Sugar prices may have fallen sharply over the past year -- from 18 cents per pound to 10 -- but appetite for the sweet stuff is growing among foreign investors, who are streaming into Brazil seeking a piece of the world’s biggest sugar and ethanol market.
This month, Cosan, the biggest South American ethanol producer, is slated to list on the New York Stock Exchange and raise some $2 billion with a stock offering. And Goldman Sachs announced in July that it will invest $209 million for a minority stake in Santelisa Vale, Brazil’s second-largest ethanol and sugar group, in advance of an expected IPO.
The Cosan offering “is very important,” says Plinio Nastari, president of São Paulo°©based consulting firm Datagro. “It will enable investors to put money in this industry without having to go through the process of buying a mill.”
Other companies are likely to follow Cosan’s example, Nastari predicts. Although expectations of a record harvest have depressed sugar prices, the value of each ton of cane-crushing capacity rose from $75 to $115 in ethanol-related mergers and acquisitions over the past year, he estimates.
“The ethanol market is going to drive the investment, not the sugar hedge. And the ethanol market will continue to grow,” predicts Nathalie Hoffman, managing member of the Progressive Energy Policy Group, a consulting firm based in Marina del Rey, California.
Brazilian domestic demand is growing, and many analysts expect that more governments in the U.S., Europe and Asia will require the use of blended ethanol-gas fuels. New Japanese regulations require a 3 percent ethanol blend in gasoline beginning in 2010. Business conglomerate Mitsui & Co. is in talks with Brazilian oil company Petrobras about a plan to construct what would be the world’s first ethanol pipeline, from the cane-growing states of Goiás and São Paulo to the port of São Sebastião.
“Brazil has gone from being a funny country using ethanol to a world model,” says Patrick Funaro, director of the Cayman Island°©based Bioenergy Development Fund, a private equity fund created by Société Générale in 2005 that expects to raise $1 billion by June 2008 to invest in biofuels.
Several similar funds have sprung up in the past few months, including Brazilian Renewable Energy Co., formed in February by an all-star cast that includes film producer Steven Bing, supermarket magnate Ron Burkle, famed venture capitalist Vinod Khosla, America Online founder Steve Case and former World Bank president James Wolfensohn, along with Brazilian investors. The group ponied up $200 million to launch the company and eventually aims to raise $2 billion and produce 1 billion gallons a year of cane-based fuel.
Ethanol has its critics, of course. Human rights activists have drawn attention to the harsh working conditions for the 1 million laborers in the cane fields. Environmentalists worry that fuel crops will displace food crops and encroach on the Amazon ecosystem.
Brazil’s president, Luiz Inácio Lula da Silva, has moved to address those issues and maintain a favorable climate for investors. Last month the government announced a plan to map existing cane plantings and prohibit new fields in any part of the Amazon. “There will be no sugarcane in Amazon biomass,” said Agriculture Minister Reinhold Stephanes. In the same month the Labor Ministry’s enforcement squad rescued 1,108 cane cutters from a plantation where they were overworked and housed in crowded, dirty quarters.
