peru ethanol mega-project -...

PERUPERUETHANOL MEGAETHANOL MEGA--PROJECTPROJECT

September 2004

THE WORLD THE WORLD

THE BIGGEST BIODIVERSITY – THE LUNG OF THE PLANET

SUSTENTABILITY SUSTENTABILITY

COAST

MOUNTAIN

FOREST

NORTH

CENTER

SOUTH

Agriculture Cattle Forestry Non productive

Total

Worldw ide 60 20 16 7 103Peru 55 16 10 3 84

Percentage 91.70% 80.00% 62.50% 42.90% 81.60%

Localization of MicroclimatesNumber of Microclimates as per aptitude

PERU AND ITS NATURAL REGIONS

PACIFICOCEAN

AREAS OF AGRICULTURAL PRODUCTION IN PERU

NORTH

CENTER

SOUTH

HIGH FOREST1’774.540 Has.

LOW MOUNTAIN2’831.597 Has.

COAST128,000 Km2 (10%)

Pob. 12’591.000 (52%)

MOUNTAIN410,000 Km2 (32%)

Pob. 8’692.000 (35%) FOREST747,000 Km2 (58%)

Pob. 3’089.000 (12%)

SUGAR CANE

The activityData about worldwide production

National production

Sugar Cane worldwide production

Sugar Cane worldwide production (millionof MT)

0

25,000

50,000

75,000

100,000

125,000

150,000

175,000

200,000

225,000

250,000

275,000

300,000

325,000

350,000

375,000

400,000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Mile

s de

TM

Brasil 2003: 386 mill. Tm.

India 2003: 290 mill. Tm.

China 2003: 90 mill. Tm.

Colombia 2003: 37 mill. Tm.

Perú 2003: 8.8 mill. Tm.

EE.UU 2003: 31 mill. Tm.

292 mill. Tm

229 mill. Tm

66 mill. Tm

31 mill. Tm

29 mill. Tm5.43 mill. Tm

Brasil and India are the biggest producers concentrating 50% of the Sugar Caneworldwide production.

Peru has only 0.67%

Worldwide productivity 2003: MT of cane/Ha

Rendimiento a nivel mundial 2003

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

Z im

babw

e

Sen

ega l

Sw

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ndia

Zam

bia

Ma l

awi

Cha d

Bur

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Fa s

oM

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i a

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omb i

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Peru holds the biggest productivity with 124 MT/ha in 2002 and 114.5 MT/ha in 2003.

País 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003Perú 106.4 106.1 112.6 109.4 108.4 108.0 110.0 122.3 123.7 114.5Zimbabwe 107.25 110.97 90.51 108.16 96.22 108.3 98.31 111.9 111.9 111.9Senegal 109.71 109 109.26 109.38 109.51 109.75 107.59 111.25 111.25 111.25Swasilandia 94.65 90.84 98.6 95.39 100.97 108.08 106.43 108.11 108.11 108.11Zambia 109.38 109.17 107.69 107.14 103.33 103.12 106.67 105.88 105.88 105.88Malawi 105.56 105.56 105.38 100 105.56 100 105.26 105.56 105.56 105.56Chad 93.48 95.59 103.27 84.44 83.63 79.31 94.29 100 101.43 101.43Burkina Faso 100 100 100 100 100 100 100 100 100 100Malasia 68 68 68.09 68.09 68.09 68.09 74.84 75.92 75.37 94.12Guatemala 91.6 111.43 87.26 114.85 101.05 93.48 90.95 93.05 93.86 93.91Colombia 83.58 84.69 90.16 93.03 86.4 86.36 82.59 82.86 83.26 84.14Ecuador 64.39 63.55 63.21 55.56 63.64 83.12 69.82 72.44 87.21 77.98EEUU 74.01 74.05 74.3 77.87 82.15 79.66 78.42 75.44 77.89 77.29Brasil 67.22 66.61 66.75 68.88 69.25 68.15 67.62 69.56 71.38 72.82México 69.08 77.57 71.15 73.56 77.54 72.89 71.33 75.75 72.18 70.61Uruguay 56.89 54.54 51.41 62.05 53.94 49.21 53.39 60.86 60.55 61.11Argentina 63.61 60.01 59.33 65.07 63.47 60.73 59.26 61.13 63.46 55.29Venezuela, 60.74 60.74 61.53 61.69 54.7 57.47 58.81 57.33 52.63 52.64Paraguay 50.31 46 48 48.34 48.28 46.95 37.76 40.22 47.75 47.75Bolivia 45.07 47.98 42.75 39.71 40.56 42.41 42.96 44.76 49.12 44.85Cuba 34.59 28.54 33.19 31.21 31.28 34.14 34.97 31.87 33.33 33.33Mundo 62.01 63.03 62.71 64.71 64.92 65.58 63.89 64.80 66.31 65.29 Fuente: FAO, MINAG

