ETHANOL PRODUCTION
IN SOUTH AFRICA
 World leader in agricultural processing,
including ethanol
 Looking to expand and diversify bioenergy
product portfolio
 Market capitalization of $18.2B and earnings
of $1.7B in 2009
 Positioned for growth opportunities
◦ Invested $6.7B in the construction and maintenance
of manufacturing plants
◦ Low WACC (6.7%) versus high ROIC (11.9%)
indicates strategic capital investments add value to
the firm
Current Oil Demand – 86
million barrels PER DAY
Ethanol displaces more than
1 million barrels PER DAY
2030 Projected Oil
Demand – 116 million
barrels PER DAY
Demand for ethanol expected
to double by 2015
Oil supply is dwindling
Reduces global dependence
on dwindling oil supply and
address climate concerns
As a diversified agribusiness, with existing scale and expertise in
corn processing and a global transportation and distribution
network, ADM has become a market leader in ethanol production.
Factors influencing ethanol demand:
 Oil prices
 Government mandates on ethanol blend levels
Current platforms:
 U.S. is the leading ethanol producer in the world
 Brazil is 2nd largest producer and leading exporter of ethanol in the
world
 U.S. and EU have been primary markets for imports as consumption
increases due to energy demands and biofuel targets
 Asia and India are emerging as major import market targets
 ADM is an industry leader in dry-mill cornbased ethanol production technologies
◦ 7 corn-based mills in the U.S.
◦ 1 sugarcane-based mill in Brazil
 Technology improvements include advanced
water treatment techniques and improved
fermentation processes
Strategy includes expanding ethanol production and developing
business in emerging African markets
 FDI in South Africa meets both of these needs
o Provides new trade platform
o Allows better access to meet growing ethanol demand in Europe and emerging
Asian markets
 Location provides easy access
to shipping routes to Europe
and Asia
 Access to a surplus of corn
 Modern transportation
infrastructure mitigates the
need to develop
transportation routes
 Buying stations located
throughout South Africa make
transport of imports easy
 Costs of Investing in South Africa:
◦ $165M for manufacturing plant
◦ $97.6M in production costs with $176M in sales
annually (based on 110M gallons of output)
◦ 21 days to establish business entity
◦ 1.75 years for construction
◦ 5 years to breakeven
 ADM’s strong cash position makes acquiring
financing for greenfield FDI in South Africa
relatively straightforward
 Opportunity Cost of Investment
◦ Risk-free return on government treasury bills
◦ Short-term Brazilian (9% yield) or other government
bonds
◦ Investment in other market segments
 Must evaluate whether the return on investment
is greater than the risk premium of the project
RISK
AREAS INCLUDE FINANCIAL, TECHNOLOGICAL,
POLITICAL, AND CURRENCY
 Price sensitivity to inputs and outputs
◦ Rising grain prices
◦ Labor rates and relationships
 Unions exist but high unemployment rate (24%)
reduces their influence
 Abundance of low-skilled labor and relative shortage
of high-skilled labor
◦ Energy shortfalls as a result of economic growth
relative to electricity generating capacity
◦ Water shortage predicted to continue
◦ Fluctuating fuel prices
 Risk of power shift to leftist parties in 2014
o
o
In favor of state owned industrial centers, especially in mining sector
Call for stricter land expropriation laws
 Impact of public health issues (e.g. HIV rate) on future market
conditions and health care implications for ADM
 Effect of external political environment
o
o
Expansion of Somali piracy
Decline in Zimbabwe’s political situation
 Rand projected to increase value placing pressure on input costs
 Further decline in US$ values would increase dollar denominated
input costs
 Change in SAF macroeconomic policies leading to increased
current account deficits
 Inflation
Does SA possess a competitive
advantage in ethanol?
 Brazil and US combined dominate world
ethanol production – 89% of global total
United States
Brazil
South Africa
•Corn based ethanol
•Corn subsidies for farmers
and tax credits for ethanol
producers
•Sugar cane based ethanol
•Ethanol production no longer
subsidized by the government
•Non-existent
•No subsidies for farmers or
ethanol producers
•Corn production surplus
•Ad Valorem duty of 2.5% on
ethanol imports
•Secondary duty of $0.54 per
gallon of ethanol
•Recently eliminated tariffs on
ethanol imports
•No existing tariffs on ethanol
imports
•Labor rates 30% higher than
Brazil
•Labor rates 30% cheaper
than US
•High level of unemployment
 Is it possible to establish a competitive
advantage through a change in macroeconomic
policy?
◦ High taxes on ethanol or other energy imports would
hurt low and middle class
 South Africa imports 67% of oil consumed
 Per Capita income is only $10,100 – population can’t afford
to pay more for oil and gasoline
◦ Corn-based ethanol is more expensive to produce and
cannot compete with sugar cane-based ethanol without
subsidies
ADM SHOULD NOT MAKE A FDI
IN SOUTH AFRICA



South Africa does not possess a competitive
advantage in corn-based ethanol
Financial, technological, political, and
currency risk factors increase the risk
premium
Best alternative is expansion of current
manufacturing efforts in the U.S. and Brazil