Brazil's Cosan Seeks Bigger Chunk of Ethanol Market
STANFORD GRADUATE SCHOOL OF BUSINESS — Increased competition and falling prices of its signature products will nick this year’s financial results for Cosan, one of the world’s top growers and processors of sugarcane and ethanol.
However, the Brazilian company will continue to work toward “becoming the first global player in renewable energy,” Paulo Diniz, Cosan's chief financial officer, told Stanford Graduate School of Business students on Nov. 14.
Cosan’s average price per ton of sugar has dipped 46 percent compared to the first quarter of last year, Diniz said, while the average price of ethanol has dropped 30 percent during the same period. “The blue sky is over,” Diniz said. “So this is going to be a much more difficult year. A lot of these incentives motivated producers and countries to increase production. So today we do have the success in production that is depressing prices.”
The hour-long presentation by Diniz was part of the Global Speakers Series, sponsored by the School’s Global Management Program. the Diniz appearance was co-sponsored by the Public Management Program.
Diniz said that Cosan’s fortunes soared in 2006, with a 45 percent increase in sugar output and sales of more than 1.3 billion liters (approximately 343 million gallons) of ethanol. “In 2002, we were crushing 13 tons of sugar cane. Today, in 2007, we crush 36 tons,’’ said Diniz. “That was a huge increase. And one of the key ingredients was a free market.”
However, global competitors have also boosted sugar production to fill a gap created after the World Trade Organization reduced exports of sugar from the European Union. At the same time, steadily climbing prices for gasoline and crude oil have ignited interest in alternative fuels, including ethanol. The alternative fuel, which Cosan processes from sugarcane, is used to power “flexible fuel” vehicles that run on gasoline, on ethanol, or on a combination of the two.
Sugar sales represent about 61 percent of Cosan’s revenue, said Diniz. Another 33 percent comes from ethanol sales, while 6 percent comes from cogeneration—taking byproducts from sugarcane processing and burning them, generating steam to produce energy that Cosan uses itself and also sells. As Cosan upgrades from low-pressure boilers to high-pressure ones, the company is able to use one-third of the energy produced and sell the rest, Diniz said.
Demand for ethanol—which can power flex-fuel vehicles—is growing, changing the makeup of Cosan’s business, he said.
Much of that market is right in Brazil, where more than 80 percent of all cars sold are flex-fuel vehicles. With the trend expected to take hold in other countries—including the United States —“we do expect by 2010 that the world ethanol market will be almost 8 billion liters, or 2.1 billion gallons,” he said.
To keep up with demand, Cosan is eyeing expansion. The company, which operates 17 mills throughout Brazil, has grown largely through acquisition of existing sugar mills. Because of “the very fragmented landscape…and a growing demand for energy,” consolidation in Brazil is likely. ”As always, we are going to continue to consider acquisitions,” said Diniz.
He added: “One cannot try to be a global player without having a presence in the major markets in the world. The U.S. is a place where somehow we have to figure out a direct or indirect way to have a presence.”
Diniz said Cosan took “what was perhaps our boldest step” last August, when the company completed an initial public offering in New York and Sao Paulo, raising about $1 billion to fund acquisitions, the construction of new mills and to keep up with soaring demand for biofuels. “That was a very important transaction,” he said.
The Brazilian company is also developing new varieties of sugarcane that can thrive in different climates. By using genetically modified sugar cane, Diniz said the company could boost production from an average of 85 tons per capita to “at least 150 or even over 200. So there will be a major jump in there.
Diniz has been Cosan’s chief financial officer since 2003 and is also a member of the board of directors. With more than 25 years of experience in finance and administration, he has worked for several international companies including Hoffman-La Roche in Brazil, Keramik Laufen in Switzerland, Canada’s Bank of Montreal, and United Technologies-Carrier Corp. in the United States. Before joining Cosan, he was with Telecom Italia group, initially as chief financial officer for TIM Brasil and later as chief financial officer for Telecom Italia operations in Latin America.
Diniz holds a MBA from International Institute for Management Development (IMD) in Switzerland and has a production engineering degree from Escola Politécnica of São Paulo University in Brazil. He also earned a postgraduate degree in human resources from INSEAD in France.