London, 19 February 2010

Two Brazilian sugar and ethanol producers on Thursday agreed to merge to create what they hope will be the country’s biggest biofuels company. The agreement, to create a group with total investments of R$7.3bn ($4bn) by 2012, follows a $12bn deal this month between Royal Dutch Shell and Cosan of Brazil.

It provides further evidence of the appeal of Brazil’s ethanol market and of confidence that foreign markets for Brazilian ethanol will open up.

Thursday’s deal is between ETH Bioenergia, part of the Odebrecht group, a Brazilian conglomerate whose main activity is construction and engineering, and Brenco, a Brazilian renewable energy group whose backers include Ashmore Energy of Houston, Texas, an investor in energy projects in emerging markets.

Brazil is the second-biggest producer of fuel ethanol after the US but its sugar cane-based industry is more efficient than the US maize-based industry.

This month the US Environmental Protection Agency ( EPA) recognised sugar cane as a low carbon renewable fuel, reinforcing hopes that subsidies and tariffs that deter Brazilian ethanol exports could begin to fall in markets such as the US, Japan and Europe.

The group will retain the name ETH Bioenergia and its ownership will be split between ETH’s shareholders, with 65 per cent of the consolidated company, and Brenco’s, with 35 per cent.

It aims to process 40m tonnes of sugar cane by 2012, producing 3bn litres of ethanol and 2,700 GWh of electricity from co-generation plants, giving projected revenues of R$4bn.

The two groups have invested R$3.8bn in sugar cane production and processing and have projects underway that will absorb a further R$3.5bn by 2012.

Cosan, which ETH Bioenergia will challenge for market leadership, produces 2bn litres of ethanol a year.

José Carlos Grubisich, president of ETH Bioenergia, said the EPA’s decision was “a definitive and unequivocal sign that the Brazilian model of sugar cane ethanol is here to stay.”

Brazil’s market consumes about 3bn litres of fuel ethanol a year. Nearly 90 per cent of new light vehicles sold in the country have “flex fuel” engines, able to run on gasoline or ethanol or any mixture of the two,.

Almost all petrol stations in Brazil sell fuel ethanol, a legacy of a government programme dating back to the 1970s. Gasoline sold in Brazil contains ethanol at 25 per cent by volume.

The system is seen as a model for how other countries could make greater use of renewable fuels. But exports represent only a fraction of Brazilian production, partly because of high domestic demand and partly because of barriers in developed markets.

Mr Grubisich said the EPA’s decision should lead to a removal of barriers in the US and Japan, followed later by Europe, and that the new company would seek investment opportunities in the Caribbean to serve the US market and in Africa to serve Japan.

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By Jonathan Wheatley in São Paulo - Financial Times