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Marcos Marinho Lutz

President of Cosan


If there is a horizon and a schedule, we will grow

In the scenario our industry faces, many are saying we are in the presidential suite of the Titanic. It is a given that the United States economy will face major fluctuations and that the rates in Japan will increase over a longer period, forcing the country to pay a huge debt.

Economists are in doubt about Europe: if all goes well, it will only not grow, but there is a chance that there may be a credit crisis, in what would be a situation much worse than in 2008, because this time, it will be the Central Banks that will go bust. Each German, from newborns to the elderly, has already paid 8,000 Euros to Greece.

Until next year, an election year, it will probably be about 12,000 Euros. When the worker who gets up early, works all day long, doesn’t have a tenth of the benefits the Greeks have, finds out that he or she paid the Greeks 12,000 Euros, a potential political problem will arise. The day Germany says “I won’t pay this bill”, the problem will already be in place.

That is why we must be alert. The Brazilian government is alert and worried, and it should be. And then there is China, which is sort of striding alongside, focused on these markets that will make the country slow down and look for markets like ours.

It is a complicated scenario: credit problems in first-world countries, in which people invested money and reserves, will build up pressure to enter into countries like ours, producers of commodities, bringing about adverse foreign exchange situations, with probably highly deflated and cheap currencies, resulting in a crisis for Brazilian industry.

Nowadays, a Brazilian toy manufacturer has already become a toy distributor. Just about all intensive manufacturing sectors in the country are becoming importers. This is a very serious scenario. Regardless of whether there is a domestic market, we have started to face foreign exchange problems. We will face a demand shock and some few sectors will enjoy a growth market. Ours is one of them.

Few sectors that employ people, that drive the economy, that make things happen, have a  market like we do. This is so because even with everything that is happening in China, the United States and Europe, we will still have a relevant ethanol market, inside and outside the country – a foreign market almost dependent on our sugar.

The question is how much more or how much less. The theme oil, in a world economy the size it has today, boils down to the question of for how long oil will still be available, or the major source of energy for the world. At the least, it will reach stratospheric cost levels. The stone age did not end due to the lack of stones. So, one need not imagine that oil is going to end, and therefore there will be a more intensive biofuel age. This is quite clear.

Cosan’s business activities currently comprise: Cosan Açúcar e Álcool, and all its plants, which has become Raizen Energia, and is responsible for production in agriculture, and of sugar, ethanol and energy. Raizen Combustíveis is the merger of Esso and Shell, which in Brazil, over time, will only keep the Shell brand. Cosan Alimentos is a retail business, a sugar processing, packing and distribution operation. Rumo is the Group’s logistics arm.

Radar manages the land used for the several cultures, of which 30% represents land with sugarcane plantations. And then there is Cosan Lubrificantes, the Mobil brand, which partners with Amyris in this business.  

Now, speaking of ethanol, and starting out with the size of the market as a comparison, growth of world demand for ethanol practically tripled from 2003 to 2011. Brazil and the U.S.A. together consume 77% of the world’s ethanol production, which currently represents a volume of more than 100 billion liters, of which 49% come from corn and 28% from sugarcane.

Brazil played an important role in world ethanol production’s growth, but production in the United States skyrocketed again, since the U.S. is a country with well-defined strategic planning and a nationwide program that brought the lives of U.S. corn planters, who didn’t know what to do with the corn, back on track. The Americans built up a gigantic industrial park and set themselves up as the world’s largest exporter, displacing Brazil from the lead position.

But Brazil also grew, and even considering our difficulties with environmental licensing, financing, etc., we also enjoyed explosive growth measured by our standards, having doubled the production capacity in this period. In the data on sugarcane crushing in Brazil, a considerable portion of this growth was contributed by ethanol.

Sugar has more stable growth, notwithstanding price oscillations and the fact that demand variations are almost non-existent. Ethanol was the major factor behind the growth of the industrial park. In the rainy harvest of 2009-10, a change in product mix favoring sugar took place, along with difficulties in crushing, and a lot of cane carried over to the next harvest, etc.

The fact is that the country experienced strong growth, affecting companies’ average balance sheet, with the industry’s debt increasing considerably, and a significant number of companies incurring in losses, especially those more exposed to ethanol when sugar prices increased and they could not take advantage of the favorable sugar price to pay their debt.

As a result, there was a decrease in the number of projects, since everybody ran short on availabilities. When one runs low on cash, the capacity to plan decreases dramatically, so one usually does what can be done, rather than what one wants to do.

To have an idea of the price level we see today, one should note that years ago the industry experienced a less leveraged situation, was poised for growth and was aligned in terms of regulatory requirements. There were no major questions with respect to the reality one was experiencing, and no doubt as to what the rule of the game would be. Then came the boom that created an unrealistic market, because I do not think ethanol is the right product to just be burned everywhere. It has some markets, and it complements gasoline.

But hydrated ethanol is a product that has some markets it must supply to. When there is excess supply, one enters other markets. We have seen this before, and because of this we complained about the price. The low price would provide an additional market. We have additional potential to burn almost 3 billion liters every year.

So, the right price level is necessary, not to forget the government plan. One must have a target to adjust the quantity of fossil fuel to the renewable fuel one wants in the country in the long term. If the government wants more participation of renewable fuel in the energy matrix, the will of the business community, nowadays capitalized and structured to make large investments, is much bigger.

There will be an even bigger will to step on the accelerator. It is important to know what the government plans are. We need to understand them and plan based on them, otherwise we will run out of oxygen and halfway down the road, start to abandon the process and the plans, and to do things that can be done, rather than those that should be done.

In the end, we are left with exports and domestic consumption. Brazil has set up a fantastic scheme that exists nowhere else in the world, able to match supply and demand, with market price mechanisms, avoiding the lack of supply, and without major market disruptions. If there is planning, large fluctuations will not occur. Ours is a very smart system, it is totally flexible, from producer to end consumer, including logistics, distribution, the fuel station owner, in short, everything. No other country in the world has this capacity.

Many countries are keen on setting up a more ambitious biofuel program. Even the U.S.A. wants to introduce E-85, but to date has a minimal logistics system to offer U.S. citizens a second fuel, although the country already has more flex cars than Brazil. We ended up getting organized in different ways, such as via the “Proálcool” program, second shock, etc., and today the country has a matrix that can adapt to such volatilities, without supply shortages, while providing the consumer two options – a cheaper alternative, which burdened your pocket to the extent of several billion reais, along with the externalities this green fuel entails.

When one goes back to normal consumption levels, then indeed one will have, starting this year, a 2 billion liter growth, which is almost only in the State of São Paulo, due to the renewal of the fleet. This demand will in fact be difficult to not meet. Albeit the country’s difficult outlook to the future, for the industry it is highly promising.

The industry will provide the country the opportunity to experience a growth period, to generate jobs, etc., because, if with demand as it will be in the future, the large groups are totally structured to renew the plantations and return to growth. This means understanding what the regulatory parameter will be, or the change that will actually take place. If there will only be a horizon and deadlines, we will face a scenario in which we can again grow, given that in my view we already have all the rest.