Worldwide productivity: MT of sugar cane/Ha

Worldwide cultivated surface (000 of Ha)

País 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003Brasil 4,345.26 4,559.06 4,750.30 4,814.08 4,985.82 4,898.84 4,845.99 4,973.30 5,095.75 5,303.56India 3,420.00 3,870.00 4,150.00 4,170.00 3,940.00 4,054.90 4,219.70 4,320.00 4,440.00 4,300.00China 1,119.41 1,185.56 1,243.65 1,108.22 1,186.94 1,042.38 1,188.59 1,281.01 1,421.80 1,328.00

Pakistán 962.80 1,009.00 963.10 964.50 1,056.20 1,155.10 1,009.80 960.80 999.70 1,086.00Cuba 1,248.90 1,177.40 1,244.50 1,246.30 1,048.50 995.80 1,040.90 1,007.10 1,041.20 1,041.20

Tailandia 799.52 922.71 985.00 980.26 917.60 945.12 921.92 850.00 850.00 970.00México 587.54 573.05 633.61 614.76 630.58 643.15 618.28 623.74 632.22 639.06

Colombia 373.28 377.86 388.19 386.97 393.51 374.03 396.56 403.11 430.00 435.00Australia 338.00 365.00 383.00 401.00 420.00 414.00 419.00 411.00 417.00 423.00

Estados Unidos 379.10 377.30 359.73 369.20 383.27 401.98 417.76 415.94 414.08 403.39Argentina 238.97 294.94 296.67 298.90 305.65 275.00 270.00 265.00 260.00 255.00

Venezuela, 107.37 101.21 104.40 104.21 130.85 127.18 128.61 137.79 131.28 131.28Bolivia 86.51 88.86 91.87 86.76 86.34 87.15 83.84 86.22 96.40 97.00Perú 51.02 59.59 54.43 63.37 52.61 58.13 64.81 60.37 68.05 77.18

Ecuador 105.60 106.21 106.00 90.00 110.00 66.92 77.38 78.05 65.02 72.98Paraguay 55.64 56.00 57.00 57.82 58.00 61.17 59.45 59.58 67.22 67.22Uruguay 3.80 3.70 3.70 3.36 3.10 2.80 2.80 2.90 3.10 2.70Mundo 17,662 18,649 19,492 19,368 19,415 19,323 19,495 19,670 20,180 20,420

Fuente: FAO, MINAG* Participación en el mundo año 2003

Brazil concentrates the 26% of the worldwide cultivated surface.

Peru only reaches only 0.38%.

National average sugar cane, Peru (2003) and Colombia (2003)

Pucalá 8,102.0 13.7 82.6 8.6 100.1 Tumán 9,118.0 14.6 118.6 13.5 110.9 Pomalca 7,638.0 14.0 79.0 7.6 99.4 Casa Grande 16,966.0 16.9 90.2 9.8 107.6 Cartavio 10,303.0 15.6 135.6 14.1 101.9 Laredo 6,899.0 16.6 134.6 16.8 121.0 San Jacinto 5,434.0 15.5 122.2 13.5 109.0 Paramonga 8,106.0 16.7 121.1 13.5 107.0 Andahuasi 3,639.0 15.0 154.6 18.0 116.2 Chucarapi 971.0 20.0 128.2 10.5 84.2 Promedio Nacional 77,176.0 15.8 114.5 12.5 105.7 Promedio Colombia 2003 430,000.0 13.5 84.0 12.8 70.5

Rendimiento azúcar

(Kg/t caña)

Rendimiento azúcar (t/ha)

Area Cosechada (ha)

Empresa

Edad de corte

(meses) 2002

Rendimiento Caña (t/ha)

Fuente: APPAB, Cadenas Productivas de Colombia

Peruvian sugar cane production

Historical data

0102030405060708090

100

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

Años

Mile

s de

Has

.

