PETROBRAS ETHANOL TARGET TRIPLED / THE FINANCIAL TIMES ( VERY HIGHLY RECOMMENDED READING )

Petrobras ethanol target tripled

By Joe Leahy in São Paulo and Ed Crooks in New York

Published: May 8 2011 23:16

Brazil’s state-controlled oil company, Petrobras, has been ordered to triple its share of national production of ethanol as Latin America’s biggest economy struggles with a shortage of the biofuel.


The plan comes as the US is poised to overtake Brazil as the world’s largest ethanol exporter.


Petrobras will increase its share of Brazil’s national output from 5 per cent to 15 per cent, said 1Edison Lobão, mining and energy minister, after Brazil was forced to import large amounts of the fuel from rival producers in the US. “The fact is that we need to produce more ethanol,” the minister told reporters.


Brazil was a pioneer in establishing ethanol as a viable alternative to petrol. Most of the Brazil’s cars today can run on both fuels.


But rising consumer demand as Brazil’s economy expands, lower investment in sugar cane fields after the financial crisis as well as adverse weather during the past two years have led to slower than expected growth in sugar cane production.


This year’s sugar cane harvest is late due to unseasonal rains, extending the lean period between harvests. Sugar and ethanol typically face shortages at this time of year, firing debate in Brazil as to whether the industry should be regulated.


The situation has been exacerbated by record high sugar prices, which have encouraged sugar cane millers to divert output to the food sweetener market.


Brazil last year imported 70m litres of US ethanol – up from only 1m in 2009, according to the US commerce department. To date this year, imports have been even stronger.


Industry estimates suggest worldwide US ethanol exports could reach 3bn litres this year, about double the Brazilian exports forecast by Unica, the country’s sugar cane industry association.


Several US ethanol producers still say margins in the industry are low, but pressure on the federal budget and rising fuel prices have reinforced calls to abolish subsidies and import tariff protection.


Leading US ethanol industry associations have backed legislation to cut subsidies for blending ethanol into fuel and tariffs on imports.


The plan would not abolish the import duty altogether, retaining a 15 cent per gallon tariff until 2016 at least, but it leaves the door open to reductions.


The blenders’ tax credit would disappear altogether if crude oil were to climb to more than $90 per barrel.


Chuck Woodside, chairman of the Renewable Fuels Association, an ethanol industry group, said it made “good sense” to tie import duty to the tax credit.


Geraldine Kutas of Unica said: “Free trade is a two-way street and we expect the US to eliminate the tariff. Now the US is not only the main producer of ethanol but also the main exporter.”


Brazil’s government has also raised the possibility of an export tax on sugar, to encourage producers to divert more of their crop into domestic ethanol production.


Copyright The Financial Times Limited 2011