethanol. With respect to the foreign market, we now have a concrete possibility to open international markets. The U.S. market in the short term, with the European market lagging a little behind, the Asian markets – Japan and China –, starting to show clear signs of integrating ethanol into their liquid fuel matrixes.

Another important aspect is the electric power issue. The government shows a growth estimate of electric power demand in Brazil, so investments will need to be made to supply this energy. The fact is that Brazil will grow by 500 TWh/year to almost 900 in the next 10 years. Of this amount, 200 have already been contracted for hydric, nuclear, wind, thermal and reserve energy projects, but we still have 200 TWh/year that need to be contracted.

Obviously, we would like biomass to enjoy differentiated treatment, which is not likely to happen in the short term. We were faced with much frustration at the last auction. We expected a price in the magnitude of R$ 140 per MWh, but reached only R$ 103, due to the audacity of whoever was willing to sell at that price.

But one also saw wind energy being sold at R$99/MGh, at profitable and competitive conditions. This is a fact: the people in the wind energy segment are being more competent that we are in reducing investment cost and finding more attractive means of financing.

There is an important field we still have not explored, which is international expansion. The central theme at this Forum is the insertion of ethanol in the global energy matrix and I am absolutely convinced that without the internationalization of the production bases, in Africa and Latin America, we will face difficulty in convincing most countries of the world to insert ethanol in a structured manner into their energy matrixes.

The change in the energy matrix structure of a country entails a very high politically risky attitude. It is a long-term endeavor, requiring efficient coordination. In Latin America, ETH is already active in Colombia and is assessing opportunities in Mexico. In Africa there is enormous transformation potential. We are already working in Angola and Mozambique – which has very high agricultural importance. We must invest in a strategic and structured manner in international markets.

With respect to expanding production capacity, we need to invest in the magnitude of R$ 80 billion, increase the planted area by more than 4.5 million hectares, to produce additional 400 million tons of sugarcane. Such investment will have to be made in a responsible manner, with a sufficiently solid capital structure so as not to face any fragility hiccups.

If we consider a structure with 40% of own capital, and 60% in debt, this means we will need cash in the magnitude of R$ 30 billion in the next 7 years and will have to scout for financing of about R$ 50 billion to make this plan viable. It is ambitious, but we did it in the past, we haven’t lost the recipe, and we can do it again.

With respect to competitiveness, what I learned is that when the sales price cannot increase, costs must decrease. We work night and day to reduce our costs. Even if the pricing policy of gasoline in the domestic market is irrational, it is a reality, and one has to live with that. We need to find different mechanisms to improve our competitiveness. We cannot allow a regression. We must combine cost competitiveness with high sustainability.

With respect to labor, we are close to the capacity limit for educating and training people to stay in synchronization with this growth process. All the companies that have tried to grow have faced difficulties in finding people, not to mention qualified and trained people.

I dare say, considering the risk this entails, what I consider to be my view of our strategic agenda. The first item is that we have to redeem the role of bioenergy, ethanol, electric power from biomass, and of sugar, in the context of a Brazilian political strategy. If it is not clear in the heads and hearts of public policymakers that this is the core of a national political strategy agenda, then all discussions will be frustrated.

I believe we have lost, and need to again find, the interlocution at the right level of opportunity for Brazil’s agroenergy industry and for the country’s insertion in regions like Africa and Latin America, and in a subsequent moment, in developed countries.
The second item relates to a competitive technology and innovation platform.

At the current time, we are faced with an identity crisis among technology developers in Brazil. CTC is experiencing a phase of introspection and strategic rethinking, but will certainly again be the driving force of research and development in Brazil, but the fact is that the Americans and Europeans have progressed at greater speed and we have lost the lead role we have always played in sugarcane agriculture and the development of fermentative processes.

We must pay more attention to a structured national and sectoral program to train people in the required quantities and qualities. We have faced difficulties in finding people, training them, inserting them into the labor market and retaining them, because the market is very much heated up, so that without competent professionals it is impossible to stand out and make a difference.

We must make sure the Brazilian capital goods industry remains competitive. This is one of the few industries that is knowledgeable of the entire business cycle, so I believe the government and the BNDES have to be active in reinforcing the capital structure, because the industry will need both as important allies in this issue. We must again be competitive as concerning investments.

The investment needed per ton of sugarcane is already at US$150, 50% above the figure of four years ago. Something is fundamentally wrong and will be a barrier for growth. I conclude by saying that notwithstanding the domestic potential, and albeit the difficulties, we have continued to work in an almost obsessive manner to open international markets.

We cannot think of ethanol as a global product without convincing the world that it is a product with a high economic, social and environmental contribution, and that Brazil will certainly be a producing and exporting country. May we be blessed by God and may He give all of us good ideas.