52 mil Has.1961

77mil Has.2003

Cultivated surface

020406080

100120140160180

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

años

Tm /

Ha

154.6Tm caña por Ha. 1961

114.5 Tm.cañaPor Ha.

2003

Productivity

955,307 963,657

0

200000

400000

600000

800000

1000000

1200000

1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2001 2002 2003

TM

AZUCAR PRODUCIDA Lineal (AZUCAR PRODUCIDA)

Historical sugar production (MT)1930 to 2003

La Libertad y Lambayeque concentrate the 75% of the cultivated surface

La Libertad43%

Lambayeque32%

Lima16%

Ancash7%

Arequipa2%

Production distribution by zone

Activity statistical summary

Fuente: APPAB, MINAG

PERÚ 1970 1974 1980 1990 2000 2002 2003

107.9

9.2

992.5

54,339

169

Caña Molida (millones de Tm.)Azúcar comercial

(miles de Tm.)

Hectáreas (has.)

Rendimiento (Tm./ Ha.)

Kgs. Azúcar / Tm. De caña

7.5 5.6 5.9

48,212 49,137 48,419

102.8 96.0 100.3

7.1 8.5 8.8

770.8 537.4 592.0 724.1 877.6 955.3

64,814 68,044 77,176

156 114 123 110 125 114

102.0 103.2 105.7

SUGAR CANE

PERUPotential for

Ethanol Production

New fields with dripping irrigation current results show a rising productivity in the northern Peruvian coast with thefirst cut between 16 and 18 months (year 2002-2004):

• Cartavio (Trujillo): 220 MT/Ha

• Laredo (Trujillo): 210 MT/Ha

• Andahuasi (Lima): 280 MT/Ha

New experience in thePeruvian northern coast

A pilot test of 12 has. shown in year 2000 with traditional irrigation:

– A production of 180 MT/Ha

– Sucrose over 16%

– Water consumption of less than 20,000 M3 /Ha-year

COMISA ProjectSullana - Piura

In the current supporting properties, 220 MT/ha is being

achieved; and the expectation with "ferti-irrigation", is

superior to 240 MT/ha, with a very high sucrose content.

COMISA ProjectSullana - Piura

COMISA ProjectComparison Agronomic Costs

7.15 10.06 9.99 MT COST IN THE FIELD $

18084.5140PRODUCTION MT/Ha

1,287.80 849.75 1,398.63 TOTAL

68.83 41.57 483.15 OTHERS

943.18 470.42 575.88 SUPPLIES

197.87 204.24 143.35 MACHINERY

77.91 133.52 196.25 LABOR

COMISABRAZILNATIONALCONCEPT

Measured over 12 months

100.00%0.006519,306Total A&G Expenses

2.50%0.00013,306Depreciation

15.36%0.00181,816Others

22.75%0.001121,147Technical Assistance

2.64%0.00014,061Materials

56.75%0.003302,283Personnel

%US$ / ltrUS$ TotalA&G Expenses

100.00%0.0412,839,552Total Production Costs

25.91%0.011993,132Depreciation

5.87%0.002225,045Others

9.06%0.004347,113Technical Assistance

21.74%0.009833,226Supplies

9.32%0.004357,184Chemicals

28.10%0.0111,076,985Personnel (Industry)

%US$ / ltrUS$ TotalProduction Cost

Total Industry Costs per Liter 0.047

COMISA ProjectReferential Industrial Costs for an Ethanol 500,000 ltr/d Facility

Year Lima/Ancash La Libertad Lambayeque Piura Total

2005-2006 4,000 10,000 6,000 20,000

2007-2008 10,000 28,000 30,000 12,000 80,000

2009-2010 40,000 68,000 70,000 22,000 200,000

2011-2015 80,000 140,000 100,000 80,000 400,000

2016-2020 110,000 240,000 150,000 200,000 700,000

2021-2025 150,000 320,000 230,000 300,000 1’000,000

PerúPotential Areas for Sugar Cane

in the Northern Coast(in Hectares)

