Ethanol: A basket of opportunities for India

Sudden rush in crude oil prices touching the new highs day on day has influenced the decision of most countries’ governments to search for the alternatives. Also considering the important reason behind such rise in crude oil prices (it touched the high of $119 per barrel), apart from weakness in dollar, i.e. the future forecast of incapability of supply side of oil to fulfill the demand for oil countries can be said as being forced to shift towards more efficient alternatives like ETHANOL.

Apart from concerns over high oil prices, the growing interest in ethanol has other notable motives. These include: the need to diversify energy sources, the desire of many countries to meet their greenhouse gas abatement targets under the Kyoto Protocol and with the idea in mind that the increasing demand for ethanol itself could facilitate export opportunity to the self-sufficient countries.

Global production of ethanol fuel increased by 18 percent to 46 billion liters in 2007, marking the sixth consecutive year of double-digit growth. Developed countries like Brazil, Japan, and the United States are in this industry since the long time. Today, Brazil gets more than 40% of its automobile fuels from sugar cane-based ethanol.

It increased its ethanol production by 21% in 2007 to 19 billion litres. United States produced about 24.5 billion litres and imported an additional 1.7 billion litres, mostly from Brazil, in 2007. Brazil and the United States accounted for 95 percent of all ethanol production in 2007.

Today, this industry is no longer restricted to a few countries and is building momentum in other parts of the world, including China, India, Thailand, EU member countries, and Australia.

In India, ethanol is currently a neglected business but, as also being realized by many economists, it has great future as a world-class producer of Ethanol.

So, is it feasible for India to produce Ethanol when it has been argued globally that diversion of food crops towards production of Ethanol resulted in rise in commodity prices?

First we need to take a look over the basics of ethanol to consider this view.

About Ethanol…

Ethanol is a liquid alcohol made of oxygen, hydrogen and carbon and is obtained from the fermentation of sugar or converted starch contained in grains and other agricultural or agri-forest feedstocks. It is already being used extensively as a fuel additive, and alone or as part of a mix with gasoline is increasing.

The processes by which ethanol can be produced are diverse as it can be produced from wheat, corn, beet, sweet sorghum, sugarcane juice, rice etc.

It is a renewable fuel because it is produced from biomass. Ethanol also burns more cleanly and completely than gasoline or diesel fuel and reduces greenhouse gas (GHG). It is one of the best tools to fight vehicular pollution and also reduces particulate emissions that pose a health hazard.

World’s ethanol production is expected to pass 20 billion gallons with CAGR (Compounded Average Growth Rate) of about 5% from 2008 – 2012. US and Brazil being the leaders in the production of Ethanol are expected to have the most growth in this industry along with the emergence of new ethanol producers in Asia and Latin America.

Trading of Ethanol is also done in the derivatives market in some exchanges like NYMEX under the category of “Energy” and CME under “Chemical”.

Feasibility to produce ethanol in India

In India, ethanol is produced mainly from the molasses, which is the byproduct from the processing of the sugarcane or sugar beet. In October’07, India’s government issued a 5 percent mandate for blending ethanol with petroleum with immediate effect. Recently, the Centre has allowed the sugar mills only to produce ethanol directly from sugarcane juice. Ethanol is currently used to meet the demand of the potable and chemical industries in the country. Ethanol producing states are UP, Karnataka, Tamil Nadu, AP, Maharashtra, Gujarat and Bihar.

The feasibility to produce ethanol can be analyzed very easily by taking into consideration various benefits that can be availed through it. Keeping in mind the importance of sugarcane from India’s point of view, as Sugar sector is the second largest sector in India, one can realize that ethanol industry is a blessing for Country, its Economy, its Citizens on the whole and the Farmers too. Some of the benefits are summarized below.

Firstly, India is the largest consumer of Sugar in the world. Indian sugarcane is currently used to produce sugar for our domestic consumption as well as for exporting to other countries. Still India is producing excess sugar as compared to its demand and this resultant oversupply is creating a downward pressure on the market price of sugar, affecting the economics of the sugar industry and consequently the livelihood of millions of sugarcane farmers that the industry supports.

Surplus cane can be used to produce ethanol as is done in Brazil. Instead of storing millions of tonnes of sugar in a falling market and exporting the balance at very low international prices, the same could instead be used to produce a few billion litres of ethanol.

Secondly, India’s transport sector is growing rapidly and presently accounts for over half of the country’s oil consumption whilst the country has to import a large part of its oil needs. India imports nearly 70% of its annual crude petroleum requirement, which is appox. 110 million tonnes. With oil prices touching a record high, it could have a significant impact on the country’s foreign exchange reserves, along with the increasing losses in the oil sector as the government tries to insulate domestic prices of petroleum products from global price increases.

Thirdly, with existing technologies, production of ethanol from sugarcane has been the most economic compared with ethanol from other feedstocks, and with biodiesel from vegetable oils.
Brazil’s sugar cane-based industry is far more efficient than the U.S. corn-based industry. Brazilian distillers are able to produce ethanol for 22 cents per liter, compared with the 30 cents per liter for corn-based ethanol. U.S. corn-derived ethanol costs 30% more because the corn starch must first be converted to sugar before being distilled into alcohol.

Fourthly, demand for ethanol, globally, is set to increase providing biggest opportunity for sugarcane producing countries to export.

Fifthly, when it comes to the storage quality ethanol is again advantageous as it can be stored for up to 5 years and sugar does not have that long a shelf life. So, in seasons of heavy cane crop, sugar industries can manufacture ethanol and store it. When the crop is limited it can be used to produce sugar, and the stored ethanol can be used for meeting commitments.

Sixthly, as estimated at the present level of petrol and diesel consumption, the ethanol requirement for 10% blend of each of these products means around 6 billion litres per year which would require nearly 90 to 100 million tonnes of additional sugarcane to be converted to produce it, which is around 30% of total sugarcane grown in India as against 55% used in Brazil for ethanol program, providing additional income for the farmers as well as for the country.

Seventhly, the nation can also save million tonnes of carbon emission equivalent every year, which can mean additional income from international carbon trading.

Lastly, according to the estimates setting up of new ethanol capacity to meet the energy demand is far more economical in terms of capital investment than setting up an oil refinery of the same capacity.

So, sugarcane, which is globally under pressure due to the excess production, is the main source for the Indian ethanol industry and its conversion to produce some economical as well as environmental friendly commodity would be very advantageous for India providing no pressure on the supply side of sugar.