Ethablog

BRAZIL GOV'T TO CONTROL CHOICE OIL ASSETS, HOLDS BACK DIVIDENDS

2009-08-17T21:17:00.004-04:00

From today's Times:

Faced with the world’s most important oil discovery in years, the Brazilian government is seeking to step back from more than a decade of close cooperation with foreign oil companies and more directly control the extraction itself.

Question: Who could possibly have seen this coming?
Answer: Anybody who read my May posts. Or who knows the first thing about Brazilian history.

This month, Brazil’s government said it wanted the national oil company, Petrobras, to control all future development of the deep-sea fields discovered in 2007, which international geologists estimate could hold tens of billions of barrels of recoverable oil.

The change would make Petrobras the operator for the 62 percent of the new area that has yet to be bid out, consigning foreign companies to the role of financial investors. That would limit their ability to help set the pace for the oil fields’ development, while giving Petrobras significantly more power to generate jobs and award lucrative contracts.

And there's this, too, from today's Bloomberg:

Centrais Eletricas Brasileiras SA, Latin America’s largest utility, is delaying a 10 billion real ($5.4 billion) dividend as it negotiates timing of the payment with Brazil’s government, its biggest shareholder.

The Rio de Janeiro-based company held back the dividends, which date as far back as the 1970s, to invest in projects such as the construction of the Itaipu hydroelectric dam along the border with Paraguay. Each voting share is expected to receive 10 reais in dividends.

“To pay all the dividends, we still need money from the government,” Chief Financial Officer Astrogildo Quental said in an Aug. 14 interview from Rio de Janeiro. “We’re in talks with the Treasury to find a solution.”

The delay underscores the risks for shareholders in state- run companies, said Edison Garcia, superintendent of Brazil’s Minority Shareholders Association, which represents investors with about 300 billion reais in assets. Nine of the 58 companies in the Bovespa stock index are controlled by the federal or local governments. Among them are Petroleo Brasileiro SA, Cia. Energetica de Minas Gerais and Banco do Brasil SA.

“This situation creates an environment of legal doubt for people investing in Brazilian state-controlled companies,” Garcia said. “The Brazilian Treasury must find a way to pay its obligations.”

Why is it I'm not exactly surprised here?

ETHANOL FUEL ADVANTAGES DEMONSTRATED IN THE INDY 500

2009-05-26T17:16:00.005-04:00

I worked with Tom MacDonald from April to August 2007. He has a long track record at the California Energy Commission with fuel ethanol, with knowledge about "the many energy, environmental, health and safety, and economic advantages of alcohol fuels".

MacDonald Associates continues to apply a long career experience working with alcohol fuels in California to analyzing and documenting the broader national and international potential and benefits of alcohol fuels. As another example...

Today’s Indy 500, won by Brazilian driver Helio Castroneves, adds more dramatic evidence of the safety-related advantages of alcohol fuels. Graphic footage seen by worldwide audiences of the major pit fire experienced by the #14 AJ Foyt Racing team and driver Vitor Meira (also a Brazilian) illustrates several of the important differences between alcohol fuels and petroleum-based fuels that weigh heavily in favor of alcohols – further validating the selection of alcohol fuels for Indy racing following the explosive gasoline-fuel crash that claimed drivers Eddie Sachs and Dave McDonald in the 1964 500.

First and foremost, today’s pit fire sequence shows the fire-fighting advantage of alcohol fuels, an advantage that should be recognized and duly appreciated by everyone involved with fuel-related fire safety. The use of water application to quickly extinguish this fire, ALLOWING THE CAR AND DRIVER TO RESUME THE RACE, would clearly not have been possible if the car had been gasoline-fueled!

Secondly, the lower volatility/explosivity and lesser heat release associated with ethanol was another important factor in minimizing and containing this fire and preventing injury to the driver, the pit crew and others nearby. While the fire briefly engulfed the entire vehicle and the driver, the lesser energy release and the rapidity with which the crew was able to extinguish the fire avoided a much more serious incident that would likely have resulted from a similar mishap with gasoline.

The distinct visibility of the above fire, even on the television screen in broad daylight, was also noteworthy given past safety issues involving the lower flame luminosity of alcohol fuels. The fact that the fire was instantly so visible is strong evidence that lower flame luminosity may not be as much of a concern for ethanol-fueled fires as has previously been suggested for alcohol fuels.

The above incident – and various other crash sequences in today’s Indy 500 coverage – add to an accumulating body of evidence with ethanol’s use for racing fuel that, if properly assembled and utilized, can offer a compelling testimonial to the safety-related advantages of alcohol motor fuels.

MacDonald Associates remains available to assist the ethanol industry and other ethanol stakeholders in efforts to better define and report on the many energy, environmental, health and safety, and economic advantages of alcohol fuels, and to help correct the misunderstandings and erroneous stories that typically affect public policy and popular views on these fuels.

Tom MacDonald
MacDonald Associates
Independent Transportation Energy Consultants
(and California Energy Commission – retired)
Sausalito California USA
(916) 529-6582

(click here for video)

BRAZIL GOVERNMENT CONSIDERING CREATION OF "PRE-SALT PETROBRAS"

2009-05-20T19:09:00.008-04:00

“Divide and conquer.”
-- Julius Caesar

(Note: I recently pointed out Petrobras’ relevance to a global biofuels market in a previous post: “The Top 10 Reasons Why Petrobras Matters, Deeply, To the Development of a Global Biofuels Industry”. Please refer to that post to understand the importance of Petrobras’ future activities – including oil exploration).

So how, exactly, does the Brazilian government stifle competition and suck the life out of the extractive industries operating in the country?

For a better understanding of this centuries-long tendency, which supports a bloated government machine and influential friends, look no further than the current proposal being drafted by a presidential commission (1).

According to Folha de Sao Paulo, one of Brazil’s main newspapers, the commission is planning the creation of a state-owned company to control the areas around Petrobras’ recent pre-salt discoveries, the largest worldwide in over twenty years. These ultra-deepwater blocks have already been partially explored by Petrobras, which found oil and gas in all the wells it drilled.

Because of the size of the blocks, however, Petrobras was unable to explore their entirety (they span 5,000 square km, or about 2,000 square miles). Also according to Folha, the company then carved out the regions where oil was struck and has now returned the remainder of the blocks to the National Petroleum Agency, which regulates the petroleum industry in Brazil.

The newspaper further points out that oil companies normally return blocks that have been exhaustively explored, where they believe there is no more oil to be found. In the present case, the areas returned by Petrobras are close to the new-found fields and, potentially, contain huge amounts of oil.

The return of the blocks by Petrobras follows Brazil’s Petroleum Laws, which give companies five years for exploration. It is often said, however, that laws in Brazil are not worth the paper on which they are printed – Petrobras could easily have bought more time to fully explore the areas.

In spite of the fact that the National Petroleum Agency denied a request by Petrobras for a four-year extension, the two organizations have a very close relationship. Had the extension been granted by the Agency, the government would have been unable to start plans for a new state-controlled oil company to control the regions.

Now the Agency can auction the blocks off again in a competitive manner or, as appears likely, hand them over to the new state-owned oil company being planned by the presidential commission.

PetroX – The “Pre-Salt Petrobras”

Relatorio Reservado (“Reserved Report”), a newsletter from a Rio de Janeiro-based organization, suggests that a sort of "Pre-Salt Petrobras", dedicated exclusively to the development of fields found in these offshore regions, is in the works. It cites an unnamed Petrobras official who points to a primary stock offering of the new venture, dubbed PetroX. According to the newsletter,

“the (new) company would be taken to market, (a process) that would allow, using the recent (pre-salt) valuations as a benchmark, for stratospheric amounts to be raised. These funds would speed up not only the exploration (of fields already discovered), but also investments in contiguous areas."

