Brazil's government vowed on Monday to work with the private sector to boost investment in the ethanol sector, giving a major vote of confidence to an industry that has struggled recently despite immense promise.
The head of Brazil's ANP energy regulatory agency, Haroldo Lima, told a major investor conference the best way for the government to prevent regular shortages in the sugar cane-based biofuel was to provide the conditions so that investment could increase "not in the medium term, but in the short term."
The state-run development bank BNDES announced that it would provide 30-billion to 35-billion reais ($19-billion to $22-billion U.S.) to finance the sugar cane sector through 2014.
The enthusiastic, business-friendly message from Lima and other officials including Energy Minister Edison Lobao came as a surprise, given that Brazil's left-leaning government assumed regulatory control of ethanol for the first time earlier this year. Some investors in the sector had feared stronger government intervention, such as setting production targets.
"It's important to consider that the sector is going through a new phase of challenges," Mr. Lobao said. "These are challenges that together, government and business, we are going to face and overcome."
Mr. Lobao said the government is working with private-sector representatives to formulate a regular 10-year investment plan -- a period that is expected to see demand for ethanol roughly double in tandem with Brazil's booming economy.
Yet, despite high prices for the biofuel and a massive expansion in the domestic fleet of cars that use it, Brazil's roughly $30-billion a year sugar cane industry has struggled with stagnant investment and insufficient supply growth since the 2008-09 financial crisis.
Officials from President Dilma Rousseff's government have criticized ethanol producers for what they describe as a failure to invest and plan -- and, thereby, a failure to prevent cyclical ethanol shortages that prompted a near-revolt among consumers at the pump earlier this year.
After growing at an annual average rate of 10 per cent since 2000, cane output in Brazil rose by no more than 3.3 per cent per year starting in 2008, when the global financial crisis hit hard several companies that had leveraged to expand.
Luciano Coutinho, the head of the BNDES, said he was "very optimistic" about the future of the sector -- an important endorsement from the institution that is by far the industry's biggest long-term lender.
Mr. Coutinho agreed that the top priority should be to expand supply. "There won't be any lack of support from the federal government to make that happen," he said.
Mr. Coutinho said the next wave of investments through 2012 should be focused on cane output, since crushing capacity is more than sufficient for the moment. After that, he said investments should focus on expanding existing mills, with new mills possible later this decade.
As Brazil's economy booms, the domestic auto fleet is expanding at a torrid 20-per-cent annual pace. Meanwhile, the percentage of vehicles that are flex-fuel -- which can run on any mixture of gasoline and/or ethanol -- is expected to rise to 86 per cent by 2020 from its current level of 45 per cent, according to Unica, Brazil's sugar cane industry association.
Unless the ethanol industry starts growing at a faster pace, Unica estimates that there could be an annual cane deficit of 400 million tonnes by 2020/21 -- compared to current production levels of 650 million tonnes.
"We're working with the government, looking at ways we can get back to expanding again," Unica president Marcos Jank said in an interview prior to the event. "We'll be discussing this at the conference."
Multinational companies including Royal Dutch Shell, Noble Group and Glencore have poured billions of dollars into the sector over the past year, although they too have focused more on acquiring existing mills than expanding production.
Other companies represented at the conference include BP PLC, Total, Petrobras, Shree Renuka Sugars and Louis Dreyfus.