INTERVIEW: Brazil's Raízen sees ethanol producers unable to meet demand

Cellulosic ethanol supply is hampered by a shortage of plants to process EU-compliant biofuel from sugarcane leaves but several new plants in Brazil through 2024-25 should ease the supply crunch, an official at Brazilian sugar and ethanol producer Raízen said in an interview.

Sugarcane is used both in the production of refined sugar and ethanol production, be it first-generation fuel or from the leaves, which counts as a residue feedstock. Which commodity it goes toward generally hinges on prices.

"We have more demand than we are able to close out right now," Paulo Neves, Vice-President Trading at Raízen, told S&P Global Commodity Insights. "The offtake from these for the next 10 years has been fully committed to buyers."

Making cellulosic ethanol -- a second generation product -- involves the production of fuel from bagasse and waste-based feedstock, which is generated during first-generation fuel production. Bagasse is the residual pulp. First-generation ethanol and second-generation ethanol plants are integrated, with sugar production occurring during the E1G process, while E2G focuses solely on fuel production from bagasse.

Technology developed during the last 5-10 years means the leaves can be used for ethanol production and, as an advanced feedstock, complies with the European Union's Annex IX A requirements under the Renewable Energy Directive. Raízen has set a goal to have 20 cellulosic ethanol second-generation plants by 2030. Currently, there are five plants under construction, with their launch expected between 2024 and 2025, and three more plants in progress from a deal with Shell. This will represent an installed annual production capacity of approximately 1.6 million cu m of cellulosic ethanol.

Raízen has already sold 4.3 million cu m of cellulosic ethanol through long-term contracts. This volume includes a contract signed with Shell in 2022, committing to supply 3.3 million cu m until 2037. Long-term contracts represent 80% of each plant's production.

New plants had been commissioned but it would take at least six months and maybe 18 for them to come online, Neves said.

"There is no idle capacity available for more sugar in Brazil, there is no idle capacity anywhere in the world," he said. Several years of low sugar prices stifled investment and now, amid annual growth of 2 million mt/year in sugar demand, there is no spare capacity and prices through the course of 2023 have soared, he said.

Deliveries to Europe

This comes amid increasing scrutiny in Europe upon ethanol arrivals, be they from Brazil or other countries.

Europe is "relevant" as an export destination for Brazilian ethanol but only after California and Japan from crops.

"There is no other Annex IX A feedstock with the economics that cellulosic ethanol has with the volume that it has to help with decarbonization in Europe," Neves said.

First-generation quotas are filled up with domestic production, he added.

European import duties also presented a barrier, he said. Imports to Europe face a tariff of Eur192/cu m ($204/cu m)for undenatured material and Eur102/cu m for denatured material -- which cannot then be used in beverages or other consumables.

Imports of ethanol to Europe in recent weeks have slowed, supporting prices, according to European traders. Platts, part of S&P Global, assessed Ethanol T2 FOB Rotterdam barges at an average of Eur800/cu m through September and October, compared with a January average of Eur752/cu m.

This is an area to watch. The European Commission will introduce retroactive surveillance on imports of bioethanol for fuel over the past three years to better protect EU producers, in light of a recent trend of higher inflows to the Continent, a legislative document published Sept. 15 said.

The decision follows a spike in imports of ethanol to the EU since the start of the decade, with a 45% year-on-year increase between 2021 and 2022 based on TARIC data, the European Commission said.

The US, Brazil and Peru were the top three exporters of fuel bioethanol to the bloc in 2022. Exports from the US and Brazil to the EU surged 96% and 37% respectively between 2021 and 2022, while Peru saw a 13% decrease.

Pakistan, most of whose ethanol is industrial grade rather fuel grade, was the fourth-largest exporter in 2022, but saw the biggest year-on-year increase in exports at 179% over the same period, the EC said.