With the oil blocks split up in such a manner, the Brazilian government would consolidate its stranglehold on the oil sector in Brazil, while maintaining a façade of competitiveness by allowing marginal access to foreign players active in the region, which include Anadarko, Exxon, and Shell, to name but a few. It would also be free to strike lucrative deals with players, Brazilian and foreign, while retaining control of the province.

(1) The presidential commision gathers the heads of several cabinet-level bodies, including the ministers of Mines and Energy, Finance, and Planning; the president of the state-owned Brazilian development bank, BNDES; Petrobras’ CEO; the head of the Brazilian National Petroleum Agency; and Lula’s Chief-of-Staff and the presumptive nominee of the ruling Workers’ Party, Dilma Rousseff (who is also the president of Petrobras’ Board – previous post).

LULA IN CHINA TO DISCUSS PETROBRAS' PRE-SALT OIL RESERVES

2009-05-19T08:09:00.011-04:00

President Lula arrived in China yesterday on an official visit. At the top of his agenda is securing a USD 10 billion dollar deal to finance the development of the ultra-deepwater offshore oil fields known as the pre-salt reserves. Another important item is getting the Chinese to adopt a more flexible attitude towards Brazilian products, mainly meat and poultry, which have been all but shut out from the Chinese market.

China is now Brazil’s largest trading partner (previous post), having passed the United States this year. In Q1 2009, it snapped up enormous amounts of low-value products, including iron ore and soybeans.

But Brazilians’ feelings are bruised by what they perceive as Chinese indifference to relations between the two countries. In 2008, China invested a grand total of USD 38.4 million in Brazil, while investments in Africa have been significantly higher: in 2006, Chinese investments in the region totaled USD 1.1 billion.

Chinese find Brazilians inscrutable

Perhaps the Chinese are befuddled by the peculiar Brazilian way of doing business. Saddled with a leach-like state apparatus, Brazil can drive to despair even the most seasoned international wheelers and dealers.

Those who aspire to doing business in Brazil must pay dues to anyone and everyone who has a say in public affairs, at any level of government. From the lowly functionary at the notary public’s office to ministers of state, everyone is looking for a piece of the action, which may be licit (fees, charges, surcharges, etc.), or illicit (kickbacks, “commissions”, “favors” etc.). These payoffs are tolerated by the Brazilian State because they simply supplement a seemingly unending alphabet soup of taxes and contributions that ultimately serve the same function: channeling money into the hands of government employees and of the country's upper caste, industrial and rural, that the State represents.

Those well-versed in the art of doing business in Brazil know how to get around these issues, avoiding traps like the one illustrated by the story of a multinational computer company that was looking to get in on Brazil’s domestic market of about 200 million.

The company had sent a young MBA to supervise the beginning of its operations in the country. While attempting to clear the initial batch of products and equipment at Brazilian Customs, the executive was informed that one of a very lengthy stream of documents lacked a certain rubber stamp. This fact meant, he was told, that the entire largish shipment would have to be unpacked and inspected item for item, putting back the project for several weeks.

The Customs official obligingly and obliquely informed him that a small fee, paid on the spot, would waive the need for the missing rubber stamp. Feeling outraged at the suggestion, the executive told the Customs official that he could go right ahead and unpack the whole lot.

When a more senior executive at the US headquarters of the firm heard about the impending delay, he swiftly went into action. He found an insider in Brazil who could dispatch things in a more expedient manner, called back the executive, and got things moving roughly on schedule. In the process, corners were cut, rules were bent, and toes were stepped on. But no matter – the company then went on to become highly successful and profitable in Brazil.

Perhaps the Chinese think such hassle is not worth the trouble. It is one thing to invest in Sudan and Algeria, two of the largest recipients of Chinese money in Africa. Institutions there are much less developed than in Brazil, meaning that they are also more pliable and, thus, more conducive to furthering Chinese interests.

Hu’s Money Never Came – Wonder Why

The most vivid illustration of the consequences of this clash of civilizations is given by the scant results produced by President Hu Jintao’s visit to the country in 2004. At the time, Lula signed several memoranda of understanding with China for infrastructure investments, which never materialized.

With Lula's current visit to China, he hopes to cinch the deal on a promised USD 10 billion for investments in Brazil’s pre-salt fields, primarily by Petrobras, which is now under Congressional investigation for corner cutting, rule bending, toe stepping, and outright graft, overpricing, corruption, and embezzlement.

With this investigation as a backdrop to Lula’s visit, I wish the Brazilian president the best of luck.

THE TOP 10 REASONS WHY PETROBRAS MATTERS, DEEPLY, TO THE DEVELOPMENT OF A GLOBAL BIOFUELS INDUSTRY

2009-05-16T10:34:00.013-04:00

Transpetro, Petrobras' subsidiary in charge of transportation, has been piping ethanol in Brazil for over thirty years. It holds the most advanced technology in the world for such operations and is currently investing USD 1.2 billion in the construction of an ethanol export corridor that comprises a pipe grid, terminals, and large ocean vessels for ethanol. With total capacity of 12 million cubic meters per year, the project is the largest of its kind anywhere in the world. More on this - including detailed technical information - is available on Transpetro's web site (in English) here.
Petrobras is providing technology to a number of developing countries seeking to start a biofuels industry. In Nigeria, its is investing USD 200 million to build an ethanol production facility in partnership with the Nigerian National Petroleum Corporation, which will own 70% of the project. In Mozambique, it is working with state-owned oil company Empresa Nacional de Hidrocarbonetos to research and develop biofuels there.
In July 2008, its biofuels subsidiary, Petrobras Biocombustivel, was working on the development of 23 joint ventures for ethanol export - a critical move in the establishment of a global biofuels market. One of the projects, developed with Mitsui & Co., aims to export ethanol to Japan, which has authorized ethanol blends of up to 3% and is a strategic market for ethanol from Brazil and other countries.
Petrobras researches the development of new strains of sugarcane with higher sugar content, greater resistance to pathogens, and better adaptability to various climate and soil conditions - an essential process to jumpstart ethanol production in other tropical countries that would benefit from a biofuels industry. Research is being conducted at the company's Sugarcane Integrated Agri-Industrial Center in Quissama, Rio de Janeiro state.
Petrobras has research agreements with a number of foreign institutions, including the United States' National Renewable Energy Laboratory, with which it is collaborating on second generation biofuels research. The research project spans all parts of the production chain, including feedstock selection, cultivation, harvesting, and distribution.
Petrobras is using its expertise in Brazil, energy, and biofuels to build five ethanol plants around Brazil, in partnership again with Japan's Mitsui. The main objective is to ensure supply to the Japanese market - a pre-requisite for that country to invest in the infrastructure necessary to store, distribute, and use ethanol. The strategic importance of the Japanese market goes without saying.
Petrobras has biofuels partnerships with a number of key players in the global energy market, including ConocoPhillips, Portugal's Galp Energia, Italy's Eni, India's Bharat Petroleum and Oil and Natural Gas Corporation, the China National Offshore Oil Corporation, the Toyota Tsusho Corporation, Mitsui & Co., and Nippon Alcohol Hanbai. With the latter, Petrobras is planning to produce ethanol in southeast Asia for export to the Chinese and Japanese markets.
Petrobras is working with a number of foreign companies to open up markets for biofuels abroad, including firms like Korea's Samsung, Norway's Statoil, and the Petroleum Corporation of Jamaica, with which the company is developing a hub to trans-ship ethanol produced in Brazil and reduce its cost, as the fuel makes its way into the highly-protected US market.
Petrobras operates a pilot plant for second generation ethanol at its Cenpes research center. Through enzymatic hydrolysis, it was producing 220 liters of ethanol per tonne of sugarcane bagasse in July 2008. The company is currently working to develop more efficient enzymes, supplementing efforts in other research centers, in Brazil and abroad, which seek to produce cellulosic ethanol on a commercial scale. This line of research also leads Petrobras to investigate new processes for handling bagasse for use as feedstock. As Brazil is expected to produce upwards of 600 million tonnes of sugarcane this year, bagasse is considered the most viable feedstock worldwide for the production of cellulosic ethanol.
Petrobras is the lowest-cost producer of biodiesel in Brazil. It has three plants around Brazil and is working to develop a range of feedstocks that can be used in other tropical countries to produce biodiesel. In Brazil, it has successfully developed a production chain for castor beans as feedstock, and also uses soybeans.

