Ten questions for the future of ethanol business

Bioethanol is produced in several countries, being the USA (producing around 50 billion liters mostly from corn) and Brazil (producing around 28 billion liters mostly from cane) responsible for almost 80% of the global estimated production of 100 billion liters (2014). This article explores what happens in these two countries and raises 10 questions about the future of this global industry.

The largest producer and market today, the USA, has a mandate in the USA fixed 13.2 billion gallons as target in 2012. But with the declining gasoline consumption that came from 142 billion gallons in 2007 to 134 billion gallons in 2011 and maximum level of 10% allowed to be added the blend wall is lower than this amount. Environmental Protection Agency (EPA) approved in 2011 a blending of 15% (E15), but only for cars manufactured after 2001, clearly advertised and offered in separated pumps. These challenges made E15 more difficult to be implemented, and it can only be found in less than 50 stations.

Although ethanol uses less than 5% of world’s grain production, in the USA it reaches almost 40% of corn’s output, generating a lot of complains from meat producers. The communication of ethanol in the USA and the lobbies against it are much more challenging than in Brazil.

The second largest producer and market, Brazil, has ethanol consumption driven by a flex fuel fleet (can use gasoline or ethanol) of almost 20 million cars,growing by3 million new units per year. Ethanol price is linked to oil prices, but in Brazil, in the last couple of years, the price of gasoline is kept below current international prices, as an effort of the Government to control inflation. This policy damagedPetrobras (state owned oil company) andethanol industry, since it compresses ethanol prices to a maximum of 70% of gasoline prices (due to lower mileage/gallon of ethanol). The Brazilian Government also can alter the blending level of anhydrous ethanol mixed on the gasoline, from 18-25% depending on the cane production, the feedstock source of Brazil.

After this snapshot about the two major producers and markets of ethanol I will share my 10 big questions that may shape and even change the future of this market:

1 A report released in UK shows that China will pass the USA as the biggest oil importer. With the extensive sales of new cars, and oil consumption in the growing truck fleet, it is expected that in 2020, 70% of China’s oil needs will come from imports, around US$ 500 billion. The number of cars will jump from 20 million in 2005 to 160 million in 2020 (Wood Mackenzie). What will be China’s influence in oil prices and the role of ethanol, since most of the largest cities are already facing tough pollution situation?

2 Concerns regarding environmental issues, global warming and the instability of oil prices have led a growing number of countries to add ethanol to their fuel matrix. What to expect? Will this movement continue creating blending markets for ethanol all over the world?

3 India is signing a 5% mandate to blend ethanol to gasoline. What will be the future of ethanol in India? Having a lot of sugar cane, and with current sugar prices, will India have a more aggressive policy on ethanol to substitute oil imports, copying the Brazilian example?

4 What will happen to the ethanol mandate in the USA? If changes occur, how could them impact the future domestic consumption of ethanol?Will E85 be economically feasible and conquer the 11 million flex fuel cars running in the USA (out of a total of 240 million cars) in the places where fuel pumps are available? If the amount produced in the USA exceeds the blending target,will exports of ethanol from the USA be economically attractive?

5 Classified by EPA as an advanced fuel, and receiving special tax treatment, what will be the role of sugarcane ethanol in the USA?

6 Will cane productivity growth coming from promising innovations allow to produce 3 or even 4 times more ethanol with the same area used and turn this ethanol much more competitive?

7 If the current flex fuel fleet in Brazil runs to a petrol station and fills up the tank with ethanol, it consumes almost 10 million tons of cane. In 2021 it is expected that the fleet will be of 50 million cars, and 40 million will be flex fuel, probably the largest in the world. If 50% of these cars use hydrous ethanol, the market can be of 33,6 billion liters in 2021. Anhydrous ethanol blended to the gasoline at a proportion of 25% can be of 13,6 billion liters, up from 8,4 billion in 2013. What will happen in the Brazilian internal market of ethanol? Will it conquer flex fuel car drivers?

8 Will cellulosic ethanol be feasible in the short term, challenging the feedstock used today to produce ethanol (mostly cane, corn and beet)?

9 What will be the impact of shale gas on the USA ethanol market and in the global market in the long term?

10 Which innovations can create substitute products that might endanger the future of ethanol as an energy source?

Although these questions emerge, the future of global bioethanol market may be promising. According to some estimates, market may move from 92 billion liters consumed in 2012to 165 billion liters in 2020, mostly consumed in North and Latin America. But the questions are tough to be answered, making it really difficult to predict if this positive future will happen.

The author is professor of strategic planning and food chains at the School of Economics and Business, University of Sao Paulo, Brazil (www.favaneves.org) and international speaker. Author of 25 books published in 8 countries and in China, “The World on the Tongue”.