University of Texas at Austin SUGARCANE ETHANOL: MAJOR CHALLENGES AND OPPORTUNITIES. Luana Maia. Institutional Relations

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1 University of Texas at Austin SUGARCANE ETHANOL: MAJOR CHALLENGES AND OPPORTUNITIES Luana Maia Institutional Relations Brazilian Sugarcane Industry Association (UNICA) São Paulo, May 02 nd, 2012

2 ABOUT UNICA The Brazilian Sugarcane Industry Association (UNICA) is the leading sugarcane industry association in Brazil. Its more than 130 member companies, voluntarily engaged, represent over 50% of the ethanol and 60% of the sugar produced in Brazil. UNICA has around 60 staff and its expertise covers key areas including the environment, energy, technology, international trade, corporate social responsibility, sustainability, regulation, economics and communications. It has offices in five locations: São Paulo (headquarters), Ribeirão Preto (in the heart of the sugarcane producing region), Brasília (Brazilian capital), Washington D.C, and Brussels.

3 OUTLINE 1. A look at the current domestic market 2. The development of biofuels programs worldwide 3. Sustainability aspects 4. Final Remarks

4 OUTLINE 1. A look at the current domestic market 2. The development of biofuels programs worldwide 3. Sustainability aspects 4. Final Remarks

5 Source: LMC, F.O.Licht s, Secex, UNICA e Rais. KEY NUMBERS - BRAZILIAN SUGARCANE SECTOR Number of mills: 430 Sugarcane growers: 70,000 Direct employment: 1.2 million Sector annual revenue: US$ 48 billion Foreign revenue (Exports): US$ 15 billion % Energy Matrix: 18% - 2 nd source (behind oil) and 1 st source of renewable energy 1 st SUGAR PRODUCER IN THE WORLD 25% of world production 50% of world exports 2 nd ETHANOL PRODUCER IN THE WORLD 20% of world production 20% of world exports

6 BRAZILIAN ENERGY MATRIX INPUT World Energy Supply Structure (%) Natural Gas 10.3% Wood and other biomass 9.7% Other Coal and renewables derivatives 5.2% 4.0% Uranium 1.4% Hydro 14.0% Petroleum and derivatives 37.6% Sugarcane 17.8 % Brazil (2010) World (2008) OECD (2009) Non-renewable #1 Source of Renewable Energy in BR (million toe) Toe: tons of oil equivalent Source: Balanço Energético nacional BEN (2011) and International Energy Agency. Key World Statistics Elaboration: UNICA

7 Sugar (million tons) Ethanol (billion liters) 75/76 77/78 Source: UNICA and MAPA. Note: 11/12* - estimated data. 79/80 81/82 83/84 85/86 87/88 89/90 91/92 93/94 95/96 97/98 99/00 01/02 03/04 05/06 07/08 09/10 11/12* Sugarcane (million tons) NATIONAL SUGARCANE CRUSHING SUGAR AND ETHANOL: HISTORICAL OVERVIEW Proalcool program 1 st phase: strong government intervention; pure ethanol vehicles & distribution Overview of the last FFV decade Automakers decision Sugarcane Sugar Ethanol

8 Millions NATIONAL LIGHT VEHICLE FLEET Today, 12 automakers offer over 90 models of flex fuel vehicles, which already account for almost 50% of the Brazilian light vehicle fleet % 10 50% Flex Fuel Gasoline Ethanol Only Source: UNICA.

