Sunday, May 8, 2011

More food into fuel

May 6 (Bloomberg) -- Archer-Daniels-Midland Co., the largest grain processor, and Cargill Inc. are spearheading a push to invest about $560 million in new biofuel refineries in Brazil, a country that already has twice the capacity it needs.

The U.S. agribusinesses have joined Brazilian companies that are expanding facilities in a bet the government will double to 10 percent the amount of biofuel that must be blended into petroleum-based diesel, driving up demand overnight.

With oil above $100 a barrel, President Dilma Rousseff is looking for alternative fuels to fill trucks’ tanks and keep a lid on inflation. Expanding production would also boost the economy of Brazil’s impoverished center-west region, where most of the industry is based. The risk is the country will be awash in unneeded biofuel, said Roberto Rodriguez Labastida, an analyst at Bloomberg New Energy Finance.

“There’s far more biodiesel refineries online than are necessary,” Rodriguez Labastida said from the research group’s office in London. “I wouldn’t say it’s smart to invest” in any more facilities to process soybeans into fuel.

Brazil demands that diesel sold at the pump contain 5 percent biofuel. It’s the third-largest market by capacity after the U.S. and Germany. Executives at four refiners said they expect the government to double that to 10 percent within three years, giving Brazil the world’s highest biodiesel blending rate.

Edison Lobao, Brazil’s Minister of Mines and Energy, is considering a higher blend rate as long as there’s enough vegetable-oil that can be processed into fuel, according to a statement posted on the ministry’s website May 4. He did not say how much it may be increased.

A Cargill spokesman declined to discuss the company’s biodiesel plans. ADM and Bunge Ltd., another U.S. agribusiness approved to build in Brazil, did not respond to inquiries.

Europe, U.S. Overcapacity

Overcapacity is also an issue in Europe, where plants are operating at about 40 percent of potential, and in the U.S., which according to some measurements is running at about 24 percent, according to Claus Keller, senior analyst of Ratzeburg, Germany-based biofuel consulting company F.O. Licht.

Doubling the concentration would rocket demand for the fuel and would cut imports of petroleum-based diesel, easing Brazil’s balance of trade.

“Brazil is bound to increase the biodiesel blend to 7 percent in the next 5 months,” said Paulo Jose Fuga, a manager at Fuga Couros SA. The Marau, Brazil-based leather maker and meat processor is spending 22 million reais ($13.6 million) on a biodiesel plant that will process as much as 108 million liters (29 million gallons) a year beginning in February. He forecast the requirement reaching 10 percent by 2014.

21 Projects

The Fuga project is one of 21 in Brazil, either new plants or expansions of existing ones, that received permits in the last year to begin construction from fuel regulator Agencia Nacional do Petroleo, Gas Natural e Biocombustiveis.

Developers include Decatur, Illinois-based Archer-Daniels- Midland’s local unit, ADM do Brazil Ltda.; Minneapolis-based Cargill; and Bunge, based in White Plains, New York. Together they are set to add slightly more than 2.2 billion liters of annual capacity, increasing the production base by about 38 percent, according to the regulator.

New biodiesel units in Brazil cost about $0.25 a liter to build, according to data compiled by London-based New Energy Finance. Rodriguez Labastida estimates that refiners are investing more than $560 million to boost their capacity, based on construction permits they have received.

Refiners, which make the fuel by treating vegetable oils or animal fats with alcohol in a chemical reaction, say they need more capacity to keep pace with rising demand for the standard diesel with which it’s mixed.

Rising Consumption

Even without the blending increase, national consumption of the fuel is expected to rise by 6 percent a year over the next decade, according to a Ministry of Mines and Energy projection.

The producers are overly optimistic about their sales outlook because national output capacity is growing faster than demand, according to F.O. Licht’s Keller.

There’s “already strong competition for volumes,” in the government’s quarterly auctions for the fuel, he said. “That’s only going to increase as more plants start operations.”

Only biodiesel projects with access to cheap raw materials, like soybean and animal fats, or “at minimum, ownership over a seed crushing plant,” make economic sense, Keller said. “I’d only build a project if I had access to the feedstock for the next 10 years.”

More Refineries

There are about 60 biodiesel refineries selling fuel in Brazil with production capacity of 5.9 billion liters a year, according to fuel regulator ANP. That’s up from 47 at the start of 2010.

The average price of biodiesel in a government-organized auction in February was 2.05 reais a liter, down 11 percent from the previous auction in November, according to ANP. Soybean oil was selling for 2.14 reais a liter on April 28 in Sao Paulo, according to information compiled by Bloomberg.

Brazil imported 9 billion liters of diesel last year, according to the Secretary of External Commerce. Increasing the percentage of biodiesel in the fuel sold at retail would decrease the amount of standard diesel in drivers’ tanks and would have saved the country about $2.2 billion in the first half of 2010 on imports, according to Brazil’s biodiesel trade group Uniao Brasileira do Biodiesel.

Vegetable Oil Supplies

Keller questioned the impact of a higher blend rate on Brazil’s farmers. A 10 percent requirement may require an additional 2.4 billion liters of vegetable oil to produce, double the current level, he said.

That new blend obligation may consume as much as 69 percent of the 7.4 billion liters of soyoil that the Brazilian vegetable oil trade group Associacao Brasileira das Industrias de Oleos Vegetais predicts will be produced in the 2011 to 2012 harvest season. About 84 percent of Brazilian biodiesel was derived from soy in February, according to ANP.

That would drive up prices for soy, raising production costs for refineries, Keller said. “Some producers may not be able to deliver” their product “under those conditions.”

No comments: