Dan van Zijll

1
Brazil BioFuels Houston Summit
CHALLENGES OF A GLOBAL ETHANOL MARKET
2
Agenda

• Challenges of a Global Ethanol Market
• Agenda
• Global Ethanol Movement Trends
• Tariffs
• CBI
• Duty Drawback
• Arbitrage
• Specifications
• Currency Risk

3
Global Ethanol Movement Trends
Whos shipping Ethanol? Where?
B
B
A
A
B China to U.S. and CBI during 2006
4
Barriers to Movements - Tariffs
Primary Tariffs Impacting Flows of Ethanol U.S.
-- 54 cpg tariff on imported fuel ethanol -
Exception CAFTA / CARICOM indigenous
product - Some relief via CBI and Duty Drawback
Mechanism Europe -- 190 per CBM (1.00 per
gallon) tariff on imported ethanol - Exception
Caribbean / Central America indigenous
product - CBI not recognized by Europe
5
The CBI Concept
Hydrous Ethanol
CBI Hydrous Tank
CBI Plant
CBI Dehydration Facility
CBI Anhydrous Tank
Anhydrous Ethanol
6
CBI vs. direct Brazil Imports
Direct Import versus CBI tolling (current
economics)
7
Duty Drawback Mechanism
How does the Duty Drawback work?
Duty needs to be paid at time of import (/- 3
million for 120 KBBL fuel cargo) Three year
limit to apply for drawback
Importer of record can offset duty in two
ways 1- Export similar product (Ethanol or
Ethanol Derivative) -- One-for-one (ethanol
equivalent basis) -- Minimal amount of this
happening 2- Jet Fuel Export Program --
International flights are Jet Fuel exports --
One unit of Ethanol for every 10 of Jet Fuel --
Refiners have to share duty drawback with
airline -- Most refiners have excessive drawback
credits on their books -- Talk of discontinuing
program in new Energy Bill legislation
8
U.S. Fuel Ethanol Arbitrage

• The Arb (Arbitrage) is open when
• U.S. domestic market is roughly US 0.60 per
  gallon higher
• than imported CIF-priced cargoes direct
  imports (1)
• U.S. domestic market is roughly US 0.25 to 0.30
  per gallon
• higher than imported CIF-priced cargoes and
  buyer has access to duty-drawback (2)
• U.S. domestic market supports CBI economics (3)
  that depend on spread between Hydrous and
  Anhydrous ethanol,
• dehydration costs, and logistics costs (ship to
  CBI country
• and re-export to U.S.)
• Today, the U.S. domestic market is arguably US
  1.75 1.80 per gallon FOB USGC or USAC. The
  only open arb is CBI with very advantageous
  dehydro economics maybe a 15 cpg toll.

9
U.S. Fuel Ethanol Imports
10
Impact of 6.5 Billion Additional Gallons of U.S.
Production

• 6.5 billion gallons of U.S. production is
  equivalent to one of the following
• 12,800 additional 30,000 gallon railcars
  turning every three weeks
• 900 additional 10 KBBL barges turning every
  three weeks
• 18,500 additional 7,000 gallon tank trucks
  turning once per week

Courtesy Jim Jordan Associates
11
U.S. Potential Fuel Ethanol Demand
450,000 BPD 6.9 Billion Gallons per Year
Courtesy Jim Jordan Associates
12
Challenges from Specification Differences
No Global Standard Specification for Fuel Ethanol
European Ethanol production has historically been
synthetic and the EU fuel spec has evolved
accordingly. Their typical fuel ethanol spec
calls for 99.6 ethanol content, BUT also
specifies a max water content of 0.2 along with
allowances for other contaminants. For Brazilian
sugar cane Ethanol (with very low levels of
contaminants), this effectively means Brazil
must produce on-purpose 99.8 ethanol to comply
with EU specs. In the U.S., ASTM 4806 calls for
a minimum ethanol purity requirement of 92.1 but
that already includes 2 to 5 denaturant. U.S.
fuel Ethanol production facilities typically
push out a 98 purity ethanol before adding
denaturant (why spend money to remove water you
dont have to remove?) Additionally, US ASTM
4806 specification calls for fuel ethanol to be
denatured. It is almost impossible to get
undenatured fuel ethanol delivered anywhere from
a U.S. production facility. Europe requires
that Fuel ethanol arrive undenatured.
13
Challenges from Currency Risk
U.S. Dollar / Brazilian Real Exchange Rate
The exchange rate between the U.S. Dollar and the
Brazilian Real has a very real impact on the
export economics of Brazilian Ethanol. Exports
are managed on a U.S. Dollar basis, but obviously
all of the costs incurred by the Brazilian
producers are in Reais. Supply / Demand
factors typically dictate whether the producer
can pass currency fluctuations on. Todays
exchange rate is 1.96 Reais per USD, but it can
fluctuate significantly as can be seen on the
table to the right. Even in the past 3 weeks
there has been an 8 swing.
14
Verticals Global Presence
Vertical Locations
Vertical North America 333 N. Sam Houston Pkwy
East Suite 725 Houston, Texas 77060 281-445-2111