CASSAVA

PERUPotential Production

CASSAVA CASSAVA –– MANDIOCA MANDIOCA -- YUCAYUCA

A root with every eight months cropin Peru

• Amazonas 11,000 has• Cajamarca 10,000• Cusco 6,000• Huánuco 7,000• Junín 8,000• Lamabayeque 1,500• Lima 1,500• Loreto 36,000• Madre de Dios 3,000• Pasco 5,000• San Martín 20,000• Ucayali 11,000

• Total (partial) 120,000 has

Potential: 1’500,000 has

REGION Ago. Set. Oct. Nov. Dic. Ene. Feb. Mar. Abr. May. Jun. Jul.

Amazonas 12.2 11.3 10.6 14.4 11.8 8.9 7.3 6.7 4.9 3.6 3.2 5.1

Cajamarca 2.8 6.0 7.5 9.5 10.9 10.5 10.5 11.5 10.6 8.7 6.5 5.0

Cuzco 1.3 7.6 38.1 36.6 10.6 2.7 0.4 0.6 0.4 0.4 0.6 0.7

Huanuco 6.9 15.6 19.9 15.9 9.3 6.1 5.5 4.5 5.4 4.7 3.6 2.6

Junín 8.7 17.3 20.1 18.7 8.8 5.1 3.0 3.3 3.6 4.1 4.3 3.0

Lambayeque 7.2 2.6 9.7 11.8 13.2 12.6 7.1 10.9 9.3 4.6 5.6 5.4

Lima 15.8 19.9 14.4 12.0 14.5 3.2 2.7 2.3 3.3 3.8 3.5 4.6

Loreto 9.4 9.3 10.4 10.0 5.2 6.1 5.5 4.5 4.4 9.1 10.0 16.1

Madre de Dios 5.7 6.1 13.3 15.2 8.9 5.7 8.3 7.5 8.6 7.7 7.7 5.3

Pasco 17.7 13.2 18.4 17.2 9.0 0.0 9.1 5.2 2.6 3.5 2.9 1.2

Puno 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

San Martín 6.7 8.8 8.0 9.2 6.9 8.0 9.1 9.3 7.9 9.4 8.5 8.2

Ucayali 6.8 7.7 14.0 11.7 8.5 5.9 4.2 4.2 8.6 9.8 11.8 6.8

Sowing Calendar

REGION Ene. Feb. Mar. Abr. May. Jun. Jul. Ago. Set. Oct. Nov. Dic.

Amazonas 5.0 5.1 5.2 5.4 7.0 9.1 7.7 9.1 10.0 10.1 13.3 13.0

Cajamarca 5.9 9.3 7.7 6.8 4.5 5.8 7.3 9.3 9.8 11.1 11.4 11.2

Cuzco 8.7 8.9 9.4 8.2 8.9 8.1 7.8 7.2 8.1 7.9 8.7 8.1

Huanuco 6.4 7.5 6.7 7.9 9.5 9.4 7.3 11.6 11.3 9.1 7.3 6.0

Junín 5.9 4.9 6.5 6.9 9.2 10.3 8.9 8.1 9.0 10.2 10.1 10.0

Lambayeque 9.6 5.9 6.7 4.1 6.6 5.7 7.4 8.5 9.3 11.5 9.9 14.8

Lima 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Loreto 7.7 7.6 7.7 7.5 7.7 7.4 8.1 8.5 9.4 9.4 10.0 9.0

