John O’Reilly of Davy Stockbrokers published an industry report yesterday predicting sugar prices are likely to continue to rise due to its use in energy and biochemical sectors, as well as in food.
BP has invested $2bn (€1.5bn) across its renewables portfolio. It has invested €550,000 in three ethanol refineries in Brazil. In the US state of Louisana, BP has built a large-scale demonstration plant to showcase its proprietary technology for its new sugar-based cellulosic biofuels. It plans to licence its cellulosic technology (BP cellulex) in the coming year.
“BP has become a significant ethanol and sugar producer in Brazil with a vertically integrated approach, owning assets all along the value chain from agriculture to milling to distribution,” said Mr O’Reilly. “It has invested $750m in three refineries in Brazil with a capacity to produce half a billion litres of ethanol per annum each. It is also a significant supplier of power to the national grid in Brazil, using waste by-product [bagasse] from milling to generate power.”
BP is just one example of a major oil company developing an interest in sugar. The increased usage of sugar as a fuel source is already very evident in some of the world’s largest sugar producing states.
In Brazil, 54% of cane production is now used for ethanol, up from 13% in 1975. This has been driven by a flex fuel car fleet that now accounts for a greater than 60% (and rising) share of the national light vehicle fleet.
Domestic gasoline prices have been strictly regulated and have thus lagged international pricing by a range of 4-24% over the course of the last year.
The Brazilian government caps the price of gasoline at the refinery as part of a policy to keep inflation under control.
Prices were raised in 2013 but were absorbed by the weaker Real, which made fuel imports more expensive. A new pricing mechanism may be introduced in 2014 that would automatically link gasoline prices to inflation.
“If fully penetrated, hydrous ethanol consumption could more than double from current levels with a consequent impact on cane diversion to sugar and, in turn, the export capacity of Brazil, the world’s largest sugar exporter by far,” Mr O’Reilly said.
Industry commentator Datagro estimates that every 10% move to hydrous ethanol equates to a 7% consumption of total Brazilian sucrose production.
Every 10% shift to flex fuel translates to a 12% consumption of total Brazilian sugar, based on today’s total output.
The Davy analyst noted that these concerns, plus the EU’s abolition of sugar quotas in 2017, were the hot topics for sugar industry experts attending the recent International Sugar Organisation (ISO) conference in London.
The ISO has 87 member states representing 86% of world production, 69% of world consumption and 95% of world exports. This group largely shares the view that, with the likelihood of further European Commission interventions in the sugar markets, it would take an industry supply shock for price inflation to re-emerge in Europe in the near term.
India could have a small impact on global prices, with the possibility of raising its mandatory ethanol blend in petrol from 5% to 10%. India is the world’s largest sugar consumer and the second-largest producer.
India currently consumes approximately 25m tonnes per annum of sugar and produced a similar amount in the 2012-2013 season from 350mt of cane grown by five million farmers. Relative to Brazil, it converts relatively little of its sugar into fuel and biochemicals. If that were to change, the impact on global prices would be considerable.
“The latest ISO conference highlighted how the sugar industry has become increasingly embedded across the food, energy and biochemical sectors,” Mr O’Reilly said..