Brazilian bank, Itaú, recently completed a survey of Brazilian sugarcane representing 59% of the industry and found that eight companies are heavily indebted and at risk of ceasing normal operations in 2021. However, the rest of the report was largely positive and upgraded the outlooks for most of the surveyed companies. The report also highlighted an increase in investment spending by 24.3% YoY from the surveyed companies, reaching a seven-year high. The industry benefited from a recovery in prices and demand levels, in addition to new fundraising opportunities allowing for investment and deleveraging.
UNICA, the sugarcane grower’s union, stated that October ethanol sales were the highest of the year, showing a marked recovery for the sector. Year-on-year ethanol demand volume is down 15%, but higher sugar prices, ethanol’s price recovery and CBio credit generation have allowed sugarcane mills to generate the revenue and cash flow necessary to make these investments. Sugar and ethanol prices were 13.3% and 12% higher, respectively, during the 2019/20 harvest season, providing more revenues to previously cash-strapped mills. Sugar futures in New York also rose, with 2021 futures up 10% vs the previous year and 2022 futures 8% higher than 2021 futures, while the Brazilian Real was at near all-time lows against the US Dollar for much of 2020. These conditions allowed mills to lock-in future revenue and drove export demand to facilitate the boom in investments.
*ANP data through August 2020 Source: ANP, Bloomberg
In addition to growing revenue to facilitate investments, sugarcane mill Jalles Machado is launching an IPO (Initial Public Offering) to raise funds. The company will use most of the proceeds to acquire a third mill and use the rest to make production improvements at its existing two mills. The Ibovespa, Brazil’s stock market, has risen 60% since its March low and seen the number of investors triple since 2018. Interest rates were slashed by the Central Bank to 2%, pushing investors from debt markets into equity markets in order to receive higher returns on their investments. Thus, it has become attractive for many Brazilian companies to enter the public market through an IPO, including companies in the ethanol industry. Debt still remains a fundraising option as FS Agrisolutions, the largest corn ethanol producer in Brazil, issued $550 million USD of ‘green bonds’. Morgan Stanley, the issuer, stated that demand was almost $1 billion USD, highlighting the potential demand for green investments in the market.
Ethanol producers will use these funds to expand capacity or may choose to add corn ethanol production to their operations. Currently, corn ethanol is produced in corn-only ethanol plants in Mid-West region where it can be planted in addition to the soy crop, and in sugarcane growing regions in ‘flexi’ plants that use corn to produce ethanol during the sugarcane inter-harvest period. Up to 1 billion liters of corn ethanol capacity is expected to be invested in 2021 and around $2 billion USD is expected to be invested in corn ethanol by 2028.Corn ethanol output reached 2.5 billion liters in the current season, up from 1.6 billion liters in 2019/20. By the end of the decade, corn ethanol production could top 8 billion liters given the ample corn supply in Brazil and investment trends. While this year’s corn ethanol production volume was higher than last season’s volume, this year's output was limited by high corn prices, raising corn ethanol production costs for 'flexi' plants.
While corn ethanol is attractive to many producers, Sugarcane ethanol provides about 32% GHG savings in comparison to gasoline in Brazil. On the other hand, corn ethanol only provides about 19% GHG savings, leading to lower CBio credit generation per liter of ethanol produced. Another difficulty with corn ethanol is the eligibility of the feedstock under the RenovaBio program. For the the volume to be eligible for CBio credit generation, the feedstock must be tracked to its origin and certified as a sustainable source. Currently the only corn ethanol plant certified under RenovaBio has just 12.6% of its ethanol volume eligible for credit generation, compared to an average eligible volume of 90.6% for approved sugarcane ethanol plants and 70.7% for sugarcane and corn ethanol ‘flexi’ plants. However, other corn ethanol plants may be able to source more eligible corn feedstock and have a larger eligible volume once approved. In addition, CBio credits have fallen in price to about 38-43 BRL (7.4- 8.4 USD) in December after their 4 November high of 72 BRL (~12.6 USD) after the government lowered the 2020 CBio target for obligated parties.
Source: ANP, *Currently only one corn ethanol plant approved under RenovaBio
In addition to CBio credit generation from ethanol production, other renewable fuels can generate them. In the Californian LCFS market, we have seen most of market turn to HVO in order to meet reduction goals and generate LCFS credits. The Brazilian government is in the final stages of approving HVO for the market and therefore HVO investments are likely on the way. Investment will likely come from co-processing HVO capacity by PetroBras, but there exists the possibility of large biofuel players, such as the ECB group, to invest in standalone production facilities as well. The ECB Group's Omega Green HVO production facility in neighboring Paraguay is scheduled to begin operations in 2022. Either way, the Brazilian biofuel market is expected to continue growing as RenovaBio develops and credit obligations increase annually.