New Brazil ethanol policy should boost demand, M&A

New Brazil ethanol policy should boost demand, M&A
From Reuters - August 11, 2017

SAO PAULO (Reuters) - An overhaul of Brazil's biofuels policy in coming days, aimed at cutting the country's carbon emissions, should boost demand for cleaner fuels, stabilize the volatile industry and accelerate a recent wave of mergers and acquisitions in the sector.

The new federal program, called RenovaBio, will give fuel distributors targets to cut emissions, which will force them to gradually increase biofuels volumes, according to policymakers, executives and analysts following discussions of the new law.

President Michel Temer will soon announce the program via presidential decree, the Agriculture Ministry said this week, and the law could go into effect next year as soon as new regulations are established.

RenovaBio could be a lifeline to Brazilian ethanol producers who have struggled in recent years to compete with cheap gasoline. It could also bolster sugar prices by encouraging mills to produce more ethanol and less sweetener.

"Our company sees this program very positively," said Rui Chammas, chief executive of Biosev SA (BSEV3.SA), the Brazilian sugar and ethanol unit of commodities trader Louis Dreyfus. "It could mark a relevant change in how ethanol is valued, recognizing positive aspects such as the low carbon footprint."

Ethanol production stagnated in recent years, as Brazil's government, in a failed effort to fight inflation, held down fuel prices which led cane mills to produce more sugar instead.

Brazil's ethanol industry complained that unpredictable fuel pricing policy distorted markets, discouraged investment and forced dozens of mills into bankruptcy. Cane industry group Unica said 80 plants have been idled in Brazil's center-south region since 2010, or a fifth of all mills.

Heavily indebted sugar and ethanol firms have been forced to sell assets to rivals with stronger capital structures, such as Glencore Plc (GLEN.L) and Razen Energia SA, a 50-50 joint venture between Cosan SA Industria e Comercio (CSAN3.SA) and Royal Dutch Shell Plc (RDSa.L).

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