In short, Petrobras is the largest and most active biofuels player in the world. Rest assured that the congressional investigation into Petrobras, approved yesterday, will do little to further the development of a global market for ethanol and biodiesel.

BRAZILIAN CONGRESS APPROVES COMMITTEE TO INVESTIGATE CHARGES OF CORRUPTION, OVERPRICING AT PETROBRAS

2009-05-15T23:55:00.004-04:00

This just in:

From Folha de Sao Paulo, one of Sao Paulo's leading dailies:

"LULA ADMINISTRATION UNABLE TO STOP CREATION OF COMMITTEE TO INVESTIGATE PETROBRAS.

The Lula administration was unable to stop the creation, this Friday, of a Congressional investigatory committee, known by its Portuguese acronym CPI, on Petrobras. The government base did not convince the requisite minimum of six senators to remove their signatures from the motion to create the CPI, a move that would have stopped its establishment.

With the situation unchanged, the committee should be installed over the coming weeks in the Brazilian Congress."

More on this later. I look forward especially to dissecting the rosy projections of foreign analysts concerning future cash flows from Petrobras - projections that completely ignored the political risk of investing in a state-controlled company in a country about which they know precious little.

Please do check back to see how George Soros' favorite investment (previous post) fares in the hands of Brazilian politicians angling for a win in next year's presidential race.

GEORGE SOROS' DARLING, PETROBRAS, COLLATERAL DAMAGE IN SCRAMBLE FOR BRAZILIAN PRESIDENCY

2009-05-15T18:37:00.011-04:00

Right now (7:30 New York, 8:30 Brasilia), the Lula administration is desperately trying to convince a number of Brazilian senators to withdraw their signatures from a motion to have a parliamentary investigative committee installed to probe a number of alleged irregularities involving Petrobras.

The Administration has between now and midnight to persuade at least five of the 32 senators who signed the motion to change their minds. The motion requests the installation of an investigative committee, known by its Portuguese acronym, CPI.

From a columnist with O Globo, one of Rio de Janeiro's main dailies:

"27 signatures are needed to create a CPI in the Senate.

The Petrobras CPI was created with 32.

The government is strongly pressing some senators to withdraw their signatures from the request (...)

It has until midnight today (note: 12:00 AM Friday night) to do so. A signature may be withdrawn with a simple faxed request.

Some (senators) sign and then back-peddle in exchange for certain favors. If you know what I mean..."

From Estado de Sao Paulo, one of Sao Paulo's main dailies:

"A request for the creation of a CPI was read this Friday in the Senate. The CPI investigating Petrobras will have 180 days to probe irregularities involving the state-controlled company and the National Petroleum Agency (note: the agency is the regulatory body for the Brazilian petroleum and biofuels industry).

According to the request, read today by Senator Mozarildo Cavalcanti, the committee would be charged with investigating:
Indications of fraud in procurement bids for the reform of platforms for oil exploration, detected during the Brazilian Federal Police's Deepwaters Operation.
Grave irregularities in contracts for the construction of platforms, as pointed out by the Tribunal de Contas da Uniao (note: similar in funtion to the US Government Accountability Office).
Indications of overpricing in the construction of the Abreu e Lima refinery in the state of Pernambuco, as pointed out by the Tribunal de Contas da Uniao.
Accusations regarding the siphoning off of petroleum royalties, which surfaced during the Brazilian Federal Police's Royalties Operation.
Accusation of fraud by the Brazilian Federal Attorney General's Office involving payments, deals, and compensation paid by the National Petroleum Agency to sugar and ethanol companies.
Accusation regarding the use of accounting artifices that resulted in the (non)-payment of taxes and contributions to the tune of BRL 4.3 billion (note: about USD 2.15 billion).
Accusation of irregularity in the use of promotional sponsorship funds by Petrobras."

The circus is on - for now. Let's see how convincing Lula's point man in Congress, Jose Mucio, will be between now and midnight.

The fundamentals still apply - Dilma Rousseff, Lula's Chief of Staff, is the President of the Board of Petrobras. Lula has publicly endorsed her to run as his party's candidate in next year's presidential elections (previous post).

The PSDB, the opposition party that Mr. Mucio accuses of seeking a CPI investigating Petrobras purely for electoral purposes, will likely nominate either the governor of Sao Paulo state, Jose Serra, or the governor of Minas Gerais state, Aecio Neves, as the candidate to run against the candidate of the PT, the party to which Lula and Ms. Rousseff belong. The PSDB surely views Petrobras as fair game - hence, their motion to have a CPI installed (the motion's sponsor, Senator Alvaro Dias, is a member of the PSDB).

How George Soros could have 20% of his portfolio (previous post) invested in a political target as easy as Petrobras is beyond me.

PETROBRAS' REGULATOR FORGES TIES WITH CHINA, NORTH KOREA, CUBA

2009-05-14T19:01:00.006-04:00

Haroldo Lima is the head of the Brazilian government's National Petroleum Agency, known by its Portuguese acronym, ANP.

The ANP was created in 1998, around the time Petrobras was partially privatized. According to its web site, the ANP is "the regulatory body for activities that comprise the industries of petroleum and natural gas and of biofuels in Brazil".

Mr. Lima is a member of the Communist Party of Brazil, which has a long Stalinist tradition (click here to visit his page on the Party's web site).

The web site also describes Mr. Lima's stellar record as a Congressman and party member (my translation):

"Haroldo Lima's name is always identified with the defense of Petrobras, of government banks, of national sovereignty, of the Sao Francisco River, of blacks, of Indians. And above all, of Socialism. He is president of the China-Brazil Parliamentary Group and participates in the Cuba-Brazil and Korea-Brazil Parliamentary Groups."

As regulator of Petrobras' "pre-salt" oil reserves, the largest discovered worldwide in three decades, Mr. Lima is in a unique position to help those he professes to protect. Just imagining the size of his CIA file boggles the mind.

PETROBRAS A PAWN PROBED, PUSHED IN PETTY PRESIDENTIAL POLITICS, POSTURING, COST OF CAPITAL NOT FALLING

2009-05-13T17:47:00.006-04:00

Here’s a game changer: Estado de Sao Paulo reports that a motion to install a Congressional committee to investigate Petrobras has just been filed today. It was introduced this afternoon and has the support of 32 senators. The goal is to investigate “indications of fraud in bids for (oil) platforms and charges that money used to pay royalties on oil exploration and production has been siphoned off”.

