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ARCHER DANIELS MIDLAND

ARCHER DANIELS MIDLAND. ETHANOL PRODUCTION IN SOUTH AFRICA. BACKGROUND. 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

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ARCHER DANIELS MIDLAND

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  1. ARCHER DANIELS MIDLAND ETHANOL PRODUCTION IN SOUTH AFRICA

  2. BACKGROUND • 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

  3. MARKET CONDITIONS

  4. ETHANOL PRODUCTION 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

  5. TECHNOLOGY: OVERVIEW • ADM is an industry leader in dry-mill corn-based 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

  6. ADM’s ASSETS ARE POSITIONED FOR GLOBAL GROWTH • Strategy includes expanding ethanol production and developing business in emerging African markets • FDI in South Africa meets both of these needs • Provides new trade platform • Allows better access to meet growing ethanol demand in Europe and emerging Asian markets

  7. SOUTH AFRICA • 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

  8. INVESTMENT COSTS • 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

  9. OPPORTUNITY COST • 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

  10. FINANCIAL & TECHNOLOGY RISK • 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

  11. POLITICAL & CURRENCY RISK • Risk of power shift to leftist parties in 2014 • 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 • 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

  12. COMPETITIVE ADVANTAGE • Does SA possess a competitive advantage in ethanol? • Brazil and US combined dominate world ethanol production – 89% of global total

  13. ANALYSIS OF COMPETITIVE ADVANTAGE • 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

  14. RECOMMENDATION • 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 • ADM SHOULD NOT MAKE A FDI • IN SOUTH AFRICA

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