SAO PAULO (Dow Jones)--New legislative changes will lead the European Union to increase purchases of Brazil's ethanol in 2007, after dipping 22% last year to about 233 million liters compared to 2005, said the European Bioethanol Fuel Association Thursday.
"It's very difficult to predict what will happen," Robert Vierhout, the general secretary of the European Bioethanol Fuel Association told Dow Jones Newswires on Wednesday evening at an F.O. Licht sugar and ethanol conference in Sao Paulo.
"With increased consumption in the United Kingdom and Netherlands likely -and if prices fall - then I see imports from Brazil rising," he said.
Climate change concerns coupled with high oil prices are spurring EU countries like Sweden and Germany to take measures to increase biofuel use.
In 2005, the EU imported 300 million liters of fuel ethanol from Brazil, or under a third of total EU production of roughly 950 million liters, said Vierhout.
Last year, however, due mostly to a change in Swedish legislation that made it more difficult to use Brazilian ethanol, EU purchases of Brazilian fuel ethanol dropped to 233 million liters, or about 15% of total EU output of 1.6 billion liters.
Now, with new, mandated biofuel targets in the Netherlands, France and the United Kingdom, imports are likely to rise again, said Vierhout.
"If we increase (EU ethanol) production by 50%, then we could produce 2.4 billion liters in 2007 - which is a reasonable target," he said. In that case, "perhaps 25%, or 600 million liters of Brazilian ethanol will be imported."
By contrast, Sao Paulo-based consultancy Datagro forecasts that the EU will buy some 500 million liters of Brazilian ethanol in the 2007-08 season (May-April), for both the industrial and beverages sector as well as fuel industry.
Missed Targets
The European Union missed its planned target to mix 2% biofuel in all fuels by 2005, a target now set to rise to 5.75% mix by 2010.
"We did not achieve that target in 2005, and the basic feeling is that we will never achieve the target by 2010," said Vierhout, noting that the EU's ethanol production capacity continues to be a big question mark, especially given high production costs and the region's primary focus on biodiesel.
But dramatic changes may be coming. Last week, the European Council endorsed a European Commission policy proposal for a binding target of 10% biofuel use in all road transport fuels by 2020.
Given this new target, EU ethanol output via sugar beet, cereals, and other feedstocks may finally take off, despite higher production costs for EU ethanol manufacturers compared to Brazil-sourced ethanol, said Vierhout.
"There are three drivers in the EU - and it's not just about reducing greenhouse gas emissions," he said. "We (also) want to become less dependent on other energy sources and countries and we want to give farmers a new opportunity to enter new sectors."
If the EU were to achieve its medium-term target of 5.75% ethanol in gasoline by 2010, that could require a fivefold increase in current EU production to between 11-12 billion liters of ethanol per year, said Vierhout, adding the EU will unlikely meet the target in the next three years. The EU has 2.2 billion liters of installed ethanol capacity.
Growing Biofuel Use
Independent of the EU target, individual nations are already ramping up their biofuel usage.
For example, the Netherlands this year started a flexible but mandatory 2% mix of biofuels in all fuels. This mix allows producers to use Brazilian ethanol, and could consequently boost South American biofuel imports, said Vierhout.
France just set a target to increase state purchases of flex-fuel vehicles to 15% of all purchases this year and 30% next year. In addition, the country plans to install 500 pumps with an 85% blend of ethanol, or E85, by September.
Sweden, with its thriving flex-fuel car market, changed laws in 2006 that said Brazil ethanol could only be used in E85 blends for flex-fuel cars. The country could change that law in the future under new political leadership, said Vierhout.
The United Kingdom is set to begin a mandatory blend of 2.5% mix of biofuels in fuels starting April 2008.
Last year, the UK imported 93 million liters of Brazilian fuel ethanol, up 10 million liters from the amount imported in 2005, due to local tax incentives that make it favorable for companies to use biofuels.
However, as ethanol prices last season - fed by overwhelming U.S. demand -soared as high as $600 per cubic meter, UK companies found it uneconomical to import Brazilian ethanol, despite tax incentives, said Vierhout. If prices decline, Brazil could benefit, Vierhout said.
Prices have to be competitive to compensate for a hefty EU import tariff of 102 euros per cubic meter for denatured alcohol, (alcohol that cannot be drunk), in addition to a tariff of 192 euros per cubic meter for undenatured alcohol (alcohol that can be used for both the beverages and fuel sector), said Vierhout.
Market analysts said they see Brazilian ethanol prices dropping in coming months as the country's 2007-08 sugarcane harvest (May-April) gets underway.
While Brazilian exports could be between 3.5 to 3.7 billion liters this year, compared to a record 3.4 billion in 2006, prices are likely to be "substantially lower" compared to a year ago, according to Cristoph Berg, director at F.O. Licht.
As long as prices stay low, with the EU increasing its ethanol output going forward, "a 25% import (to EU production) ratio of ethanol seems to be reasonable," said Vierhout.
The EU is also eyeing African, Caribbean and Pacific countries for ethanol supply.
Brazil is the world's lowest-cost ethanol producer.
Source: Grace Fan; Dow Jones Newswires; 55-11-3145-1488; brazil@dowjones.com; Powered By E-signal