9 SUGARCANE PRODUCTS: STEP BY STEP Current technology Sugar Drop-in fuels (diesel, jet fuel, gasoline) Technology under development Cane juice (Sucrose) 3 generation Detergents & solvents Cane stalks Ethanol Cosmetics Sugarcane Bagasse (Cellulose) Lubricants Biopolymers (bioplastics, isoprene, etc) Straw (Tops and Leaves) (Cellulose) Bioelectricity Flavors and Fragrances Food

10 BIOELECTRICITY USE Brazilian potential to generate bioelectricity 2 Itaipus 2nd Largest hydroelectrici ty power plant in the world ONS data indicate a 4% savings of reservoirs for every 1,000 MWa of bioelectricity generated during the dry season (April-November) Note: 1 t of cane produces 250 kg of bagasse and 204 of straw and points, 1 t of cane (bagasse + straw) generates 199,9 KWh for export, Lower Calorific Value (LCV) of straw = 1,7 LCV of bagasse, capacity factor = 0,5 (Koblitz), using a 65 bar boiler. In 2008/09, it should be considered a use of 75% of available bagasse and 5% of available straw and, from 2015/16, a use of 75% of available bagasse and 70% of available straw. Up to 2010, it was considered the energy traded at Energy Auctions in a Regulated Contracting Environment, for 2011 an increment of 1600 MW was considered, and by 2012 an increment of 2000 MW per year. Source: UNICA, Cogen, Koblitz (2009).

11 BIO-PACKAGING FROM SUGARCANE Sugarcane is replacing traditional fossil fuel inputs in the petrochemical industry

12 BIOPLASTICS FROM SUGARCANE Sugarcane is replacing traditional fossil fuel inputs in the petrochemical industry Bio-Isoprene

13 2000/ / / / / / / / / / /11* 2011/12** Million tons DECADE OVERVIEW 1. World financial crisis acquisitions involving affected companies Launch of flex fuel vehicles in 2003 Global interest in ethanol 2. Weather problems in three consecutive harvests Loss of Ethanol: domestic 10.5% competitiveness a.a. for ethanol compared to gasoline Sugar: 8.9% a.a. 600 Stagnation 555 MT Sugar Ethanol - exports Ethanol - domestic use Sourcee: UNICA and Ministry of Agriculture,Livestock and Supply. Nota: 11/12 estimate

14 STRONG CONSOLIDATION Moema Group Higher concentration increases competitiveness (economies of scale and scope) Despite recent M&A, the industry remains fragmented

15 Millions of vehicles Fleet motorcycles (million) WHAT COMES NEXT ETHANOL: ACCELERATED GROWTH OF THE FLEX FLEET Estimate of the Brazilian fleet of light vehicles (Otto cycle) Fleet of motorcycles: 53% of bikes sold, in the first half of this year, were flex 60 81% Flex/total 30 61% Flex/total 50 70% Flex/total % Flex/total Flex fuel Gasoline Ethanol (only) Flex fuel Gasoline Brazil will need to double the supply of fuels (ethanol and gasoline) to attend the demand in 2020 Source: Estimate of UNICA.

16 Sugarcane Production in (MT) SUGARCANE DEMAND SCENARIO To supply 50% of the country s automotive fleet with ethanol (anhydrous+hydrous) and maintain Brazil s current share in world sugar market (~50%): ,2 Billion tons Increasing production Million tons 886 Million tons depends on the ability to restore competitiveness for 400 hydrous ethanol in the / / /21 domestic market Sugar Anhydrous Ethanol Hydrous Ethanol Source: UNICA. Note: the hydrous ethanol is pure sold at the pumps and used without modification by the flex-fuel vehicles, then it competes directly with gasoline by the preference of consumers (this product is 4.9% water), the anhydrous ethanol is blended with gasoline in proportions ranging from 18% to 25% (the anhydrous ethanol has a lower water content - 0.4%).

17 GROWTH SCENARIO IN THE SUGARCANE SECTOR (with restoration of the hydrous ethanol competitiveness) 2010/ / /2021 Sugarcane production (million t) ,206 Sugar (million t) % Exports (72%) (73%) (73%) Ethanol (billion liters) % Exports (7%) (8%) (20%) Bioelectricity (GW average) Share in Brazilian electric matrix (%) (2%) (13%) (18%) ASSUMPTIONS Sugar exports: Maintenance of Brazil s share of 50% in the global sugar market until 2020/21. Ethanol domestic market: 50% of ethanol share in the total fuel consumption by the light vehicle fleet in 2020/21. Ethanol exports: Gradual growth in ethanol exports, aiming to reach the estimated volume in the American mandate for advanced ethanol (13.5 billion liters in 2020/21). Non-fuel Ethanol: Projected demand of 5 billion gallons/year by Elaboration: UNICA, Copersucar and Cogen (2012).