Though the establishment of the committee is no done deal, this development is still pretty big news – the president of Petrobras’ Board, Dilma Rousseff, a member of Lula’s PT (Workers’ Party) is also a likely contender in the 2010 presidential elections, health permitting (previous post). She has received Lula’s public endorsement; with an amazing 80% approval rating, Lula is naturally considered quite capable of helping elect his successor.

The PT is, of course, opposed to any efforts to investigate Petrobras. A senator from the PT has declared that:

“Whoever wants an investigative committee to investigate Petrobras is unpatriotic, because Petrobras is the company that has invested the most in these times of crisis. CEO Sergio Gabrielli has already testified before Congress and will do so as many times as necessary. Those in favor of an investigative committee are at the service of other international oil companies.”

Investigative Committee Opening Salvo in War for Brazilian Presidency

Mines and Energy Minister, Edison Lobao, is said to be conducting a covert campaign to discredit Petrobras CEO, Jose Sergio Gabrielli, who has recently come under fire because of accounting changes (some would say shenanigans) that have allowed the company to save BRL 4 million (about USD 2 billion) in taxes this year.

Like Ms. Rousseff, Mr. Gabrielli is a member of Lula’s Workers’ Party, known as the PT. The main political party in the opposition is the PMDB, Minister Lobao's party. The senator who filed the request for an investigative committee belongs to the PSDB, an offshoot of the PMDB and a likely ally in next year's elections. The PSDB is widely expected to present a viable candidate to challenge whomever the PT chooses to run – quite probably, Ms. Rousseff.

Now Petrobras has been caught in the middle of petty presidential politics. In the medium term, it will find itself a pawn in the race to succeed Lula. After all, the company controls the crown jewels of the Lula administration – the huge pre-salt oil reservoirs.

In the short term, its presidency, currently occupied by Mr. Gabrielli, is being coveted by many in the PMDB. According to Estado de Sao Paulo, Petrobras is considered a “dream of a state-owned enterprise” – hence Mr. Lobao’s motivation to yank it out of the hands of the PT and into those of fellow PMDBistas.

In any case, this episode serves as a very vivid illustration of the kind of political risk with which Petrobras has to constantly deal. Try figuring out a beta for that.

US DEPARTMENT OF AGRICULTURE: BNDES FUNNELING MONEY INTO BRAZILIAN SUGAR AND ETHANOL INDUSTRY, STOKING OVERCAPACITY

2009-05-13T10:27:00.002-04:00

I have pointed out before the questionable wisdom of using a Brazilian government bank like BNDES, financed by contributions from payroll taxes, to support the production of sugar and ethanol in the country. So far, the most visible result has been massive overcapacity, which has led to a precipitous drop in ethanol prices on the Brazilian market (previous post).

While most plants can produce both sugar and ethanol, about 150 of the country’s 420 plants are ethanol-only operations (previous post). Most were set up during the ethanol fever that took hold of the industry post-2006, when oil prices were skyrocketing and the U.S. government embarked on an all-out crusade to jack up the price of corn and crush the American livestock industry.

Highlights on the expansion of Brazil’s sugar and ethanol industry, taken from the USDA’s recently-released report on the 2009-2010 outlook for the Brazilian sugar and ethanol industry:

Dropping sugar and ethanol prices during 2007 and 2008 and the global financial crisis in September 2008 became a major obstacle to new investments in 2009 and 2010, although investments in the sugar-ethanol sector had been growing steadily during the last few years. (Financing from the National Bank for Economic and Social Development - BNDES, the major federal bank funding new projects, increased from R$ 3.56 billion in 2007 to R$ 6.5 billion in 2008.) Credit has become scarce, to fund both sugar export operations and investments in new mills. The industry estimates that total credit to finance investments should drop from R$ 12 billion in 2008 to R$ 7 billion or less in 2009. Approximately 40 percent of the mills that were supposed to start running in 2009 (35 mills) have already postponed operations until 2010.

US DEPARTMENT OF AGRICULTURE FORECASTS BRAZIL TO MILL 605 MILLION TONNES SUGARCANE IN 2009-2010, ETHANOL EXPORTS DROP

2009-05-13T08:51:00.005-04:00

Inquiring minds are looking at the United States Department of Agriculture's GAIN (Global Agriculture Information Network) report on the 2009-2010 outlook for the Brazilian sugar and ethanol industry.

The numbers put out by the USDA's Foreign Agricultural Service, which has an office in Sao Paulo, jive with those published at the end of April by Conab (previous post), the agency within the Brazilian Ministry of Agriculture responsible for forecasting agricultural production in the country, and with the figures offered in early April by Plinio Nastari's Datagro (previous post), the leading sugar and ethanol consultancy in Brazil.

Highlights from the USDA's GAIN report:

"Sugarcane for crushing for MY 2009/10 is projected at 605 million metric tons (mmt), up 7 percent from the previous year, due to continuing area expansion. Sugar production is forecast to increase to 36.85 mmt, raw value. Sugar exports are forecast at 24.36 mmt, up 4.05 mmt from the previous year, due to expected lower supply from other producing countries such as India. Ethanol production for MY 2009/10 is forecast at 28.45 billion liters, while ethanol exports are expected to drop to 3.7 billion liters."

COMPARISON OF DIFFERENT PROJECTIONS
FOR CANE, ETHANOL AND SUGAR PRODUCTION
2009-2010 HARVEST YEAR - BRAZIL

	USDA	BRAZIL GOVERNMENT (CONAB)	DATAGRO
Total sugarcane for crushing (million tonnes)	605	622 – 634	598
Y-o-Y increase in sugarcane for crushing	7%	8.6% – 10.7%	5.72%
Sugar production (million tonnes)	36.85	36.42 – 37.91	35.2
Y-o-Y increase in sugar production	14%	Up to 17%	11.38%
Ethanol production (billion gallons)	7.53	7.35 – 7.57	7.38
Y-o-Y increase in ethanol production	4.6%	n/a	3.0%

Source: USDA, Datagro, Conab

GENETICALLY-MODFIED CORN AND SOY GET ALL MIXED UP IN BRAZIL, THREATEN EXPORTS

2009-05-11T18:46:00.007-04:00

Brazil has rules for the deployment of genetically-modified organisms (GMOs), including corn and soybeans. But Folha de Sao Paulo, one of the country's main dailies, reported on Sunday, May 10, that the country’s soy and corn crops are hopelessly mixed up, a situation that came about because Brazil does not have the necessary harvesting, transportation, and storage equipment and facilities to separate crops that have been genetically modified from those that have not.

This state of affairs creates a number of problems:

By law, consumers have a right to know if the food they are consuming has been genetically manipulated or not. But, given the extent of the problem, they must now presume that at least a portion of what they eat comes from seeds developed by Monsanto, Syngenta, Bayer, and other corporations.
Folha reports that, while the problem is just beginning with corn, the vast soybean fields of Brazil’s Center-West, in the states of Mato Grosso, Mato Grosso do Sul, and Goias, have been totally contaminated by GMOs, according to producers it interviewed. This fact has already led to the cancellation of a number of export contracts.
Sadia and Perdigao, two of the country’s largest producers of poultry, pork, beef, turkey and chicken, have said that they will maintain their policy of not using GMOs. But Folha says that, in light of the generalized mix-up, they have been unable to explain how the separation will be accomplished.

The realization that GMOs may make their way into the meat Sadia and Perdigao produce and sell comes at a particularly bad time. The two companies are contemplating a possible joint venture in some operating areas, seeking to boost margins eroded by the current downturn. A joint venture would also allow Sadia to recover from heavy losses associated with the downfall of Lehman last September and with wrong-way bets on forex derivatives.

