I have said it before, but it is worth reiterating: Brazil is a country of size, contrast, and plenitude. Despite lacking in infrastructure, it has a vast commodity base, which is difficult to articulate. On day four of our trip, the SKAGEN Kon-Tiki portfolio managers and I witnessed first-hand how a wide range of products can be created using apparently identical industrial processes. One company that stands out in this regard is SKAGEN Kon-Tiki holding Raizen, which makes a wide variety of energy products using one input - sugarcane.
We started off by learning about some of the company's key projects through site visits in São Paulo. While charging points for electric vehicles (EV) are starting to appear at filling stations in São Paulo, miracle EV growth is unlikely due to Brazil's infrastructure and distances. Hybrid and full EV vehicles are expected to make up a combined 8% of the fleet by 2040, but EVs are a luxury product in Brazil due to their cost. Instead, the country has a Brazilian equivalent of the European hybrid EV, which is a "mixed vehicle" consisting of conventional fuel combined with more carbon lean biofuels derived from ethanol. Conventional gas sold at pumps is blended with 27% ethanol, and there is potential for hybrid vehicles consisting of ethanol combustion engine and EV in the future.
A strong circular tilt
We also visited two of the factories that Raizen operates in the greater state of São Paulo. Raizen uses sugarcane to make a variety of products, and they have 1.2 million hectares of sugarcane for annual production. They employ a new and disruptive solution called "E2G," or second-generation ethanol, where waste produced in traditional ethanol production, the bagasse, is used to create ethanol gas for direct or electrical use. The E2G process squeezes out an extra 50% output by using sugarcane straw and bagasse waste from conventional ethanol production without using more land. Sugarcane has favourable ESG characteristics compared to alternatives such as corn and grain, and it is not a resource competing for food or fuel purposes. Raizen's core energy products are ethanol for fuel, electricity, and biogas, all with a strong circular tilt, where waste serves as fertiliser for the fields.
EESG - Economy, Environment, Social, and Governance
Raizen is partially owned by Cosan, a holding company that focuses on subsidiaries in its storytelling. During our trip, we took the opportunity to meet with the CEO of Cosan, who explained that being lean on carbon is not only great for EBITDA but also for the environment, which is why Cosan has adopted EESG - Economy, Environment, Social, and Governance. The company is invested in five areas of competitive advantage in Brazil, and it adds value to subsidiaries as an operational investor with clear input on how to improve their performance.
In conclusion, Brazil's commodity base is vast, and companies like Raizen are making the most of it. The use of sugarcane to make a variety of energy products is a good example of circular economy principles, where waste is used to create value. While EV growth may be slow in Brazil, the country has found an alternative in mixed vehicles, consisting of conventional fuel combined with more carbon lean biofuels derived from ethanol. The country's focus on ESG is also encouraging, and it shows that Brazil is not only about size and plenitude, but also about sustainability.