Monday, March 19, 2007
Whether or not you believe in global warming, it's clear that ethanol – particularly sugar-based ethanol – is attaining global importance as an energy source.
The biggest player in this market is Brazil, which has converted 40% of its automotive fuel to ethanol. Today, Brazilian motorists can choose between blended (25% ethanol, 75% gasoline) and pure (100%) ethanol at the pump.
Brazil began to focus on the alternative fuel back in the '70s, when the oil crises decimated the country's economy. At that time, Brazil imported 80% of its oil. And when the crisis hit, Brazil's GDP growth dropped from 14% in 1973 to 5% in 1975.
To make certain this never happened again, the Brazilian government pushed to develop ethanol technologies. The idea caught on, and by 1984, 95% of Brazilian auto production consisted of pure-ethanol vehicles. By 1988, Brazilians were consuming 1.7 gallons of ethanol for every gallon of gasoline.
The industry suffered a serious setback in the '80s, when oil prices fell and sugar prices rose. Brazilian producers began kicking up oil production, resulting in a shortage of ethanol. Since most Brazilians were driving ethanol-only automobiles at this point, the shortage ticked them off almost as much as the oil shortage in the '70s.
The Brazilian ethanol industry went nowhere for the next 10 years until the "flex-fuel vehicle" – a car that can use ethanol and gasoline interchangeably – hit the market. Since 90% of the country's fuel stations had the infrastructure in place to sell ethanol, the cars were a huge hit. Within three years of their release, four of out every five cars built in Brazil were flex-fuel.
Brazil's sugar-based ethanol has the lowest production costs in the world, far lower than the cost of corn-based production in the U.S. Because of this, it's the largest exporter in the world, sending 20% of its annual production abroad.
One particular ethanol play you should keep an eye out for hasn't hit the market yet. But it will soon. It's called Brazilian Renewable Energy (Brenco for short) and it's run by Philippe Reichstul, ex-CEO of Petrobras, Brazil's formerly state-owned oil giant.
The company is attracting some pretty big names.
Vinod Khosla, cofounder of Sun Microsystems, is one. Khosla left Sun in 1985 and has since become a very successful venture capitalist. Khosla is heavily invested in the Brazilian ethanol industry. Brenco is his latest find.
Another owner is supermarket billionaire Ron Burkle. Burkle has a history of spinning off ventures for huge gains. Using his investment firm Yucaipa, he turned his $5 million fortune into over $4.3 billion in just 17 years' time.
AOL's founder, Steve Case, also owns a stake. And Brenco just completed a private-equity offering of $200 million last week.
Regardless of your political slant or your views on global warming, this is a company worth watching. And if you're looking for publicly traded ethanol companies, look in Brazil, where ethanol is already a hit.
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