Following the Law, the Brazilian Way

Folha reports that CTNBio, the Brazilian government agency in charge of approving and overseeing the deployment of GMOs in the country, has said that the rules governing GMOs “are being followed, but not to the extent required by law”.

In other words, the rules are being fudged and, the government hopes, will eventually fade away into distant memory as the use of GMOs becomes a fait accompli. One has to wonder how the country’s trading partners will react once they realize that they can have any kind of corn or soybeans they want – as long as it’s transgenic.

As is usual in Brazil, the legal framework governing an industry looks far better on paper than on the ground. Pre-salt investors: take note.

DELFIM NETTO, STIGLITZ SPEAK AT EXAME MAGAZINE SEMINAR ON 2009 OUTLOOK FOR BRAZIL

2009-05-11T14:40:00.007-04:00

Delfim Netto is a widely-respected economist and Congressman who held a number of cabinet-level positions in Brasilia in the 1960s and 70s.

On Monday, May 11, he spoke at a conference held by Exame magazine, one of Brazil’s leading business publications, and made prognostications for the Brazilian economy throughout the rest of 2009.

The Brazilian economy will resume growth “with some vigor” in Q4, but won’t see 4% growth until 2010.
Brazil could have seen growth of 2% to 4% in 2009 if the Brazilian Central Bank had acted more decisively and in a more timely manner.
The Brazilian Central Bank had the wherewithal to commit more resources to staving off the crisis because it was sitting on reserves of USD 200 billion; it was also extended a credit line of USD 30 billion by the US Fed.
The Brazilian Central Bank has been correct in its initiatives, but has been seven months late and very conservative, declining to “use its muscle to force the economy to drop to 2%, 3% or even 4% growth”.
The Brazilian Central Bank also erred in its preferential treatment of large banks over small ones, and of public institutions over private ones.
The recent inflow of foreign capital into Bovespa, the Sao Paulo stock exchange, can be explained by the quality of the companies traded on the exchange and the likely capacity of the country to swiftly make its way out of the downturn. So far this year, Bovespa is up 36% in dollar terms. Net of taxes and fees, that figure represents a gain of 25% in a little over four months.
The capital inflows have contributed to a sudden appreciation of the BRL, an event that may have a “devastating” impact on the productive system.

Joseph Stiglitz, recipient of the Nobel Memorial Prize in Economic Sciences, also spoke at the conference and stated that one of the positives originating from the crisis is that it will allow Brazil to lower its interest rate to a level closer to the global average. Mr. Netto joked that doing so is of little consolation at a time when the Brazilian economy went from an excellent situation to a much worse condition.

Mr. Netto summed up the points that will help Brazil decouple from the crisis:

Brazil is the only BRIC country to have a functional constitutional democracy.
Brazil has a single language and no border, ethnic, and religious problems.
Brazil can produce a considerable amount of renewable energy and has enormous oil reserves.
Brazil has a reduced likelihood of facing a crisis in its foreign accounts, as it has substantially reduced its debt-to-GDP ratio and its liabilities in foreign currencies; it also has large reserves in hard currencies.

The Exame article closes with a quote:

“We will probably not have an energy shortage or a crisis in the balance of payments. So Brazil will be able to get out of this crisis, will be able to build a concrete road, a German Autobahn for the next 25 years. But, without the State, that will not happen. The State has its problems, but must be intelligent enough to help the private sector go down this path.”

PRESIDENT OF PETROBRAS' BOARD STRONG CONTENDER FOR NEXT PRESIDENT OF BRAZIL

2009-05-09T23:44:00.010-04:00

Chavez has seized sixty oil services companies in Venezuela, handing them over to state-run oil company PdVSA with a promise to “bury capitalism” in the country.

Could something similar happen in Brazil with Petrobras?

Here’s a snippet (my translation) from the speech Lula gave when he was sworn in as President in January 2003:

“In face of the depletion of a model that, instead of promoting growth, has produced stagnation, unemployment, and hunger; in face of the failure of a culture of individualism, of selfishness, of indifference to one’s neighbor, of the disintegration of families and communities (…), Brazilian society has chosen to change and started, with its own hands, to promote the necessary change”.

The above paragraph was extracted from Veja, Brazil’s main weekly news magazine, which labeled the words a “chant to soothe the radical ears of the Workers’ Party”, headed by Lula. In other words, such rhetoric, which closely resembles that of Chavez, is probably as “radical” as it’s ever going to get.

But a few facts are worth bearing in mind. While Lula’s past as a fire-brand union leader is well-known, the background of some of the other actors in Brazil’s commodity plays is not as familiar.

Routing for Dilma

In January 2009, a report in The Economist called Lula, who has one year and a half left as President, “a freakishly popular president”. The magazine points out that, “It is rare indeed to find a president in his second term with an approval rating of 80%, as Brazil’s Luiz Inacio Lula da Silva now enjoys.”

Lula is now attempting to transfer some of that political capital to his current Chief of Staff, Dilma Rousseff, whom Lula has publicly endorsed to run as the Party’s candidate in the 2010 presidential elections – health permitting.

Ms. Rousseff, unlike Lula, was engaged in armed resistance against the military government that ruled Brazil between 1964 and 1985. The Turkish Weekly (Ms. Roussef’s father, Petar Rusev, was born in nearby Bulgaria) reports that Ms. Roussef

“(…) has been involved with leftist organizations since her youth. After the 1964 rightist coup in Brazil, Rousseff founded and led a leftist underground organization (…) and joined the resistance movement against the military dictatorship.

Later she was captured by the political police, and was sent to prison for three years - between 1970 and 1973, where she was severely tortured.”

Ms. Rousseff is also President of the Board of Petrobras. She served as Minister of Mines and Energy between 2003 and 2005, when she was appointed Chief of Staff by Lula, after a corruption scandal (fanned in no small measure by Veja magazine) claimed the political careers of a number of the Workers' Party’s founding bosses, who also happened to be Lula’s closest allies.

A Stalinist Pulling the Petroleum Strings

Another interesting character is the head of the Brazilian government’s National Petroleum Agency, Haroldo Lima, who is also a Congressman from the state of Bahia for the Communist Party of Brazil.

Mr. Lima caused a stir in April 2008, when he announced that Petrobras had discovered "the third biggest (oil) field in the world" – an announcement that bruised feelings at Petrobras (which naturally wanted to break the news) and led the company’s shares to rise 7.67%, prompting the oil producer to release a communiqué to calm things down.

Mr. Lima’s activities in the past are just as interesting as his role in the oil world today. Like Ms. Rousseff, he took up arms against the Brazilian military government. In the early 1970s, he was instrumental in bringing a group he had helped form, called the Marxist-Leninist Popular Action, into the fold of the larger Communist Party of Brazil, a dyed-in the-wool Stalinist organization.

Mr. Lima had gone underground in 1967-68 to avoid arrest. He then spent the next six years on the run, traveling around Brazil, taking on odd jobs as he planned guerrilla actions against the military regime. He was arrested in 1976 and brutally tortured over the next three years.

No hard feelings?

With so many US investors looking to do business with Ms. Rousseff's Petrobras, it is worth taking a minute to analyze the sensitivities involved.

Documents declassified by the United States National Security Archives provide insight into the relationship between the US government and the Brazilian military government from 1964 to 1985.

These “declassified documents shed light on the role of the U.S.”, including an audiotape with President Lyndon Johnson urging taking “every step that we can” to support overthrow of Joao Goulart (note: the democratically-elected president of Brazil at the time).

The documents also show that the U.S. ambassador to Brazil requested pre-positioned armaments to aid Golpistas, while acknowledging “covert operations backing street demonstrations, civic forces and resistance groups”.

