Engineering News

For Caribbean, Rum More Interesting Than Ethanol
Tuesday, July 22, 2008

Although Brazil and the U.S. have urged the tropical countries to use more sugarcane for ethanol, Caribbean producers think making rum is a much better use for the commodity.

After two years of an ethanol boom, the Central American and Caribbean sugarcane producers have yet to turn to ethanol in any way. There has been no movement toward a national gasoline blending policy like those in the U.S. and Brazil or toward an export strategy targeting the duty-free U.S. ethanol market. Nearly all of the ethanol that is exported to the U.S. from the Caribbean originated in Brazil.

"All of the feedstock we process and export as anhydrous ethanol is Brazilian sugarcane ethanol," said Erwin Jones, president of Jamaica Ethanol Processing Ltd.

Rum is higher on the list for their own sugarcane stocks, Jones said.

"The value of bulk ethanol as rum is almost two times the value of bulk fuel ethanol and then there is the incremental value of branding and marketing for the distilleries," Jones said.

Brazil and the U.S. are the only major global ethanol producers. Officials from both countries have pushed the expansion of ethanol's reach in other markets by trying to persuade sugarcane-growing countries to turn their crops into fuel.

The Inter-American Development Bank even launched an ethanol commission in 2006 that put former Florida Gov. Jeb Bush and former Brazilian Agriculture Minister Roberto Rodrigues at the helm in an attempt to work with governments on ethanol production.

Little has been done over the last two years. Some blame sugar subsidies in Central America. Guatemala can sell sugar to the U.S. for around 22 cents per pound when the actual market price is 12 cents per pound for the October contract on the ICE Futures U.S. exchange. That also gives producers in that part of the world more incentive to make sugar than ethanol, said William Maloney, a biofuels consultant at ED&F Man, one of the world's largest sugar and ethanol trading companies. "Plus a lot of these countries in the Caribbean and Central America have no home market for ethanol yet," he said.

Big oil companies in the region have also been reluctant to acquiesce to any political calls to blend ethanol with gasoline, Maloney said.

"They cry about having to invest in blending equipment, which is nothing, really," he said. "If the commitment ever does happen, they'll get behind it because they'll have to get behind it." Once blending is mandated by law, oil companies have to mix the cheaper fuel with the more costly gasoline made at oil refineries.

Expansion of sugarcane crops in the small Central American and Caribbean nations is also limited, said Jones in Jamaica.

"Any massive expansion in processing capacity will have huge environmental consequences, particularly in small states," he said. "The dreamers have not considered these facts."

Those expansionist ideas are mostly Brazil and U.S. attempts to persuade other countries to follow Brazil's ethanol example. The sugarcane-rich Caribbean basin seemed the place to expand, but little in the way of progress has been made either on the policy side or in long-term capital investments.

Meanwhile, the ethanol market in the Caribbean and Central America is nonexistent, and that means Brazil remains the only game in town for the alternative fuel. The U.S.-produced ethanol stays local, and Brazil exports around 15% of what it doesn't consume locally, or around 5 billion liters.

There is some concern among U.S. corn ethanol producers that if Washington removed its $0.54 per gallon tariff on Brazilian ethanol, a flood of new producers would enter the market and put pressure on corn ethanol prices.

"First, even if the Caribbean ethanol processors could deliver on the ethanol promise, you're looking at maybe 500 million gallons (1.8 million liters)," said David Lewis, vice president of Caribbean ethanol consultancy Manchester Trade in Washington D.C.

"Last year, we barely exported 188 million gallons," he said.

Caribbean ethanol can enter the U.S. duty free. There is no limit on sugarcane ethanol exports to the U.S., but there is a limit if that sugarcane ethanol originated in Brazil. In that case, the Caribbean Basin cannot export more than 7% of U.S. consumption, which was around five billion gallons last year.

The tariff on Brazilian ethanol was put in place years ago to cover a $0.51 per gallon tax break for oil companies that blend ethanol. The subsidy is part of the government's agricultural subsidy program, said Lewis, The U.S. Renewable Fuels Association, however, contends the money is really a tax benefit for oil companies who blend the ethanol with gasoline.

"If there is no tariff, now you really give the Caribbean nations a reason to turn to rum and forget ethanol," Lewis said.

Brazil's Sugarcane Industry Association, or Unica, argues that if the tariff was gone, these companies would move much faster in order to provide the U.S. market with ethanol. Companies here say that if Washington removed the tariff it would provide incentives for them to rev up production and expand.

Low sugar and ethanol prices already led to the postponement of four new ethanol mills planned for this year. Of the 31 new mills expected at this point, just 13 are up and running in the on going 2008-09 sugarcane crop.

What the ethanol market in seeing, tariff or not, is a relatively stagnant acceptance of ethanol as an alternative fuel in sugarcane producing nations that could otherwise be making ethanol for themselves.

Some countries, like the Dominican Republic, are starting to blend ethanol with gasoline. The Dominican Republic authorized a 7.5% ethanol mixture in gasoline in March. Others are at least considering it politically as a means to diversify energy sources.

"It's a start," said Lewis. "Rum and sugar are still way more interesting to these guys, so all of the ethanol they are exporting is really made in Brazil."

In 2007, Brazil and the U.S. recruited sugarcane rich, fossil-fuels-poor El Salvador to participate in a pilot project to produce its own ethanol. El Salvador is the No. 2 exporter of ethanol in the Caribbean basin, following Jamaica.

Source: Dow Jones Newswires

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