18 OUTLINE 1. A look at the current domestic market 2. The development of biofuels programs worldwide 3. Sustainability aspects 4. Final Remarks

19 WORLD BIOFUELS PROGRAMS Oil consumption Current Mandates In discussion

20 Source: LMC. Elaboration: UNICA. Note: e - estimate e e WORLD ETHANOL PRODUCTION AND EXPORTS PRODUCTION X EXPORTS EXPORTS BY COUNTRY 120 Billion liters 6,0 Billion liters , Production 4,0 Brazil ,0 Others , Exports 1,0 USA 0 -

21 Billion liters Sources: EISA of 2008, U.S. Environmental Protection Agency (RFS-2), Final Rule. US - RENEWABLE FUEL STANDARD 2 Consumption Targets 160 Conventional 140 Non-celulosic advanced 120 Celulosic advanced 100 Biomass based diesel mandate: +136 bln. liters, of which 58% must come from advanced biofuel Biomass based diesel Celulosic advanced Non-celulosic advanced Conventional

22 Billion litres Source: based on the 27 NRAP. Elaboration: UNICA EU LEGISLATIVE FRAMEWORK 10% of renewable energies in the transport sector by 2020 without specific targets for certain renewable energy sources and without intermediate targets. Ethanol estimates according to the National Renewable Action Plans (EU 27) EU import tariffs on ethanol are 0.19 and 0.10 /liter.

23 SUSTAINABILITY INITIATIVES FOR BIOENERGY: A UNIVERSE IN CONSTANT EXPANSION REGIONAL INITIATIVES NATIONAL INITIATIVES (GOVERNMENTAL OR PRIVATE) INTERNATIONAL BODIES INITIATIVES MULTISTAKEHOLDER INITIATIVES CEN European Committee for Standardization EU DIRECTIVE NATIONAL GLOBAL G8+5 FAO OECD IDB CBD IEA IFC UNEP ISO NEN NTA 8080 etha STAR RTFO Renewable Transport Biofuel Quota Law- Fuel Obligation Ordinance for sustainability requirements Greenergy Greenergy Brazilian Bioethanol verification programme 2BSvs Biomass Biofuel Sustainability Source: UNICA. January 2012 (v.6) ISCC BEFSCI Bioenergy and Food Security Criteria and Indicators VSE Verified Sustainable Ethanol BNS Biomass Nippon Strategy RBSA Abengoa RED Bioenergy Sustainability Assurance RFS Renewable Fuel Standard LCFS Low Carbon Fuel Standard CSBP Council on Sustainable Biomass Production Sugarcane Zoning Green Protocol GBEP Global Bioenergy Partnership National Commitment National Commitment for the Improvement of Labor Conditions in Sugarcane Task 39 Liquid Biofuels from Biomass Scorecard IDB Biofuels Sustainability Scorecard Equator Principles Substa-CBD Bonsucro Better Sugarcane Initiative RSB Round Table on Sustainable Biofuels IFC Principles RTRS PC 248 Sustainability Criteria for Bioenergy Rainforest SAN Rainforest Alliance RSPO Roundtable on Sustainable Palm Oil Roundtable on Responsible Soy

24 WORLD SUGARCANE MAP Ethanol production in 100 countries would also enhance energy security by reducing world reliance on only 20 oil producing countries. Sugar

25 OUTLINE 1. A look at the current domestic market 2. The development of biofuels programs worldwide 3. Sustainability aspects 4. Final Remarks