One has to wonder what kind of feelings Ms. Rousseff and Mr. Lima really harbor.

BOVESPA, COMMODITIES BOOM LEAD US DOLLAR TO PLUNGE AGAINST BRAZIL'S REAL

2009-05-09T23:18:00.004-04:00

The Brazilian central bank bought up dollars on Friday, May 8, in an attempt to stop the precipitous plunge of the USD against the BRL. In spite of the Bank's efforts, the USD closed at BRL 2.068, the lowest rate since October 3, 2008. This past week, the dollar depreciated 5.18%, with a 2.04% drop on Friday alone.

The ongoing boom in commodities has kept a steady stream of money coming into the country, while foreign investors poured BRL 2.061 billion (about USD 1 billion) into Bovespa, the Sao Paulo stock exchange, on May 4 and 5 alone , the month's first workdays. This flow brings the total YTD to BRL 7.719, or about USD 3.747 billion.

PETROBRAS POISED TO MAKE BIG GAINS - FOR THE BRAZILIAN GOVERNMENT

2009-05-07T23:45:00.005-04:00

Fellow blogger Horacio Marquez over at Money Morning believes that “Brazil’s Petrobras will be poised for big gains when the economic recovery kicks off in earnest”.

I would respectfully take issue with one of the points he makes:

“Brazil has made huge strides from the debt-ridden, top-heavy, bureaucratic government of its past.”

The reality is that, in 2008, the national tax burden was 36.54% of GDP, up from 32.2% in Q1 2002, extending the 500-year tendency of the country's government to become increasingly bloated.

As an institution, the Brazilian ship of state is a machine designed to suck dry businesses in general and extractive industries in particular, transferring wealth into public hands in order to support the huge bureaucracy that governs the country. Judges, ministers of state, mayors, prosecutors, legislators, professors at public universities, and a coterie of aides, secretaries, supporters and sycophants in general constitute an immense court whose upkeep is provided for largely through fiscal measures.

In April 2007, this state of affairs led then-Executive Secretary of the Ministry of Finance, Bernard Appy, to state, in an unusual display of candor for a public official, that,

“Brazil is losing investments of around BRL 20 billion (USD 10 billion) per year because of its complex and confusing tax system, whose rules are increasingly unstable.”

The quote appeared in a report published in Brazil’s Estado de Sao Paulo, one of the country’s leading dailies.

The report goes on to say that Mr. Appy would introduce to the Brazilian Congress a new tax bill being drafted by the government. It quotes him as saying that,

“Legal uncertainty leads companies to become more conservative in their investment decisions and to seek higher rates of return.”

Though nothing is known to have come out of this or any other initiative by the Brazilian government to cut into its own flesh, the point made by Mr. Appy was vividly illustrated later in 2007 when, after Petrobras announced that it had discovered vast oil fields – the largest oil finds worldwide in over three decades –, it declared that the rules of the game would be changed with the game underway, much to the chagrin of Shell, BG, Galp, Repsol, Exxon, and Anadarko, among others. Promised a slice of the action, these companies went on to discover they would be tossed a few crumbs if they behaved properly.

Such has been the modus operandi of the Brazilian government over the past 500 years. Whatever the industry, the government will milk it until it can barely stand, either through fiscal initiatives, or through the deployment of agents that suck up all the oxygen in the room.

In this light, it is easy to see why Petrobras wants the lion’s share of the country’s new-found wealth – wealth it will pass on to its creator, the Brazilian state (note to all the investors out there salivating at the oil fields: Petrobras is still a company run by the Brazilian government, which owns 55.7% of common shares with voting rights).

Other examples along these lines abound:

The Sugar and Alcohol Institute

Known by its Portuguese acronym, IAA, the Institute was set up in 1933 to “regulate production relations” in Brazil's immense sugarcane industry. It imposed price caps and floors, determined export quotas, and basically governed the sector with an iron fist from its creation until 1990, when it was terminated, disgraced by scandal and corruption.

Brazil’s First Bank

Banco do Brasil is a publicly-traded company founded by the Portuguese royal family after it fled to Rio de Janeiro in 1808, in the wake of Napoleon’s invasion of Portugal.

Having packed very little gold for the long trip, the royals resorted to a foolproof trick with Brazilians: flattery. Because upon being flattered by foreigners, Brazilians will blush and do practically anything that is asked of them.

In the case of the Portuguese royal family, what was asked of wealthy Brazilians was that they surrender all their gold, to be “deposited” in Banco do Brasil, founded, coincidentally, in 1808.

In exchange, these wealthy Brazilians were given the title of Marquis of this and Viscount of that, the second part of the title usually consisting of colorful Brazilian Native Indian names. When Napoleon was defeated in 1815, the royal family promptly returned to Portugal, carrying the gold reserves with them and leaving behind a bankrupt Banco do Brasil, as well as scores of rich Brazilians honored to have been fleeced by the nobility of Europe.

But I digress: a more recent example also drives home the point of whom the bank really serves. On April 8, 2009, the bank’s CEO, Antonio Francisco de Lima Neto, was fired by President Lula himself, who was unhappy with the way Mr. Neto was setting the interest rates charged by the company he had been appointed to run in a profitable manner. The company’s stock on the Sao Paulo exchange promptly fell 8% that same day.

Sic transit gloria Brasilis.

LACK OF CREDIT COMPROMISES QUALITY OF BRAZIL SUGARCANE FIELDS, TIGHTNESS IN SUGAR MARKETS SEEN INTO 2010

2009-05-07T19:57:00.007-04:00

Sugar experts gathered yesterday, May 6, in New York at the ISO/Datagro Sugar Conference to discuss the outlook for the industry. The event was sponsored by the Brazilian Ministry of Agriculture, Cosan, Crystalsev, Bloomberg, and the newly-formed International Ethanol Trade Association, known as IETHA, among other organizations.

Speakers included Joel Velasco, Unica’s chief lobbyist in Washington, Sergey Gudoshnikov, of the International Sugar Organization, and a few other economists.

The outlook for sugar has improved considerably since the beginning of 2008 (chart - source: Cepea, own calculations). Indeed, the commodity was one of the few whose price did not crash in Q3 2008.

Among supporting factors is a prolonged, severe drought in the countries surrounding the Indian Ocean. Australia’s two main river systems have dried up, while the shortfall in India will lead the country to become a net importer of sugar. Indeed, according to Estado de Sao Paulo, one of Brazil’s leading dailies, Mr. Gudoshnikov of the ISO projects a supply deficit of 4.3 million tonnes for 2009. Brazilian output is expected to grow substantially, but the increase will be partially offset by declines in production in India and production issues plaguing Brazilian sugarcane fields. Thus, the tightness is expected to continue into 2010.

This outlook stands in contrast to the situation in the 2008-2009 harvest year, which saw a surplus of 6 million tonnes.

Mr. Gudoshnikov further projects that global imports in 2008-09 will total 50.2 million tonnes, compared to 45.9 million tonnes in 2007-08. He estimates availability for export also at 50.2 million tonnes, an increment of 3.6 million tonnes over the previous harvest year. Dow Jones reports that the ISO places final world inventories at 61.9 million tonnes, a drop from the 69.7 million tonnes of the previous season.

Brazilian Monster Crop not Big Enough

The tightness in supply will persist, even with Brazil’s sugarcane crop expected to reach a record 620 million tonnes, an increment of 47 million tonnes over the output of the 2008-2009 season, which drew to a close at the end of March. A growth of 35 million tonnes is expected for the following season, indicating that the expansion of Brazil’s sugarcane production is slowing down.

