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Cablegate: Brazil Biofuel Update, June/July 2006

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DE RUEHBR #1461/01 2001802
ZNR UUUUU ZZH
P 191802Z JUL 06
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC PRIORITY 6091
INFO RUEHRI/AMCONSUL RIO DE JANEIRO 2486
RUEHSO/AMCONSUL SAO PAULO 7490
RUEHRG/AMCONSUL RECIFE 5128
RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RUCPDO/USDOC WASHDC
RHEBAAA/USDOE WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHRC/USDA WASHDC

UNCLAS SECTION 01 OF 02 BRASILIA 001461

SIPDIS

SIPDIS

STATE PASS USTR FOR MSULLIVAN
DEPT FOR EWHITE OES/EGC AND PKELLY OES/STC; OES/ETC GTHOMPSON; BSC
WPOPP
DEPT PLEASE PASS TO SLADISLAW DOE

E.O. 12958: N/A
TAGS: TRGY SENV ENRG KSCA ETRD EAGR BR
SUBJECT: BRAZIL BIOFUEL UPDATE, JUNE/JULY 2006


BRASILIA 00001461 001.2 OF 002


RISING EXPORTS
--------------

1. Brazil's main sugarcane-producing center, in the southwest region
of the country, exported a record 428 million liters of ethanol in
June 2006, in contrast to 268 million liters of ethanol over the
same period last year. Most of the region's exports went to the
United States, which has been importing large volumes of ethanol
this season due to the elimination, in May, of the country's use of
the gasoline additive MTBE. According to the technical director of
the Sao Paulo Sugar and Alcohol Producer Association (UNICA),
Antonio de Padua Rodrigues, the region is likely to export 1.5
billion liters by September, and will have to revise its 2006-2007
ethanol export estimates, which forecast 1.9 billion liters of total
export. Rodrigues added that it is possible that Brazil will export
2.5 billion liters still this season. U.S. demand accounted for
over 60% of the direct shipments in June.

PETROBRAS MOVING IN
-------------------

2. On June 30, 2006, the Administrative Council of Brazilian
state-run oil company Petrobras approved and launched a program of
new investments aimed at leading Latin America in oil, gas and
biofuels production. The company is planning on investing US$ 87.1
billion in new projects between 2007 and 2011. Company CEO, Jose
Gabrielli, justified the investment by saying that Petrobras wants
to lead the world in biodiesel production. The total estimated
investment for the development of renewable energy sources and
biofuels is US$ 0.7 billion.

CARGILL TOO
-----------

3. Two major Brazilian dailies recently reported that American
company Cargill Inc. concluded a US$ 70 million deal to purchase a
63% stake in Cevasa, a sugar and ethanol mill in Sao Paulo. The
company's chairman in Brazil, Sergio Barroso, is quoted as saying
that Cargill has been analyzing the sugar and alcohol industry in
Brazil for some time and that becoming more active in this promising
sector is a logical step for the company. Barroso further mentioned
the high degree of competitiveness reached by the Brazilian sugar
cane industry through its technological, industrial and agricultural
expertise. The company's decision is strategic due to the recent
announcement by U.S automakers to double production of vehicles
using the flexible-fuel technology by 2010.

DIESEL OPTIONS
--------------

4. The Brazilian newspaper Estado de Sao Paulo also ran an article
saying that Petrobras will test the first samples of bio-diesel made
from bovine sebum, estimated to be cheaper than the bio-diesel made
from soybeans. Petrobras will receive 31 million liters of the new
fuel through the end of the year. According to the producer of the
fuel, Carlos Zveibil Neto, bio-diesel can be made from various
oleaginous substances, such as the bovine sebum. The fuel is an
Italian invention, which Brazilian producers have received a license
to use and produce.

5. Petrobras also announced the development of a new diesel fuel
mixed with vegetable oils that will sharply reduce the country's
need for imported diesel. Petrobras said that the new fuel, called
H-Bio, is cheaper when compared to the diesel produced only from
petroleum. H-Bio was developed over 18 months of tests utilizing
oil from sunflower seeds, cotton, castor beans and, mainly,
soybeans. According to Petrobras CEO Gabrielli, H-Bio is a very
important for Brazilian independence in energy and, initially, the
country will save as much as US$ 240 million annually (25% of the
country's importing of the product) until 2008 on oil imports. The
new H-Bio fuel is different from bio-diesel, which is also produced
with vegetable oils. In June, Minister Furlan predicted to
Secretary Gutierrez that by 2008, approximately 20% of Brazil's soy

SIPDIS
oil will be exported for this purpose.

JAPANESE FINANCING
------------------

6. The International Cooperation Bank of Japan will finance over US$
600 million for the production of ethanol and biodiesel in Brazil.

BRASILIA 00001461 002.2 OF 002


Half of this amount will be invested in expanding production in
three Brazilian states and the other half will finance biodiesel
projects in the Northeast region of the country. Japan imported
317.8 million liters of ethanol for industrial purposes and has been
a significant consumer of the Brazilian fuel since the passage of a
2003 law, which allowed for a 3% mix of ethanol in gasoline.

WILLIAMSON

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