Madre de Dios 2.8 4.1 8.2 10.3 10.8 10.8 10.8 12.6 12.1 9.1 6.3 2.1

Pasco 9.6 8.7 5.9 9.7 7.8 8.6 10.5 6.2 7.9 7.8 7.6 9.7

Puno 0.0 2.2 5.3 9.8 22.4 25.0 35.3 0.0 0.0 0.0 0.0 0.0

San Martín 6.8 8.7 8.5 8.1 9.2 8.6 8.3 9.1 7.9 8.7 7.9 8.2

Ucayali 11.2 9.9 8.6 7.1 5.6 7.1 5.8 7.3 8.7 8.7 8.6 11.4

Cropping Calendar

• Projected yield: 25,000 to 35,000 Kgs/ha

• Price at industry gate $0.10 / Kg

• Crop Income $1,200.00

• Production cost $500.00

• Gross margin $700.00

once a year

A typical Processing PlantA typical Processing Plant

Cassava ReceptionCassava Reception

ProcessingProcessing

Feeding Process to Fermenting TruckFeeding Process to Fermenting Truck((futurefuture))

SugarCane Axle

PERUVIAN ETHANOL MEGA-PROJECT

COMPARISON SUGAR CANE COMPARISON SUGAR CANE vsvs CASSAVA CASSAVA vsvs CORN CORN AgronomicAgronomic FieldField CostsCosts

Average / Ha as Average / Ha as perper PeruvianPeruvian StandardsStandards

Sugar Cane Cassava Corn(90-200-1000) (180-30-500) (330-10-800-2)

Avrg. Cost / Liter of Ethanol $0.055 $0.093 $0.242

ETHANOL

THE INTERNATIONAL MARKETTHE INTERNATIONAL MARKET

FUEL ETHANOL AS A WORLD COMMODITY?Source: ED&FED&F Alcohol Inc.Alcohol Inc.By William MaloneyDirector of Business Development

Positive Developments

• Increasing Trend Towards Main Trading Blocks

– NAFTA, EU, CAFTA, FTAA

• WTO & Reform in World Agricultural Trade– Reduced Barriers & Subsidies

• Increasing Environmental Awareness – Kyoto Treaty, Greenhouse Gas Reductions

• Technical Acceptance of Ethanol• Generally Higher Petroleum Prices

– Ethanol More Price Competitive

Overview – Key Factors for Success

• Abundance of Inexpensive Feedstocks– Northern Hemisphere – Grains– Southern Hemisphere – Sugar Cane

• Technology – Reduced Costs

• Supportive Political Framework – Tax Incentives – Blending Mandates

Major Ethanol Producers, 2001, thousand m3

2217.801 170

11 4347 347

3 090

1 780

390

120

385

EURussiaBrazilUSAChinaIndiaSaudi - ArabiaThailandSouth African CU

OverviewWorld Fuel Ethanol Production

000 CBM – Year 2001

OverviewProduction by Feedstocks

Grains39%

Sugar Crops61%

Historical Fuel Ethanol Trade Flows

Time Frame Origin Destination

1980’s Brazil, EU (via CBI) USA

1990’s USA, EU, South AfricaEU (via CBI)

BrazilUSA

2000 - 2003 Brazil & EU (via CBI) USA

Historical Fuel Ethanol Trade Flows

Brazil Fuel Ethanol Production

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

18,000,000

1992 1993 1994 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003(Proj)

2004(Proj)

Year

Lite

rs P

rodu

ctio

n

Brazil – Largest Producer, Consumer & Exporter

• Origins in ProAlcool Program of late 1970’s and early 1980’s in response to world oil price shocks

• Sugar Cane based – Cane increase from 7.3 MM MT in 1975 to 45.92 MM MT in 2002

• Produced 12.62 Billion Liters in 2002/03 Crop Year (2.915 Billion US gallons)

• Exported 1.59 Billion Liters in 2002 (420 MM US gallons)• Projected Production in 2003/04 Crop Year is 14.3 Billion Liters

(3.77 MM US gallons)• Project to Export 1.12 Billion Liters (295 MM US gallons) for all uses

Tremendous capability to expand production

Developing Fuel Ethanol Programs

– India – Sugar Cane– Australia – Sugar Cane, Grains– Thailand – Sugar Cane, Cassava– China – Sugar Cane, Grains, Imports– Central America & Caribbean – Sugar Cane– Colombia – Sugar Cane– Peru – Sugar Cane– Colombia – Sugar Cane– Canada – Grains– European Union – Sugar Beets, Grains, Imports?– Japan – Imports

