OVERVIEW & OUTLOOK: Brazilian Sugarcane Industry

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OVERVIEW & OUTLOOK: BRAZILIAN SUGARCANE INDUSTRY by Leticia Phillips, Representative in North America for the Brazilian Sugarcane Industry Association - UNICA. Presentation featured at the 2nd International Conference: Brazil: A pathway into the future from the Emerging Markets Institute at Cornell University's Samuel Curtis Johnson Graduate School of Management and Better Brazil

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OVERVIEW & OUTLOOK: Brazilian Sugarcane Industry

  1. 1. OVERVIEW & OUTLOOK:BRAZILIAN SUGARCANE INDUSTRY Leticia Phillips Representative, North America Washington, September 20, 2012
  2. 2. ABOUT UNICA• UNICA is the leading sugarcane industry association, representing +130 producers and mills in Brazil• Responsible for 50% of all ethanol and 60% of all sugar production in Brazil• Emerging as a leader in the generation of bioelectricity already meeting 2% of Brazil’s electricity demand• International presence, now in Washington & Brussels, to engage in constructive dialogue
  3. 3. KEY NUMBERS - BRAZILIAN SUGARCANE SECTOR  Number of mills: 413  Sugarcane growers: 70,000  Direct employment: 1.18 million  Sector annual revenue: US$ 28 billion  Foreign Revenue (Exports): US$ 16.2 billion  % Energy Matrix: 16% - 2nd source (behind oil) and 1st source of renewable energy 1st SUGAR PRODUCER IN THE WORLD  25% of world production  50% of world exports 2nd ETHANOL PRODUCER IN THE WORLD  20% of world production  20% of world exportsFonte: LMC, F.O.Licht’s, Secex, UNICA e Rais.
  4. 4. BRAZILIAN ENERGY MATRIX INPUT 47.3% 45.5% 44.1% Other Coal and Renewables Uranium 52.7% 54.5% 55.9% Derivatives 4.1% 1.5% 5.6% Natural Gas Petroleum 2009 2010 2011 10.1% and Non-renewable Renewable Wood and Derivatives Other 38.6% Biomass 9.7% Sugarcane 15.7% WORLD (%) Hydro 12.9 7.6 14.7% 92.4 87.1 #1 Source of Renewable Energy in BR World (2008) OCDE (2009) Non-renewable RenewableSources: Balanço Energético Nacional BEN (2011) and International Energy Agency. Key World Statistics 2010. Elaboration: UNICA
  5. 5. LAND USE IN BRAZIL Million Ha* Total Area Native Vegetation Land in Actual Use Other Uses 851 554 260 38 100% 65% 30% 5% Conservation Permanent Other Native Units and ILs Protected Areas Vegetation 204 135 214 Pastures Crop Land 24% 16% 25% 198 60 Sugarcane 23% Sugarcane 7% 9.5 FOR ETHANOL 1% 4.6 0.5% Ethanol Productivity 16.000 12.000 8.000 4.000Source: ICONE, Gerd Sparovek, IBGE, MMA, INPE/TerraClass, Embrapa, PAM2010. 0Elaboration: Cosan and UNICA. 70´s Today FutureNote: ILs = Indigenous Lands. Other Native Vegetation include Legal Reserves (RLs)
  6. 6. RAPID GROWTH OF THE FLEX FUEL FLEET IN BRAZIL Light Vehicles (Otto Cycle) – Million of Motorcycles– – Million of units units 60 30 81%* 61%** 50 25 70%* 40 20 51%* 11%** 30 15 20 10 10 5 - 0 2008 2017 2003 2004 2005 2006 2007 2009 2010 2011 2012 2013 2014 2015 2016 2018 2019 2020 2011 2014 2017 2005 2006 2007 2008 2009 2010 2012 2013 2015 2016 2018 2019 2020 Brazil will need to double the supply of fuel (ethanol e gasoline) in order to attend the demand in 2020Fonte: UNICA. Nota: *frota de veículos flex fuel sobre frota total ciclo Otto.
  7. 7. BIOELECTRICITY: EXPORTS TO THE GRID (MW) 2.4% NATIONAL COMSUMPTION:  almost 6 milion homes/year  2,6 million tCO2 avoided  5% savings of reservoirs during dry 20% months Fonte: UNICA e MME (2011). *Previsão 50% 33% 37% 156%
  8. 8. PROJECTIONS FOR SUGAR PRODUCTION - MT 15,7 MT 13.7 In order to supply the internal 12.2 market and keep 50% 11.0 participation in the world market, Brazil needs to increase 37.4 32.6 24.3 its production in 15,7 MT of sugar 2011/12 2015/16 2020/21 EXPORTAÇÂO CONSUMO DOMÉSTICOFonte: FO.Licht, LMC, Secex e estimativa UNICA. Nota: o volume de açúcar consumido no mercado doméstico Inclui o açúcar contido nos produtosindustrializados destinados à exportação.
  9. 9. SUGARCANE PRODUCTS: STEP BY STEP Drop-in fuels (diesel, jet Current Sugar fuel, gasoline) technology Technology under Cane juice development (Sucrose) Detergents & solvents 3° generation Cane stalks Ethanol CosmeticsSugarcane Bagasse (Cellulose) Lubricants Biopolymers (bioplastics, isopr ene, etc) Flavors and Fragrances Straw (Tops and Leaves) Bioelectricity (Cellulose) Food
