Brazil’s Ethanol Frenzy Shows Cracks as Raízen Crisis Deepens

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(Bloomberg) — Big oil and global crop traders rushed into Brazil’s ethanol market more than a decade ago with a spate of deals. Now, the most emblematic of those deals is unraveling amid fading enthusiasm for the business.

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Once the country’s top biofuel supplier, the Shell Plc and Cosan SA joint venture Raízen SA faced a credit crisis that culminated last week in a deal to restructure debt worth around 65 billion reais ($12.3 billion). That is set to change the nature of the partnership between the oil giant and the Brazilian group known for its agriculture expertise. 

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Cosan exited talks on a capital injection and may see its stake in Raízen get diluted after disagreements over a proposal to split the business of fuel distribution from the unit that produces ethanol.

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Brazil is the world’s second-largest ethanol producer after the US, and the fallout from the nation’s most well-know biofuels player marks the end of an era of heavy investment in the once dominant sugar-cane fuel. It also underscores how companies’ expectations of profits from a global push to cut transportation emissions haven’t materialized as quickly as anticipated.

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“There was a vision of a world where renewables would grow more quickly and occupy a larger space,” said Ana Bastos, a senior adviser for consultancy J.Pacta who worked for 10 years as an executive at the Brazilian biofuels branch of BP Plc. “It ended up taking longer and growing less.”

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Some of Raízen’s problems have been specific to the company. The joint venture, formed in 2011, made a huge commitment to expand, including with new technology for making ethanol from sugar-cane waste. The cost of those bets would later rise, with Brazil’s elevated interest rates helping push the company’s debt higher. The company said in a court filing last week that there was a “time lag” between financial expenses growing and new investments bringing additional revenue.

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Beyond Raízen’s specific technology issues, there are common challenges to the entire ethanol industry. Booming production of cheaper ethanol from corn in Brazil is putting a ceiling on prices domestically, while exports haven’t been sufficient to address the supply glut. 

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The drawbacks have pushed away other investors, especially crop traders. Louis Dreyfus Co. sold its Biosev sugar unit to Raízen in 2021, and three years later Bunge Global SA exited a Brazilian ethanol joint venture with BP. Now, there are questions on what will be the future of big oil’s bets in the segment.

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“I don’t think big oil is interested in more renewables in their portfolios,” said Marcelo De Assis, an independent oil consultant based in Rio de Janeiro who previously oversaw the economics department at Shell in Brazil.

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Over the past decade, ethanol exports never accounted for more than 10% of Brazil’s production, with that share decreasing in recent years despite the industry’s continued efforts to market ethanol abroad.

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For one, countries in Europe sought ways of restricting crop-based fuels over concerns they could impact food production. More recently, US tariffs hurt exports out of Brazil, while new rules under President Donald Trump discouraged the production of biofuels made with materials outside North America.