As Japan Studies Brazil Ethanol,Brazil Traders Bet On US

You may have read elsewhere that Iran is going forward with a full-scale uranium enrichment program. This of course has the oil market in a tizzy as crude is trading at a 7 month high of about $69.17 a barrel. Predictions for summer oil prices, which are always higher than normal, are that the price of oil will stay in the high 60's, possibly higher depending on whether or not we attack Iran's aforementioned nuclear sites.

So now would be an excellent time to re-examine our alternative fuel possibilities:

Brazil's state-owned oil firm Petrobras SA (PBR) on Monday signed a new agreement furthering ethanol export studies with Japanese trading company Mitsui (8031.TO), but local traders and analysts say they are far more excited about the U.S. market these days.

"Forget (Japan)," said Tarcilo Rodrigues, the director of Sao Paulo-based Bioagencia consultancy. "The U.S. is the big buyer this year."

"The top buyer of ethanol will definitely be the U.S.," agreed a local trader, adding that the possibility of the U.S. reducing its 54-cents-per-gallon direct ethanol import tax is looking more likely in coming months.

There are several reasons for a new Brazilian burst of enthusiasm about U.S. ethanol purchases, as well as lessened interest in Japan, say local traders.

For one, as the U.S. this year phases out its use of gasoline additive MTBE, which contaminates water supplies, its demand for a clean-burning oxygenate such as ethanol could sustain world ethanol prices between $500 and $550 per cubic meter, traders said. That is as much as 60% higher than a rough average of $350 per cubic meter last year, said traders.

"I think we'll have fewer exports this year, given the popularity of flex fuel cars on the local market, but U.S. demand will be high, supporting prices," said a Sao Paulo trader.

At the same time, the U.S. - which last year mandated an increase in renewable fuels to 7.5 billion gallons by 2012 - is projected to need plenty of Brazilian ethanol in future years, as demand outstrips supply even with extra U.S. ethanol-producing capacity estimated to come online.

"The U.S. is seeing Brazil as less of a threat and more as a complementary producer of ethanol these days, which means that they could lower their ethanol tariff," said Rodrigues. "Japan is different. As a country that doesn't produce ethanol, it wants to guarantee that Brazil can supply its market before starting purchases."

"These are different methods of buying ethanol, and while Japan is still studying the feasibility of fuel ethanol, we're already selling to the U.S.," Rodrigues added.

Other traders noted that despite Japan's ongoing viability studies, it may take years before the country finally agrees on guaranteed purchases of Brazilian fuel ethanol.

"Japan has been dilly-dallying about buying ethanol from Brazil since 2001," said a Riberao Preto trader. "I don't believe that they'll start buying fuel ethanol anytime soon, now that prices are far higher than they were five years ago."

"Japan will only become a fuel ethanol importer when other countries, such as India, also agree to supply ethanol," said another trader. "If I were Japan, I wouldn't rely solely on the Brazilian supply."

Still, in the medium- to long-term, prospects look good for a Japanese contract with Brazil, say Petrobras executives.

In March this year, Petrobras set up a joint venture with state-owned Japanese firm Nippon Alcohol Hanbai to export ethanol. The new company, Brazil-Japan Ethanol Co., serves as Petrobras' agency in Japan.

Meanwhile, in May 2005, Petrobras, Mitsui and Brazilian iron-ore giant Companhia Vale do Rio Doce (RIO) also jointly signed an agreement to study ethanol logistics in Brazil.

The new memo of understanding signed on Monday between Petrobras and Mitsui occurred during the visit of Brazil's Trade Minister Luiz Fernando Furlan to Japan.

Petrobras has estimated that Japan could import between 1.8 billion to 6 billion liters of ethanol, depending on whether the government mandates a 3% to 10% mix of ethanol in its gasoline.

In 2005, Japan bought roughly 315 billion liters of Brazilian ethanol, but solely for use in its chemicals and alcoholic beverages industries, according to data from Brazil's Agricultural Ministry.

By contrast, however, the U.S. in 2005 purchased roughly 260 million liters direct from Brazil, and an additional 454 million liters duty-free, under the Caribbean Basin Initiative, which allows ethanol exports from El Salvador and other countries to enter the U.S. tax free.

Brazil is the world's largest sugar producer and exporter and the world's No. 2 ethanol producer after the U.S., but No. 1 ethanol exporter.