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July 2, 2007 10:32 pm

Sweet attraction of Brazil’s biofuels

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It is a crackly phone line between São Paulo and Hong Kong but the satisfaction in Ricardo Leiman’s voice comes across loud and clear.

“The facts speak for themselves,” he says. “People [such as] Archer Daniels Midland and Bunge have been looking for years. [But] we have the agility to move quickly. We have bought our plant and are already doubling it in size.”

Mr Leiman, a Brazilian, is chief operating officer of the Noble Group, a Hong-Kong based commodities handler and processor with operations linking the Americas, the Middle East and Asia.

It already handles about 10 per cent of Brazil’s ethanol exports. This year it spent $70m to acquire a sugar and ethanol mill in São Paulo state, the heart of Brazil’s sugar and ethanol industry. Total investment at the unit is expected to reach $200m.

Yet Mr Leiman’s view of his bigger rivals’ tardiness may be exaggerated.

Foreign and Brazilian private equity and other investors are rapidly assembling sugar cane-based portfolios.

Cargill, the US agribusiness group, last year entered a joint venture in a sugar and ethanol mill; rumours are rife that it is in the midst of a further acquisition. ADM, also of the US, is building a biodiesel plant in Mato Grosso state. It recently said it was seeking acquisitions in sugar and ethanol.

Among the big US-based traders only Bunge says it has no assets in the sector, though it, too, is widely understood to be looking.

Overshadowing them all is a recent announcement by Odebrecht, a diversified Brazilian construction group, which said it was preparing to spend up to R$5bn ($2.6bn) over the next five years on sugar cane production and processing.

“The market is extremely agitated,” says José Francisco Davos, director for business development at Dedini, a manufacturer of equipment for sugar and ethanol mills based in Piracicaba, São Paulo state. “Every mill in Brazil is coming under strong attack from potential buyers.”

Dedini itself is rumoured to have been approached by private equity buyers, although Mr Davos says that, while it would listen with interest to any offer, none has been made.

Instead, Dedini is preparing to go public in the next year or two.

In Brazil, the number of mills in operation is expected to increase from about 335 today to about 425 by 2012. Before the Odebrecht announcement, Unica, an industry association, said forthcoming investment would amount to $15bn.

Driving the deals, in the first instance, is the Brazilian market. Brazil is the world’s 10th biggest economy and one of the biggest consumers of fuel ethanol. More than three quarters of all new cars can run on ethanol, gasoline or any mix of the two, while petrol sold at the pumps is nearly a quarter ethanol.

With car output increasing and the annual rate of economic growth edging up to about 4.5 per cent, the local market will absorb much of the new ethanol production coming on stream.

But the dream of many investors is that Brazil will become a “green Saudi Arabia”, supplying the world with a new alternative to fossil fuels.

On the face of it, it has the capacity. Production can expand many times without, for example, threatening the Amazon rainforest, where the climate is hostile to sugar cane.

The biggest obstacles to export growth are in developed markets, where much less efficient ethanol producers are protected by subsidies and import tariffs, for example of 54 cents per gallon in the US.

If the US is to realise President George W. Bush’s aim of increasing ethanol consumption to seven times current US production by 2017, it will have to accept imports. Globally, legislation will be required to make ethanol available at the pumps, on its own or as a significant part of petrol.

Nevertheless, investors are confident this will happen.

“It’s a political decision that individual countries will have to take,” says Mr Leiman at Noble. “There is a conflict of interest between [fossil fuel] distributors and the newcomers. But we are optimistic that the mandates will be put in. The trend is clear.”

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