Challenging Times for Biofuel Firms in South America

(Biofuels International) Slowing growth forecasts for South American economies look set to present a sustained challenge to biofuel investors and developers in the region, not least in Brazil where a weakening of Government resolve on biodiesel blending rates has angered producers.

After reporting an estimated 6.7% growth ‘rebound’ in Latin America and the Caribbean (LAC) in 2021, the World Bank’s latest Global Economic Prospects (GEP) publication projects a slowing of LAC growth to 2.6% this year and 2.7% in 2023.

With the region having benefitted last year from rapid progress on Covid vaccinations and a sharp drop in new cases, the Bank’s downbeat forecast for the next two years is a contrasting reflection of a “sluggish labour market, a tightening of macroeconomic policies, and softer external demand”.

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On the natural impact front, for example, parts of Argentina, Brazil, Chile, and Paraguay have all recently experienced their ‘worst droughts in decades’, again according to GEP’s analysts. This is prompting a switch back to fossil fuels to produce electricity, much of which has typically been generated in the past from hydropower across these countries.

B10 downgrade

On the political front, meanwhile, the Brazilian Government’s decision in late November last year to reduce the country’s biodiesel blending rate to 10% (B10) for the whole of 2022, drew immediate protests from producer and industry bodies.

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“The B10 decision dismantles the biodiesel programme and condemns thousands of Brazilians to death by diseases related to pollution, especially those linked to the use of imported fossil diesel,” said Ubrabio’s CEO, Donizete Takasaki.

The move certainly appears to fly in the face of RenovaBio, the Brazilian Government’s high-profile initiative to help drive the country’s renewable energy growth towards a set of extremely ambitious 2030 targets. This included a pledge to deliver a 70% expansion of biofuel production and consumption in Brazil by the end of the current decade.

Progressive biodiesel blending steps were part and parcel of hitting this objective with the launch of RenovaBio in 2017 adding momentum to a process, which started at B2 in 2008 and was due to reach B15 in 2023.

Having climbed to B13 in 2021, however, with the promise of B14 to follow in 2022, the policy has rather fallen apart in recent months.

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With each 1% of blending advance being calculated to be worth 600 million litres a year of additional production, the industry’s anger at the Government’s B10 downgrade in 2021, and subsequent standstill for 2022, is easy to understand.

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Brazilian biodiesel producers are also coming to terms with a new direct sales and supply system which was introduced on January 1, 2022, replacing the country’s former auction process. Industry leaders wanted the switch-over delayed to address a lack of concrete rules for the direct system, alongside concerns over future manufacturing and fuel taxes.

As it is, the new system came into effect as planned and was promptly declared a success by the National Petroleum Agency, based on the signing of deals to deliver 957 million litres of biofuel in January-February this year. This represents an increase of about 36% above estimated demand for the period.

Given that committing to 36% more product than you’d expect to be able to sell doesn’t usually stack-up, it will be interesting to see what happens when the next round of direct deals is struck.

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In Argentina, for example, 2021 saw the end-of-term conclusion of the country’s previous Biofuels Law and the introduction of a new law running though to December 2030, complete with a change in regulations which has given the Government the freedom to cut biodiesel blending to 3%, if necessary.

With B10 having previously operated in Argentina, albeit cut to B5 when the new law was enacted, the B3 “minimum option” was introduced to give the country’s Secretariat of Energy the authority to lower the blend rate if it believed that economic conditions required a reduction in fuel prices.

In relation to bioethanol, the new law mandates a blend rate of 12%, with output volume divided evenly between sugarcane and corn feedstocks.

However, the Energy Secretariat now has the authority to reduce the volume coming from corn ethanol by up to half, if necessary.

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In Colombia, meanwhile, producers have had to cope with a constantly changing range of ethanol blending rates over the past 12 months.

The country’s government cut levels from E10 early in the year to a low of E4 in September, passing through E7 and E6 on the way.

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Optimism remains

Nevertheless, there remains an upside to most stories, or at least an optimistic view to be considered, a point perfectly made by Erasmo Carlos Battistella, CEO of BSBIOS, when he addressed COP26 in Scotland in December 2021. Speaking from the Brazil Pavilion at COP26, Battistella stressed the need for countries to invest in research and development to encourage biofuels as an immediate option for the global transition to a cleaner energy matrix. READ MORE