Developing Fuel Ethanol Markets Key Drivers

A PROSPECTIVE VIEW OF WORLD’S ETHANOL´S DEMAND

ACTION

LOGIC

MANDATORY ORINDICATIVE

USE

DIFFERENTIATEDTAX RATES

ENVIRONMENT DEGRADATION

GASOLINE AND DIESEL ADDITIVE TO REDUCE NEGATIVE

EMISSIONS

LESS TAX FOR BIOFUELS/

CO2 TAX

OIL DEPLETION R & D & D HIGHER TAX FOR FOSSIL FUELS

SECURITY OF ENERGY SUPLY

CREATED DEMAND INCENTIVE FOR BIOFUELS

SUPPORT FOR RURAL ECONOMICS

SAFETY SUPPLY OF BIOFUELS

JOBS / RURAL INCOME/TRADE BALANCE

FIG. 2: World Ethanol Markets

0

5

10

15

20

25

30

35

1975

1980

1985

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

Year

Vol

. Mil.

m3

BeverageIndustrialFuel

World Ethanol Market

FIG.6: World Ethanol Markets, 2001-2005

0

5

10

15

20

25

30

35

40

45

2001 2002 2003 2004 2005

Year

Volu

me,

mill

ion

m3

BeverageIndustrialFuel

World Ethanol Market 2001 - 2005

Government sugar policy funds sugar stocks creating structural surplus of 9 million MT – better to convert sugar cane to ethanol

• Added value to agricultural– Reduce urban migration

• Improve environment – Air pollution– CO2

• Replace imported petroleum products• Improve balance of payments• Mandated Demand of 100-150 MM US Gallons per annum at E-

5 Blend• Potential Production much higher – Exports likely

India

Central America• Increase value-added from molasses conversion• Potential agricultural development in new sugar cane

cultivation– Sustain & increase employment

• Reduce imports of petroleum – no oil resources and few refineries

• Foreign exchange earnings from exports, improved balance of payments

• Greenhouse gas reductions – creditsMarket Potential:• Current Market Size (2002):

– E10: 305 MM Liters/Year (80 MM Gallons)

• Projected Market Size (2010):– E10: 460 MM Liters/Year (120 MM Gallons)

European Union

• Kyoto Treaty Compliance• Support Agricultural Economy

Indicative targets for use of renewable fuels have been established • Assumes 5% ethanol in all EU gasoline• Additional renewables from edible oils in diesel, question if

diesel targets can be met, may increase ethanol use further

Potential EU Market is 3 MM liters by 2005 and 9 MM liters by 2010

Large volume of imports likely required to meet targets

12,5%Great Britain

4%Sweden

27%Portugal

6%Neederlands

28%Luxemburg

6,5%Italy

15%Spain

13%Irland

25%Greece

21%Germany

0%France

0%Finland

21%Denmark

75%Belgium

13%Austria

REDUCTION TARGET (%)COUNTRIES

TARGETS OF EMISSION REDUCTION COMMITMENT AS PER THE KYOTO PROTOCOL EUROPE

8%European Community

Japan

• Kyoto Protocol Compliance• Starts regulation with a level of 10% Ethanol replacement in gasoline in year

2005• Lack of Landmass for large scale production• World’s largest importer of alcohols for industrial & beverage applications• Major importer of hydrocarbons – few liquid fuel resources• No conflict with local agricultural interests or domestic ethanol industry

Japan will likely become the world’s largest importer of fuel ethanol

Annual demand in 2005 of 6 MM liters increasing to 8 MM – 12 MM liters

China

• Short of Petroleum• Produces 163 million tones of crude oil a year or 70% of internal needs.

