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Analysis

A Willing Industry without a Market

Wed, 02/19/2014 - 08:43

The National Energy Strategy states that it is important to substitute fuel imports with biofuels to reduce greenhouse emissions and enhance Mexico’s energy independence. According to Benito López, General Director at Biomex, alternative fuel sources have seen little support in Mexico compared to Brazil and the US. This has changed since the current administration has shown its support for renewables, and the biofuels industry must seize the moment. According to Biomex’s statistics, Mexico imports approximately 150 million liters of ethanol per year for these purposes. Small plants and the sugar industry produce ethanol in Mexico to supply these markets, with production reaching 60 to 70 million liters per year. This is not significant considering the market demands up to 250 million liters per year. This means that Mexico’s high ethanol demand is largely being met through imports.

López claims that while previous administrations failed at creating a market for biofuels, the private sector came up with many ideas to kick off biofuel production hoping that PEMEX would become a consumer. Most of these projects turned out to be unprofitable. Some plants were built that could not operate as the use of corn was forbidden while other plants worked with sugar cane, a very expensive raw material. Some companies operating in Mexico have tried to cover the demand once anticipated from PEMEX, and the private sector is ready to meet potential demand once the public sector launches new bids to buy biofuels. “PEMEX approached us to obtain a better understanding of Mexico’s ethanol supply capacity, in order to avoid failed bids,” says López. PEMEX representatives needed to know if projects complied with environmental regulations and if the types of land use would need to be modified since Mexican legislation forbids changing land use from agriculture for human consumption to biofuels production. If all these requirements are met, PEMEX will try to find viable biofuels projects in the country to raise new bids.

Land use remains the main issue for biofuel producers in Mexico. The country’s Biofuels Law states that the impact on food production must be minimized. Despite the legal specifics, López says there is no available suitable land for biofuel production, therefore the industry has to focus on existing land. SAGARPA states that marginal land should be used for biofuel production, meaning low-quality lands that are currently not being put to productive use. The international debate over whether land should be used for human consumption or industrial purposes has slowed down the development of the biofuel sector globally, but López believes well-planned biofuel projects could be compatible with both land uses.

Some of the issues regarding land use can best be understood by drawing comparisons. In Mexico, it is stated by law that a single producer is eligible to use 100 hectares. At such a rate, it would take 2,500 Mexican producers to match the land used by a single producer in Brazil. Brazil is a world leader in ethanol production, due to the large areas designated to grow sugar cane and create economies of scale. The country’s sugar cane costs are regulated by the law of supply and demand. In contrast, the price of sugar cane in Mexico depends on a government decree. This makes the country unable to compete with producers such as Brazil in the global market.

The law pertaining to biofuels, published in 2008, explains the role and responsibilities of the Mexican government and the Inter-Secretariat Commission, composed of five different ministries. These organisms have been working since 2008 but their activities have been hampered by the fact that PEMEX was the only potential ethanol buyer. López admits that PEMEX has to pursue its mandate, and therefore cannot subsidize the biofuels industry or buy more expensive additives. Developers of potential biofuels projects have to juggle a number of balls at once. In order to produce agricultural products for biofuels, candidates must inform SAGARPA one year in advance, specifying the location to ensure proper land use and no deforestation. Biofuels are required to be sustainable, which involves an evaluation by SEMARNAT. It is important to consider the area where inputs will be produced and the location of the plants, since raw materials should not be transported long distances. Finally, the end user must be relatively close to production facilities to avoid the transportation of large quantities of biofuels in diesel-powered trucks.

Different ministries have been working in order to establish the legal infrastructure required. SAGARPA has done its part by promoting investment in biofuels projects with support programs to ensure inputs, SEMARNAT has given the go-ahead for several projects, and SENER has started a program to begin mixing biofuels with gasoline. These elements paint a promising landscape, but López points out that the biofuels market in Mexico is still very weak.

The plant Biomex is building in Tamaulipas is slated to create close to 1,500 jobs during its construction stage and 2,500 jobs during the operational phase. The firm attributes its ability to compete with international prices to its experience in the agricultural sector. “Our project is the only one that is considering sorghum as a raw material because of our experience with this grass. We produce approximately 35% of the sorghum in Mexico,” explains López.