New investments signal turnaround in Brazil ethanol industry

By Reese Ewing

SAO PAULO, Oct 28 (Reuters) - Improved returns from sales athome and abroad are unleashing the first major flurry ofinvestment in Brazil's struggling ethanol industry in nearly adecade, with at least nine companies expanding or building newcapacity.

Medium-sized private mill Rio Verde said it would doubleethanol output over the next two years to capture resurgentbiofuel demand.

Cargill and Odebrecht are the biggest of at least eightother companies investing in expansion in the past months, evenas Latin America's largest economy sinks deeper into its worstrecession in over a decade.

The real's collapse has improved Brazilian ethanol's edgeabroad, and recent increases in refinery-gate prices bystate-run oil company Petrobras and taxes on gasolinehave boosted domestic demand for the biofuel to record levels.

Once completed, Rio Verde's expanded output will account foronly a small portion of Brazil's total capacity, but this andthe other projects are the strongest sign yet that ethanol hasturned a corner after government subsidies of gasoline pricescould no longer be sustained.

"The outlook for ethanol has brightened, even as the broader economy looks more difficult," said Luis Galan,operations manager at the Rio Verde mill in Goias state.

Earlier this year, Rio Verde started commissioning its newethanol unit, which will produce 180,000 liters (47,500 gallons)a day, in addition to its current 300,000 ltr/d output. Another190,000 ltr/d will come in the second phase in 2016 or 2017.

The total 670,000 ltr/d comes to 0.5 percent of Brazil'scapacity of 115 million ltr/d.

To be sure, many of Brazil's 360 mills are in no position tostart building new plants as they struggle with stifling debtaccumulated over the past decade. Many are still skeptical thatthe government has abandoned its practice of suppressing fuelprices to curb inflation, which helped drive nearly 80 mills outof business in the past several years.

But the government is quickly running out of ways to replacefalling revenues in the deepening economic downturn. This makesadditional tax increases on gasoline more likely, which wouldfurther strengthen ethanol's advantage at the pump.

"The sector is finally turning around," said AlexandreFigliolino, head of agribusiness at investment bank Itau BBA.

(Reporting by Reese Ewing; Editing by Lisa Von Ahn)