  10. 10. U.S. RENEWABLE FUELS STANDARD (RFS-2) 40 35 Sugarcane Ethanol is L O Advanced W 30 Renewable Fuel with E 61% GHG Reduction Billions of Gallons R 25 G 20 H G 15 10 5 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Celulosic Advanced 0.10 0.25 0.50 1.00 1.75 3.00 4.25 5.50 7.00 8.50 10.50 13.50 16.00 Biomass-based Diesel 0.50 0.65 0.80 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 Non-celulosic Advanced 0.10 0.20 0.30 0.50 0.75 1.00 1.50 2.00 2.50 3.00 3.50 3.50 3.50 4.00 Conventional Biofuels 10.50 12.00 12.60 13.20 13.80 14.40 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00Source: EISA of 2008, U.S. Environmental Protection Agency (RFS-2) Final Rule.
  11. 11. 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%): 1,400 1,2 Billion tons 1,200  Increasing production Sugarcane Production in (MT) 1,000 886 depends on the ability Million tons 800 to restore 555 600 Million tons competitiveness for 400 hydrous ethanol in the 200 450 domestic market 340 140 0 2011/12 2015/16 2020/21 Sugar Anhydrous Ethanol Hydrous EthanolSource: UNICA. Note: the hydrous ethanol is pure sold at the pumps and used without modification by the flex-fuelvehicles, then it competes directly with gasoline by the preference of consumers (this product is 4.9% water), the anhydrousethanol is blended with gasoline in proportions ranging from 18% to 25% (the anhydrous ethanol has a lower water content -
  12. 12. NATIONAL SUGARCANE CRUSHING SUGAR AND ETHANOL: HISTORICAL OVERVIEW 45 Overview of 700 40 Proalcool program FFV the last decade 600 1st phase: strong Automakers 35 government decision Sugarcane (million tons) 500 Ethanol (billion liters) Sugar (million tons) 30 intervention; pure 25 ethanol vehicles & 400 distribution 20 300 15 200 10 100 5 0 0 75/76 77/78 79/80 81/82 83/84 85/86 87/88 89/90 91/92 93/94 95/96 97/98 11/12* 99/00 01/02 03/04 05/06 07/08 09/10 Sugarcane Sugar EthanolSource: UNICA and MAPA. Note: 11/12* - estimated data.
  13. 13. DECADE OVERVIEW 1. World financial crisis vehicles in 2003  Launch of flex fuel acquisitions involving affected companies  Global interest in ethanol 2. Weather problems in three consecutive harvests Stagnation Ethanol: 10.5% a.a. 700 Loss of domestic competitiveness for ethanol compared to gasoline 3. Sugar: 8.9% a.a. 600 560 MTMillion tons 500 400 300 200 100 - 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2011/12** 2010/11* Sugar Ethanol - exports Ethanol - domestic use Sourcee: UNICA and Ministry of Agriculture,Livestock and Supply. Nota: 11/12 – estimate
  14. 14. STRONG CONSOLIDATION Moema Group Higher concentration increases competitiveness (economies of scale and scope) Despite recent M&A, the industry remains fragmented
  15. 15. ETHANOL X GASOLINE Consumer prices in Brazil - hydrous ethanol x gasoline “C” Gasoline C 3.0 at the pump 2.5 Ethanol at the pump 2.0 R$/liter 70% parity 1.5 Ethanol price at the mill 1.0 Cost of production 0.5 2006 2007 2008 2009 2010 2011 There are no clear rules to set pump prices for gasoline. Uncertainty drives away investments to expand ethanol production.Source: ANP. Elaboration: UNICA.
  16. 16. OVERCOMING THE CHALLENGES AND SEIZING THE OPPORTUNITIESSector policies needs to be driven by a competitiveness-oriented agenda:• Ensuring predictability, legal stability;• Fomenting construction of greenfields and co-generation;• Investing in innovation and technology.Restore the competitiveness of hydrous ethanol• Gasoline long term price-fixing• Changes to the tax structure (ICMS, Pis/Cofins, CIDE)• Reduction of sugarcane production costs Demand is solid• FFV use of ethanol can increase• New Products and new use• Global demand in expansion• Increase in sugar exports•Supply Growth• Limited in the short term (productivity increase and marginal investments)•Need for significant investment to build new mills• Need for public policies that recognize the positive externalities of ethanol and ensure itscompetitiveness
  17. 17. Thank you www.unica.com.br/en A LOW www.sugarcane.orgCARBON, ADVANCED RENEWABLE FUEL

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