Raízen pronounces 5 new vegetation in a €3.3bn contract with Shell

In a major step towards putting its second-generation ethanol (E2G) thesis on its feet, Raízen has just signed a €3.3 billion contract to supply more than 3.3 billion liters to Shell, which controls the company together with Cosan.

To meet the demand, Raízen will build five new cellulosic ethanol plants – a capex of R$ 1.2 billion per plant.

The investment will be made in part with the R$6.9 billion cash Raízen raised in the IPO in August 2021, but the most significant part will be made with project finance.

Today’s announcement should help to reduce skepticism from the market, which currently attaches zero value to the company’s E2G strategy – either because of the high capex involved or because of uncertainty about how long the current E2G premium will last.

Raízen’s share, which came out at R$7.40 in the IPO, is currently trading below R$5.

The contract also accelerates the goal that Raízen has set itself in the IPO. When the new plants are ready – between 2025 and 2027 – the company will have nine E2G plants. The promise in the IPO was to make up to 20 plants in 10 years.

CEO Ricardo Mussa told the Brazil Journal that he is negotiating other such contracts with companies in Europe, California and Japan.

The contract with Shell sets a minimum price for Raízen’s ethanol and provides for a price adjustment linked to the market price upon delivery of the product. (If the screen price is above the floor price, Raízen and Shell will split the premium.)

E2G is produced from sugarcane bagasse – a residue from the production of sugar and first-generation ethanol (E1G). It is considered an “advanced biofuel” – that is, one whose production does not compete with food production, avoiding the ‘food or fuel’ dilemma.

The product is not a commodity. It has high added value, higher margins than first-generation ethanol, and its price has doubled over the last year.

At the time of Raízen’s IPO, E2G was trading at US$700-800 per cubic meter. Today, on the spot market, it goes above US$ 1,300-1,400 per cubic meter. Analysts say that because building the plants takes time, it’s impossible to know if the prize will be there when the plants are ready.

“These contracts will guarantee an adequate return to these plants,” said Mussa. “Once depreciated, they have a very low operating cost.”

The main use of second-generation ethanol is in commercial aviation, as the European Union has created mandates that encourage the use of sustainable aviation fuel (SAF). There are also industrial applications: E2G is raw material for the production of the so-called ‘green plastic’.

E2G emits 80% less greenhouse gases than fossil fuels, 70% less than US corn ethanol and 30% less than 1st generation ethanol.

Raízen owns the technology and is studying licensing it to third parties at a later date to further leverage its return.

Source: Brazil Journal