New investments signal turnaround in Brazil ethanol industry

Improved returns from sales at home and abroad are unleashing the first major flurry of investment in Brazil’s struggling ethanol industry in nearly a decade, with at least nine companies expanding or building new capacity.

Medium-sized private mill Rio Verde said it would double ethanol output over the next two years to capture resurgent biofuel demand.

Cargill and Odebrecht are the biggest of at least eight other companies investing in expansion in the past months, even as Latin America’s largest economy sinks deeper into its worst recession in over a decade.

The real’s collapse has improved Brazilian ethanol’s edge abroad, and recent increases in refinery-gate prices by state-run oil company Petrobras and taxes on gasoline have boosted domestic demand for the biofuel to record levels.

Once completed, Rio Verde’s expanded output will account for only a small portion of Brazil’s total capacity, but this and the other projects are the strongest sign yet that ethanol has turned a corner after government subsidies of gasoline prices could no longer be sustained.

“The outlook for ethanol has brightened, even as the broader economy looks more difficult,” said Luis Galan, operations manager at the Rio Verde mill in Goias state.

Earlier this year, Rio Verde started commissioning its new ethanol unit, which will produce 180,000 liters (47,500 gallons) a day, in addition to its current 300,000 ltr/d output. Another 190,000 ltr/d will come in the second phase in 2016 or 2017.

The total 670,000 ltr/d comes to 0.5 percent of Brazil’s capacity of 115 million ltr/d.

To be sure, many of Brazil’s 360 mills are in no position to start building new plants as they struggle with stifling debt accumulated over the past decade. Many are still skeptical that the government has abandoned its practice of suppressing fuel prices to curb inflation, which helped drive nearly 80 mills out of business in the past several years.

But the government is quickly running out of ways to replace falling revenues in the deepening economic downturn. This makes additional tax increases on gasoline more likely, which would further strengthen ethanol’s advantage at the pump.

“The sector is finally turning around,” said Alexandre Figliolino, head of agribusiness at investment bank Itau BBA.