The conventional wisdom says that with most endeavours in life you should always have plan B as a backup. In businesses, particularly so. Where this plan is likely to backfire too, and you don’t have a plan C than you are most likely screwed. Alas, the Brazilian sugar-ethanol industry finds itself in such a dilemma. The architects of the RenovaBio policy simply did not envisage the throes to befell from Covid-19 pandemic. Overnight, the impact of the lockdown restrictions ensuing from the public health measures was to slash the demand for transport fuel. According to the CEO of Petrobras, during the commencement of the epidemic, with lockdown restrictions in place, Brazil ’s gasoline and ethanol consumption fell 60%. This has recently recovered, and the decline is 30-35%. At the same time, the price of crude oil has fallen. The collapse of oil prices aided by the suicidal battle between Saudi Arabia and Russia in the oil price war in March triggering drop in crude oil prices to US$20/barrel has reduced the cost of gasoline in Brazil – triggering the collapse of ethanol prices. No sign of imminent reversal is foreseen. Further, the government’s refusal to give a lifeline through increasing gasoline taxes and dropping taxes PIS and Cofins for 120 days has added to the industry’s woes.
When the Brazilian government passed the RenovaBio policy in December 2017, though couched in compliance with the Paris Agreement on Climate Change, the central aim was to expand ethanol production, and by default, curtail sugar production. The realisation was that it was much easier to sell ethanol locally than compete with a range of sugar exporters in the global market, particularly since Brazil was overexposed – commanding 45-50% of the export market share. Further, as not only many small producers started to expand sugar production in their countries to save on foreign currency, the policy makers in Brazil understood it would be increasingly tough to unload such large amounts of sugar in the marketplace. By shifting into ethanol production, the industry over the last two years produced 20 million tonnes less sugar. This, in part, supported the increase in sugar price by not adding to the glut.
Now, the Covid-19 crisis is forcing the issue of returning to expanding sugar production to previous levels. Indeed, under the circumstances, expanding sugar production is the only option in the toolbox. But it is worth noting that when the sugar price was high (above 15 ¢/lb earlier in the year) on expectations of a global supply deficit, millers shrewdly hedged some 17 million tonnes of 2020/21 output. With the Brazilian Real devaluing further against the dollar (BRL5.89 = US$1 on 12th May, rising a bit to BRL 5.42 on 24th May), sugar production has been further incentivised. Analysts forecasting 2020/21 sugar output increasing by 10 million tonnes can only add to the bearish pressure on prices. And we are back to sugar output levels of two years ago.
Source: LMC International
The central failure of policy making in Brazil pertaining to the sugar-ethanol sector has been that by and large it has been reactive – not proactive. Policy makers have simply not ventured out beyond their comfort zones to support the sector through embracing opportunities that, for example, industrial biotechnology has to proffer. Sugar is a superb feedstock from which to produce substitute petrochemicals. The biotech start-up Amyris, with operations in Brazil is doing just that. Recently, Proctor & Gamble licensed its technology to Cargill to produce acrylic acid from lactic acid.
Alas, two-trick pony admits its enterprise. Press reports suggest that some 25% of the sugar-ethanol plants are under threat of closure by the end of the year as debts pile up. This is a wake-up call to shift the emphasis.
1 Hobson’s choice refers to having apparently free choice when there is no alternative. As Wikipedia notes, “The phrase is said to have originated with Thomas Hobson (1544–1631), a livery stable owner in Cambridge, England, who offered customers the choice of either taking the horse in his stall nearest to the door or taking none at all.”