Lack of proper care and field renewal, associated with adverse credit and macro conditions, are responsible for the drag on agricultural production. At least 40% of the sugarcane produced in 2009-2010 will come from a fourth cutting (sugarcane plants can be cut up to seven times, with decreased sugar content in the stalks produced each year by new growth).

Fourth cuttings yield from 70 to 75 tonnes per hectare, while first cuttings have a much higher yield: 120 to 130 tonnes per hectare. In the season that has just ended, 18% of the sugarcane processed came from a first cutting; in the current season, that figure is expected to drop to 10%.

BRAZILIAN GOVERNMENT JUMPING UP AND DOWN WITH JOY, FINDS TIME TO PUT OUT A PRESS RELEASE ABOUT COUNTRY’S ONGOING COMMODITIES BOOM

2009-05-06T22:13:00.008-04:00

Here’s the relevant snippet (my translation) from the Brazilian government’s press release regarding the recent shocking evolution of the country’s exports. The release, dated May 4, is in MS Word format, in Portuguese, and can be found here.

EXPORTS HIGHLIGHTS FOR APRIL 2009

"(In April 2009), over the same period of the previous year, basic products grew 27.4%, totaling USD 5.594 billion, a record for any April on record; while manufactured goods (USD 5.041 billion) and semi-manufactured goods (USD 1.434 billion) registered a decline of 27.4% and 17.2%, respectively, considering the daily average.

Among basic products, the main highlights concern crude oil (+230.0%, up to USD 462 million), iron ore (+115.7%, up to USD 1.4 billion), soy meal (+54.5%, up to USD 418 million), soy beans (+15.8%, up to USD 1.5 billion), and poultry (+9.4%, up to USD 424 million)."

**********************
And here are the tables with the data for selected products for March and April 2009, April 2008, and year-on-year and month-on-month calculations (email me for the Brazilian government's Excel spreadsheets with the complete data set - translated).

(Source: Brazilian Ministry of Development, Industry, and Commerce)

CHINA STEPS UP SHOPPING SPREE IN BRAZIL, HUNGRY FOR COMMODITIES, NOT SO MUCH FOR U.S. DOLLARS

2009-05-06T20:21:00.009-04:00

Fellow blogger Shocked Investor notes that "China (is) Brazil's biggest importer, surpassing the USA".

I would like to elaborate on this news item, as "shocked” really is an understatement in light of the breathtaking pick-up in overall exports of Brazilian commodities in Q1 09.

Year-on-year, sales to Asia grew by 36.2%. China accounts for 76.4% of that total, with sales concentrated in soy beans, iron ore, pulp, and steel.

A quick visit to the web site of the Brazilian Ministry of Development, Industry, and Commerce yields the following data on these and a few other selected products:

(source: http://www.mdic.gov.br/sitio/interna/interna.php?area=5&menu=1161)

Vale (Public, NYSE:RIO) must be pleased: the company's ADRs are trading at 112% above their November 2008 low, or 54% YTD.

The article referenced by Shocked Investor, which came out on May 3 in Estado de Sao Paulo, one of Brazil's main dailies, carries a quote that pretty much sums it up. Miguel Daoud, chief economist at a consultancy named Global Financial Adviser, believes that,

"In the worst of worlds, Brazil is better off."

If anybody is interested in the Brazilian government's Excel spreadsheets with the complete data set, which I have translated, just email me.

STRUCTURED FINANCE SEMINAR TO DISCUSS INVESTMENT OPPORTUNITIES IN BRAZIL, PETROBRAS BECKONS

2009-05-05T18:48:00.009-04:00

The Third Brazilian Structured Finance Seminar will be held in the city of Sao Paulo, of all places, on June 24, 2009. The event’s web site correctly states that, “The local market for asset-backed securities ha(s) been advancing and developing rapidly in Brazil on the back of new regulations and deep local capital markets”.

The problem is that the “regulations” stay “new” because they change according to the prevailing political winds. Case in point: the recent discovery by Petrobras of immense ultra-deepwater offshore oil fields, the first of which was announced by the government in November 2007. According to Global Voices, a project by the Harvard Law School’s Berkman Center for Internet and Society,

“The one new element that the oil-rich dreams have brought to the Brazilian political arena is the government resolution to change its set of rules for oil exploration and production. Although assuring international partners that there will be no change to the rules of the game already under way, Mines and Energy Minister Edison Lobao said (…) that ‘the government has to have better terms in the sharing of natural resources, which belong to the Brazilian people’. Indeed, the withdrawal of subsalt blocks from last year's (note: 2007) annual auction of oil concessions was seen as a move to keep the most potentially productive areas out of foreign hands, and a local sign of a growing global trend of a so-called resource nationalism spurred by high oil prices.”

This kind of behavior has been the norm throughout Brazilian history. Today, the republican government, instituted in 1889, carries on a long legacy of controlling and milking to the hilt the extractive industries operating in the country, tossing the occasional bone to the private agents doing the hard work. This tradition was established immediately after the discovery of the territory by Portuguese explorers in 1500 and brutally enforced over the following four centuries by the representatives and descendants of the crown of Portugal.

Because of Brazil’s mineral and agricultural potential, the region was so jealously-guarded by the Portuguese that, in the early 19th century, European geographers still debated whether the huge Guanabara Bay, around which the city of Rio de Janeiro is perched, was indeed a bay or the mouth of a large river.

To those looking to get in on the commodities action in Brazil, whether through structured finance products or otherwise: caveat emptor.

AS ETHANOL PRICES COLLAPSE, BRAZIL PAYS FOR EVEN MORE ETHANOL PRODUCTION

2009-05-05T12:29:00.007-04:00

The collapse in the price of ethanol over the past three months has been astonishing (chart). With the harvest season barely beginning, the price is the lowest it has been since Q3 2007, when the sugarcane harvest was in full swing.

Much of the current downturn can be chalked up to initiatives by BNDES, the state-run development bank. It extended credit lines to politically-connected companies with a penchant for easy money, as these looked to cash in on the ethanol boom that followed President Bush’s SOTU address in January 2006 (some may remember that as the occasion when the former US president vowed to soon make ethanol from switchgrass and such).

Among those in the sugar and ethanol business who have enjoyed the bank’s largesse are:

The ubiquitous Goldman Sachs, which has a stake in Brenco, the company whose CEO, Henri Philippe Reichstul, is a former Petrobras president. A coterie of Californian billionaires, including Vinod Khosla, Steve Case, Ron Burkle, and Steve Bing, are among its many investors, as are James Wolfensohn, a former World Bank president, and Bill Clinton, the former Arkansas governor;
ETH Bioenergia, where Eduardo Pereira de Carvalho landed almost immediately after leaving the presidency of Unica in June 2007;
And, of course, Petrobras itself, whose transportation subsidiary, Transpetro, was extended a USD 560 million credit line in June 2007 for the acquisition of four tankers.

In October 2008, BNDES had 78 biofuels projects in its portfolio. These and other ventures by risk-averse entrepreneurs are generously subsidized by the Brazilian taxpayer, as BNDES currently lends out at 11.25%, but pays 12.75% interest on the money it borrows.

This gamble with public money has proved fatal to the industry: over the past three years, it fueled the massive overcapacity responsible for ethanol producers' current woes. Many companies – most notably Santelisa Vale, which resulted from the leveraged takeover of Vale do Rosario by Santa Elisa in 2007 – have been forced by creditors into the arms of better-capitalized competitors (in the case of Santelisa Vale, Louis Dreyfus - previous post) or into the Brazilian equivalent of Chapters 11 and 13.