Imports the balance of 30%• Alternative sources are costly, sometimes cumbersome to transport and

distribute, and generally less efficient than oil• Replacements must be found since China’s oil gas reserves could be

exhausted in the next 30 years• China´s foray into ethanol is becoming a big concern• China has a surplus of corn which would be the main raw material for

ethanol

• Kyoto Protocol Compliance. New legislation is promoting the use of ethanol• Started regulation with a level of 10% Ethanol replacement in gasoline in year

2001• Is the world’s second larger producer of corn after USA• Actual production cost of Ethanol from corn over $0.35 / lt.• The use of the fuel ethanol is a strategic move by the Central Government to

promote sustainable economy, social development and environmental protection

• 9 provinces have decided to step forward in the commitment for replacement• Increasingly consumption of imported hydrocarbons• No conflict with local agricultural interests or domestic ethanol industry

China is expected to become one of the world’s largest consumer of fuel ethanolAnnual demand of 4.5 MM liters in year 2005 with a strong increasing projection

China

USA – North America

• Renewable Fuels Standard (RFS)• State & Federal Tax Incentives• Limited Market Access – High duty rates

Renewable Fuels (RFS) to be required by 2010 - 5 Billion US Gallons per annum, thereafter equivalent percentage of gasoline

Imports:• Imports duty-free under quota (7% of market) from Caribbean

Basin Initiative (CBI) beneficiary countries (Dehydrated Brazilian ethanol)

– Current Quota is 500, MM CBM (132 MM US gallons) increasing to 1.300 MM CBM (343 MM US gallons)

• Indigenous ethanol imports duty-free from Andean Trade Preferences Act, CAFTA.

Trade Agreements Allowing Free Trade In Fuel Ethanol

USA - • Andean Trade Preferences Pact • Caribbean Basin Initiative (CBI)• Israeli Free Trade Agreement• Jordan Free Trade Agreement (to be ratified by

Congress)• Central American Free Trade Agreement (Under

Negotiation)• Least Developed Countries

EU - • Andean Pact• Central American Common Market (CACM)• Lome Convention (ACP)• ‘Everything but Arms’ (GSP Lease Developed

Countries)

WORLD ETHANOL TRADE

00.5

11.5

22.5

33.5

44.5

1992 1993 1994 1995 1996 1997 1998 1999

Year

Volu

me,

mill

ion

m3

Sourcee: Berg, Christoph. World Production and Trade: Reforms and Subsidies. World Ethanol 2000 Conference, 9-10 November 2000, London.

World Ethanol Trade

Potential Volumes Traded Internationally

Market Range (Million CBM) Range (Million US Gallons)

European Union 0.3 – 0.9 79 – 237

Japan 8.0 – 12.0 2,110 – 3,168

USA 0.5 – 1.3 132 – 343

Other 0.0 – 0.5 0.0 – 132

Totals 8.8 – 14.7 2,323 – 3,880

Projected Future Fuel Ethanol Trade Flows

Ocean PacificAtlanticOcean

PERU – ASIA PACIFICTHE SHORTEST WAY FOR ETHANOL SUPPLY FROM SOUTH AMERICA

Restrictions to Increased World Trade

• Protections of Domestic Producers & Agriculture– Tariffs & Quota (e.g., CBI)

– Restricted Importation (e.g.,Japan, until new regime established)

– Tariff Classifications - denaturants

• Ethanol Specifications

• Lack of Vibrant World Exchange & Futures Market

Import Tariffs

Country / Trade Bloc Rate of Duty USA $143 CBM + 2.3% CIF Value

($0.54 per US Gallon)

Brazil 21.5% of CIF Value

European Union $206 / CBM Undenatured ($0.78 per USG)$110 / CBM Denatured ($0.42 per USG)

Ethanol Tariff Classification

2207 00 00

Undenatured ethyl alcohol of an alcoholic strength by volume of 80% vol or higher, ethyl alcohol and other spirits, denatured of any strength

2207 10 00

Undenatured ethyl alcohol of an alcoholic strength of 80% or higher

2207 20 00

Ethyl alcohol and other spirits, denatured, of any strength

2208 20 00

Undenatured ethyl alcohol of an alcoholic strength by volume of less than 80% vol, spirits liqueurs and other spirit beverages

Fuel Ethanol Specifications

Characteristic Unit ASTM (USA) ANP (Brazil) Sweden

Ethanol Volume %, min. 92.1 99.3 97.6

Methanol Volume %, max. 0.5 - 0.3

Solvent-washed gum mg/100 ml, max. 5.0 - 10.0

Water-content Volume %, max. 1.0 0.56 0.2

Denaturant Volume % min. & max. 1.96 & 4.76 - -

Inorganic Chloride Content Mass ppm (mg/L), max. 40 (32) - -

Copper Content mg/kg, max. 0.1 0.07 -

Acidity (as acetic acid) Mass % (mg/L), max 0.007 (56) 30 mg/L 30 mg/L

Hydrocarbons Content Volume % max. - 3.0 -

pHe 6.5 – 9.0 - 6.0 – 9.0

World Ethanol Exchange & Futures Market?

