Mexico's ethanol ambitions face rocky road

Mexico City (Platts)--17Nov2006

As Mexico's gasoline imports bill threatens to reach $10 billion this
year, President-elect Felipe Calderon has promised to introduce ethanol as a
partial substitute. Yet, the project faces a series of stumbling blocks that
typify the problems the nation faces in its struggles to reach its economic
potential.
On the surface the project seems to be a no-brainer. Following the
Brazilian example, Calderon aims to use sugarcane, whose cultivation and
industrial processing employs nearly half a million workers. The sugar
industry is in crisis and as 400,000 Mexicans enter the US illegally every
year, Calderon has pledged to create jobs and alleviate poverty after he takes
power December 1.
The production of ethanol "can play a major role in keeping people in the
countryside and avoiding their emigration to the cities and the US," says
Rocio Torres of the Energy Research Institute at the Autonomos University of
Mexico City.
With one stroke, the theory goes, Mexico would cut its gasoline import
bill, create new jobs in some of the country's poorest areas, and cut the flow
of illegal emigration.
But first several hurdles have to be crossed. Number one is the question
of legislation. Unlike other state companies, such as Norway's Statoil and
Brazil's Petrobras, Pemex cannot simply decide to add ethanol to its gasoline.
Mexico's state company has to wait for orders from Congress, and a
biofuels bill that would have allowed it to use ethanol as an additive instead
of MTBE, which it currently imports, was delayed on a technicality in the
legislature's last session. The current Congress, which took over September 1,
has yet to table a motion on the issue.
The sugar industry itself is another problem. Yields in the cane fields
are among the highest in the world, yet the antiquated mills produce sugar at
twice the costs of Brazil -- and even in Brazil, ethanol is occasionally more
expensive than gasoline.
If the economics of ethanol are to make sense, Mexico will have to
modernize its sugar industry. One man who might be able to do that is Alfonso
Romo, the Monterrey-based magnate who plans to join with other business
leaders in investing between $500 million and $1 billion in a project to
produce ethanol.
Romo is heading an agricultural experiment in the southern state of
Chiapas to determine which products are best suited to ethanol production.
When ethanol is used as a substitute for alcohol, a relative cheap conversion
is required for most automobiles. But, Romo said recently, "as a 15 percent
additive to gasoline, any car in Mexico can use it without the need for
special equipment."
Calderon's project ignores the potential of corn, largely because Mexico
is already a major importer from the US, principally for animal feed, and corn
-- like oil -- is a politically sensitive issue in Mexico, which considers
itself the ancestral home of the grain.
That has not, however, stopped two corn-based ethanol projects being
developed in the northwestern state of Sinaloa. Ironically, the most advanced
is that of Zucarmex, a company that owns four sugar mills. Equally ironically,
the 50 million gallons of ethanol that Zucarmex aims to produce by 2008 is
destined not for Mexico, but for markets in California and Arizona.
--Ronald Buchanan, newsdesk@platts.com

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