Compounding the problem is the fact that the country suffers from insufficient storage capacity – a problem that the government, through BNDES, has set out to tackle (previous post). In March, BNDES announced that it would channel USD 1.1 billion towards the construction of storage facilities for up to 1.32 billion gallons of ethanol. The stated goal is to allow for a more even flow of the fuel to the market throughout the year.

The result, of course, will be to stoke more investment in ethanol production, which will further depress prices, driving many Brazilian producers out of business and leading an unknown number to default on the loans from BNDES.

WITH VIOLENT CRIME ON THE RISE IN SAO PAULO, UNICA’S “ETHANOL SUMMIT 2009” PUTS ATTENDEES IN HARM’S WAY AND AWAY FROM SUGARCANE LAND

2009-05-04T17:30:00.003-04:00

An article published on Friday, May 1st, in Brazil’s leading daily underscores the need for vigilance for those attending Unica’s “Ethanol Summit”. This is especially true for foreigners, who are usually an easy target for gangs and criminals in Sao Paulo, the world’s sixth-largest metropolitan area.

The piece, which came out in Folha de Sao Paulo, carries the headline, “Robberies, rape, and homicides on the rise in Sao Paulo”. It also raises questions that make the choice of Brazil’s most dangerous city even more inexplicable.

Folha de Sao Paulo reports that crime has increased in Sao Paulo over the first three months of 2009, in tandem with the rising unemployment associated with the deep recession the country is experiencing. There has been a spike in the number of robberies, cases of rape, and even homicides, which had been declining since October 2008 (for statistics, click here).

Plinio Nastari, from Datagro, chose Aracatuba, a city located in the interior of Sao Paulo state, right in the heart of the country’s sugarcane region, to hold the II International Symposium on sugar and ethanol. The event took place last March and had the merit of not only keeping visitors out of harm’s way, but also of placing them very close to the multiple sugar and ethanol plants that operate in the region.

If Unica holds another “Ethanol Summit”, it should follow his lead.

PETROBRAS’ HANDS FULL WITH PRE-SALT PETROLEUM DEVELOPMENT, DOESN’T HAVE MUCH TO OFFER TO BIOFUELS

2009-05-04T13:23:00.005-04:00

Petrobras, which created a subsidiary in charge of biofuels in March 2008, has ambitious goals for ethanol and biodiesel.

According to the company's Business Plan for 2009-2013, Petrobras aims to:

Carry out activities in ethanol, domestically and in international markets;
Carry out activities in biodiesel, domestically and, in a selective manner, in markets abroad, giving preference to the use of feedstocks from small, family-based farming;
Guarantee the development of competitive technologies for the production of biofuels, mainly through the use of residual biomass as feedstock.

But a look at the numbers published by the company tells a different story.

Investment Plan for 2009-2013 Assigns Low Priority to Biofuels

To reach these ambitious goals, Petrobras has set aside USD 2.8 billion - out of a total USD 174.4 billion in planned investments for 2009-2013, the bulk of which will go towards developing recently-discovered offshore oil fields - the so-called "pre-salt reservoirs".

These large findings (the Tupi field alone is estimated to hold from 5 billion to 8 billion boe) are presumably one of the factors that have led investors like George Soros to become so enamored of the company (according to Seeking Apha, in Q4 2008, Petrobras [PBR] accounted for 19.53% of Soros Fund Management's portfolio, topping the list).

But on Friday, May 1st, Folha de Sao Paulo, Brazil's leading daily, reported that tests on the Tupi field "begin amid frustration". These tests are crucial, as the new fields pose unprecedented technical challenges, lying underneath 1.25 miles of water and up to five additional miles of ocean floor, including a thick layer of corrosive salt.

Other problems holding back tests on Tupi include legal and institutional uncertainty and wrangling inside the highest levels of the Brazilian government surrounding a number of issues:

Will the several oil discoveries (in addition to Tupi, other fields include Iara, Carioca, and Corcovado) be grouped together, or explored individually?
How will foreign oil companies be treated? (Shell, BG, Galp, Repsol, Exxon, and Anadarko also want in on the action).
How, if at all, will the Brazilian government temper its tendency to dominate the national oil industry, a historical inclination that it has satisfied primarily through the use of Petrobras and fiscal policy?
Will contracts be honored by this and future Brazilian administrations?

Lula's Ministers Find More Important Things to Do

Folha de Sao Paulo also reports that a cabinet-level committee has been formed to explore these and other issues surrounding the development of Brazil’s new oil wealth. Dilma Roussef, former Minister of Energy and Lula's current Chief of Staff - and also the likely candidate of the ruling Workers' Party in next year's presidential elections, health permitting – is a key element in the committee.

But the group hasn’t met in over three months. Before the collapse in oil prices in Q3 2008, the committee got together frequently – five times in August 2008 alone. Now, with oil hovering around USD 50 and amid the continuing uncertainty caused by the global economic crisis, developing the oil fields has lost much of its urgency.

Uncertainty about the marginal cost of production is also influencing the outlook: Jose Formigli, Petrobras’ executive manager for E&P in the fields, has affirmed that they continue to be viable, as long as oil remains at between USD 35 and USD 45 a barrel. Yet David Zylberstajn, former general director of the Brazilian government's National Petroleum Agency (and, at the time, son-in-law to Fernando Henrique Cardoso, the country's president before Lula), has stated that production from the new fields is only feasible with oil at USD 60.

With so many uncertainties, the development of the fields, which ranks so high on Petrobras' wish list, looks like a very iffy proposition.

That does not bode well for Petrobras as a biofuels development agent - a role that, judging from the numbers on the company's investment plans for 2009-2013, is little more than a pastime.

DATAGRO'S PLINIO NASTARI: CALIFORNIA'S LCFS DECISION SHOULD OPEN DOORS TO BRAZILIAN ETHANOL IN FOURTEEN OTHER STATES

2009-05-04T12:06:00.003-04:00

Plinio Nastari, founder of leading sugar and ethanol consultancy Datagro, believes that the recent decision by the California Air Resources Board (CARB) to approve the Low Carbon Fuel Standards sets the stage for a number of other states to pass similar legislation, with the goal of reducing carbon emissions through the use of clean-burning fuels, like sugarcane ethanol. Mr. Nastari's estimates show that the expansion of the markets for Brazilian ethanol represents about 30% of the total US market for gasoline.

According to a Brazilian business newspaper, Mr. Nastari believes that, "the United States will have to import sugarcane ethanol because (the production of) corn ethanol will not be enough, nor is corn ethanol clean enough to meet the standards approved in California", where the goal is to promote a 10% reduction in the carbon intensity of all fuels by 2020.

BRAZILIAN 2009 ETHANOL EXPORTS TAKE A TUMBLE IN Q1

2009-05-04T11:27:00.006-04:00

A local newspaper reports that the southern state of Parana, Brazil's second-largest producer of ethanol, exported 174 tonnes of ethanol in the first three months of 2009, representing sales of USD 87,646. Over the same period in 2008, exports reached over 75,000 tonnes, which brought in USD 39 million. The blow from this precipitous drop in exports, laid down to the global economic recession, was softened by higher prices for sugar. The data come from the federal government's Agency for International Trade, known as Secex.

The same agency reports that, of the ten products leading the state's exports, only three saw an increase in volumes over Q1 2008. Strong sugar sales to international customers helped make up for the loss of revenue from ethanol. In Q1 2009, sugar exports climbed from 299 thousand to 476 thousand tonnes, representing sales revenues of USD 137 million - a 71% increment over the same period for 2008.