26 SUGARCANE ETHANOL ENVIRONMENTAL PERFORMANCE Advantages of sugarcane ethanol Source Cana-deaçúcar Milho (EUA) Trigo (UE) Beterraba (UE) Feedstock Sugarcane Corn Wheat Beets Energy balance (units of rewable energy per unit of fossil fuel input) Productivity (liters/hectare) GHG reduction (from US and EU legislations) ,000 3,800 2,500 5,500 61%-91% 0%-38% 16%-69% 52% *Note: reduction of avoided emissions with ethanol as a gasoline substitute and calculated according to life-cycle analysis. Source: World Watch Institute (2006) and Macedo et al. (2008) energy balance. Productivity: IEA International Energy Agency (2005), MTEC, EU Commission, EPA and UNICA. GEE: IEA International Energy Agency (2004) and Macedo, I. de C. et al. (2004 and 2008). Elaboration: UNICA

27 Million Ha* LAND USE IN BRAZIL Total Area Protected Area Arable Land Others % 58% 39% 3% Other Arable Land Others 111 Pastures 34% % Crop Land 60 18% Sugarcane % Sugarcane FOR ETHANOL % Ethanol Productivity * Area refers to 2010 civil year Source: ICONE, ESALQ and IBGE. Elaboration: Cosan and UNICA s Today Future

28 SUGARCANE AGROECOLOGICAL ZONING IN BRAZIL 1. It excludes sugarcane expansion in the most sensitive biomes e.g. Amazonia and Pantanal. 2. It excludes sugarcane expansion on any type of native vegetation (Cerrados, Campos, etc.) 3. Authorized areas for sugarcane expansion: 64.7 ml hectares, equivalent to 7.5% of the Brazilian territory (Currently 0.9% of the area is used for sugarcane)

29 SOCIAL AND ENVIRONMENTAL RESPONSIBILITY The Green Protocol is a voluntary agreement established between UNICA and the government of state of São Paulo to end the use of fire in sugarcane harvesting and to adopt other conservation measures, such as the protection of riparian areas. 260 thousand ha of riparian areas are already protected by the sector and 70% of the cane is to be harvested mechanically in harvest year 2011/12. Response to the process of mechanizing the sugarcane harvest to eliminate burning; Project to train and requalify 3,500 workers per year for jobs in sugar mills and ethanol plants as well as to work in other sectors; Similar programs are now being adopted by the mills.

30 SOCIAL AND ENVIRONMENTAL RESPONSIBILITY A trilateral agreement - Government, Private Sector and Labor Unions - which sets around 30 better work practices that goes beyond legislation demand. It is an agreement of voluntary participation where verified companies will be placed in a Positive List in the website of the General Secretary of the Presidency of the Republic. UNICA was the first agribusiness association in the world to publish a sustainability report following the Global Reporting Initiative Framework. GRI Sustainability Report In its last version (2010) it achieved an A+ Grade. Dissemination of the practice within the Sugarcane sector: around 75 mills have now their own GRI Sustainability Report!

31 An international multi-stakeholder certification of best sustainability practices 14 Brazilian mills certified: 1.4% of global surface under cane SOME BONSUCRO MEMBERS

32 OUTLINE 1. A look at the current domestic market 2. The development of biofuels programs worldwide 3. Sustainability aspects 4. Final Remarks

33 FINAL REMARKS (I) 1. Consumer demand and public policies will drive increased use of biofuels. 2. Key factors favoring the commoditization of ethanol: Adoption of targets for the use of biofuels by a growing number of countries Global corporations from a wide range of sectors investing in ethanol production, generating economies of scale and scope Ethanol helps countries achieve emission reduction targets and mitigate climate change, increasing energy security Ethanol can be produced in more than 100 countries (energy diversification and economic development factor)

34 FINAL REMARKS (II) 3. Factors preventing ethanol from becoming a global commodity: Tariffs and trade-distorting measures Excessive non-tariff barriers. Proliferation of sustainability requirements 4. What needs to be done? Repeal fallacious myths and inform about benefits to climate change mitigation Elimination of trade-distorting domestic support mechanisms Increased technical, scientific and economic cooperation between producing countries

35 Thank you