July 26, 2016 In Strong Spirits

Volume 11 | Issue 2

What Brazil’s Grupo JB – a traditional maker of cachaça and other alcohols – lacks in size, it has more than made up for with the ingenious ways it takes advantage of sugar cane’s by-products. Michael Sommers talks to director Carlos Beltrão to find out more about the alcohol/sugar producer’s innovative diversification strategies.

Although it’s a fairly big fish in the regional pond of Pernambuco where it has been operating for over 40 years, in terms of Brazil’s massive national sugar and alcohol sector, Grupo JB is a small fry. Confesses JB’s commercial director, Carlos Beltrão: “We currently produce 1.8 million tons of sugar cane in a country whose total annual yield is 450 million tons. However, in the state of Pernambuco where we have our headquarters, we produce around 1.2 million tons of the state total of 17 million. Indeed, in Pernambuco, our plant is the fourth largest in the industry.”
“WHITE GOLD”
JB’s healthy performance in its home state is no mean feat when one considers that Pernambuco’s economy was founded on the sugarcane plantations that were installed in this and other Northeastern states as early as the 1530s. Known as “white gold,” Pernambuco’s sugar provided vast amounts of wealth to the Portuguese crown that ruled over Brazil until the early 19th century. Even following independence, Pernambuco continued to rely heavily on its cane crops. In fact, both of Carlos Beltrão’s parents were descended from manufacturers of cachaça – (distilled from fermented sugarcane juice, the Brazilian version of rum is the country’s signature alcohol) – going back for several generations.

It is thus less than surprising that the story of JB began in 1964, when Beltrão’s father purchased an estate in the town of Vitória de Santo Antão, which included a small cachaça mill. When JB’s founder passed away in 1977, his four sons took over the company reigns. By then, the business, which changed its name to JB Distillery Limited in 1981, was one of the biggest manufacturers of cachaça in the Brazilian Northeast. However, at the time, the national cachaça market was quite small. Eager to branch out, the company decided to begin manufacturing alcohol as fuel for automobiles.

The timing was perfect since in 1978, as a response to soaring oil prices, Brazil launched the first cars that ran on alcohol instead of gasoline. By the mid-1980s, however, prices had risen substantially due to suppliers’ inability to keep up with demand. In fact, between 1988 and 1996, Brazil actually had to import alcohol. “Exporting alcohol was prohibited because there wasn’t enough for internal consumption,” recalls Carlos Beltrão. “Meanwhile, because the price of sugar was higher than the price of alcohol, everyone wanted to produce and sell sugar instead. The only way we could export was to import raw cane, refine it here in Brazil and then re-export it.” This is exactly what JB – in conjunction with five other companies – began doing in 1990. It imported alcohol as combustible from overseas and, in return, exported alcohol used for beverages and perfumes, as well as neutral alcohol.

EXPANDING FRONTIERS
Spurred on by its import and export business, production levels grew and JB’s total sales revenues soared: from $5 million in 1990 to $100 million in 1995. Moreover, rapid expansion made it necessary for the company to invest in new cane fields and processing plants. Consequently, in 1996, JB purchased Linhares Agroindústrial S.A. (LASA), a sugar cane and alcohol distillery located in the southeastern state of Espírito Santo (north of Rio de Janeiro and south of Bahia). “In terms of growing sugar cane, Espírito Santo has the same characteristics as Pernambuco,” explains Beltrão. “And LASA is close to one of Brazil’s major ports, which is great in terms of logistics, particularly with regards to exports. Furthermore, while harvest season in Pernambuco is from September to March, in Espírito Santo it lasts from April to October. As a result, we were suddenly capable of producing alcohol throughout the entire year. This was a major bonus for our clients, who would never again run the risk of being without a steady supply of alcohol.”

Indeed, having control over the entire production process has been key to JB. In Pernambuco, the company is largely self-sufficient – planting and harvesting 70 percent of its own sugarcane (approximately 800,000 tons) on an area measuring 62,000 acres. In Espírito Santo, it supplies 100 percent of its own cane, with a yield of 550,000 tons, harvested from 34,600 acres of land. Such control has become essential as JB meets the challenge of being a small, regional producer competing in a sector, where both nationally and internationally, the main players are giants. Says Beltrão: “As a result of globalization of the sector, we’re becoming smaller. A lot of foreign capital is coming into Brazil and many sugar and alcohol plants are being purchased by international interests who are then merging them into large groups.”

NICHE MARKETS
In order to compete with these major groups, JB has adopted product diversification as a growth strategy. After purchasing a neighboring factory in 2003, in Vitória de Santo Antão, JB began producing sugar (its current output is 12,000 110-pound bags of sugar a day). However, it is counting on neither sugar nor alcohol (of which it produces a total of 900,000 liters a day at its two plants) to distinguish it from its competitors. Although the arrival in 2004 of hybrid fuel car engines – which run on alcohol, gasoline, or a mixture of both – has once again given a major boost to Brazilian producers of ethanol, lacking the large-scale resources of its competitors, JB expects its profits to be derived from other sources. Comments Beltrão: “We’re trying to enter all alcohol markets: perfumes, drinks, and our traditional cachaça. But we’ve also begun to explore newer and alternative niches, where we’re pretty much pioneers.”

One such niche is the CO2 market. In 2004, JB purchased technology from an American group with which it began producing CO2 for soft drinks from fermented alcohol. Says Beltrão: “Traditionally carbon dioxide was made by petrochemical or fertilizer manufacturers. In Brazil, we are the first alcohol producer to enter this market. We have Carbo Gás units at both plants and can produce 70 tons of C02 a day in Pernambuco and 48 tons in Espírito Santo. What’s really positive is that this method of production is environmentally sound since it is completely renewable. If we didn’t reuse it, this CO2 would go into the atmosphere. Although it’s a small percentage of our business, it has done very well and we expect its profits to increase by 50 percent over the short term.”

Another lucrative and environmentally friendly niche is the production of energy. After Brazil’s energy crisis of 2001, during which strict rationing was the order of the day, JB participated in an emergency energy program developed by the federal government. It began using the steam given off by the burning of sugar cane bagasse to fuel a 25 MW generator, subsequently taking care of all its plant’s energy needs. In 2004, it went further by installing a second 25 MW generator, thus becoming one of the first alcohol producers in the country to begin selling renewable energy derived from cane’s waste residues to third parties.

Meanwhile, in February of this year, JB purchased Alcoolquímica Nacional, a company acquired from Dow Chemicals that manufactures VAM (vinyl acetate monomer). Located in Cabo Santo Agostinho, Pernambuco, the company currently produces 90,000 tons of VAM, which is used in a wide variety of industrial and consumer products ranging from paints to adhesives. Although currently VAM is made from petrochemical sources, JB’s ultimate goal is to manufacture VAM from alcohol derivatives (which was done in the past and then abandoned). The acquisition – and subsequent investment in alcohol-derived VAM – promises to boost JB’s growth considerably. In 2006, while revenues from sugar and alcohol totaled $80 million, and Carbo Gás yielded $4 million, Alcoolquímica Nacional generated $62 million.

By focusing on these niche markets, JB hopes to achieve modest but steady annual growth rates of between 5 and 8 percent over the next five years. Says Carlos Beltrão: “When you process sugar cane, one-third of what you get is juice, one-third is bagasse, and one-third is comprised of other fibrous residue. Our biggest challenge is to find ways that all of these by-products can be used and reused while creating renewable energy and respecting the environment. In the end, our mission is both complex and simple: to take maximum advantage of everything that sugar cane itself has to offer us.”

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