• Will likely develop over time as traded volumes increase

• Requires international agreement on fuel ethanol specifications

• Requires liquidity – multiple producers and established markets, though may evolve like sugar, a “dump market” with volumes limited to thsewith non-preferential access

• NYMEX has expressed interest but,

• Major US ethanol producers oppose as they don’t want free flow of information and fuel ethanol to be a commodity

TODAY THERE ARE TRANSACTIONS, BUT NO MARKET

• A TRUE MARKET BY 2005 REQUIRES POLITICAL WILL, NEGOTIATIONS,FOCUSED AND SYTEMATIC EFFORTS, AND STAKEHOLDERS’ CONSENSUS

• BRAZILIAN CAPACITY TO GENERATE SURPLUSES FOR EXPORTS,DESPITE ATTRACTIVE SUGAR PRICES

• BRAZIL AND USA ARE NATURAL LEADERS FOR GLOBAL MARKETBUILDING INITIATIVES

• PUBLIC AND PRIVATE GLOBAL ETHANOL COALITIONS: DIALOGUE,NEGOTIATION AND PARTNERSHIP

• ROLE OF EMERGING PRODUCERS, CONSUMERS AND FUTURES MARKETS:AUSTRALIA, CANADA, CHINA, COLOMBIA, EU, INDIA, JAPAN, MEXICO,RUSSIA, SAUDI ARABIA, SOUTH AFRICA AND THAILAND ... and PERU

• R&D AGENDA, TECHNOLOGY TRANSFER AND NEW MARKETS (NEWGEOGRAPHY AND END-USE)

Prospects for Global Tradein Fuel Ethanol

USA 18 - 20

BRAZIL 15 - 18

JAPAN, all imported 6 - 12

CHINA, partially imported 6 - 12

EUROPEAN UNION 2 - 3

WESTERN HEMISPHERE 1 - 3

OTHER ASIA 1 - 3

CANADA 1 - 1.5

AFRICA 0.5 - 1

AUSTRALIA 0.5 - 1

Prospective Domestic Markets(Fuel Ethanol million m3/yr, 2010)

PerúA forthcoming competitive offer

• Kyoto Protocol Compliance• Should start with a level of 5% Ethanol replacement in gasoline in foreseen by

year 2005. Law still to be regulated• No Ethanol local production as of now• Prospection of development in Ethanol activity from sugar cane in the northern

coast (Internal Demand for the whole country):Years Number Production Internal Demand

(Acc. Has) (Million Liters/year) (Million Liters/year)

2005-06 20,000 3002007-08 80,000 900 3302009-10 200,000 2,520 3702011-15 400,000 5,400 4502016-20 700,000 9,900 5002021-25 1’000,000 15,300 600

• Also prospects the lowest production cost in the world market.

Conclusions• The international trade in fuel ethanol is likely to develop as a

number of contained trade flows taking advantage of existing trade agreements.

• Central America, Andean Pact and the Caribbean are well placed to take advantage of the major markets in the USA and Europe if they can be competitive.

• Brazil is now the natural supplier to the Far East (Japan) and the USA via the CBI; although Peru may have a competitive and comparative advantage due to its lower cost and shorter seaway respectively.

• China market arises as an important target because of its size; specially if volume and lower costs of product and sea transport are offered.

• A truly liberalized global market in fuel ethanol remains today a vision for the distant future – but opportunities exist.

PERUPERUETHANOL MEGAETHANOL MEGA--PROJECTPROJECT

PRESENTATION TO THE CMECCMEC--CHINACHINA DELEGATIONSeptember 2004