Government and industry bodies first teamed up last August to find a mix which would be clean, commercially viable and have the side-benefits of stimulating flagging demand for alcohol and cutting Brazil's bill for diesel imports.

They came up with an unusual combination -- diesel and alcohol distilled from sugarcane.

In preliminary tests, an experimental mix using 10 per cent hydrous alcohol showed a minimum loss of engine pick-up and significant reductions in smoke, soot and particle emissions.

According to Alfredo Szwarc, co-ordinator of the project, the results so far have been encouraging from both technical and environmental viewpoints.

"Up to the moment, the results have been quite satisfactory. But we're still working on it and the final results should be in September," Szwarc said.

"We still have togo through some more preliminary phases to check viability before entering the commercial part," he told Reuters in a telephone interview.

The first phase of the programme, under the auspices of the science and technology ministry, ends in September when recommendations should be made on technical merits. Sao Paulo's Technological Research Institute conducts the tests.

The second phase ends in May and will comprise commercial tests on urban vehicle fleets. The state/private group has spent around $1 million on the tests so far and the funding is expected to continue for another year.

Proposed mix to cut high air pollution in key cities

Local governments across Brazil hope the alcohol/diesel mix will help reduce air pollution, a leading cause of sickness in major urban areas.

Early tests showed a 22 per cent drop in carbon monoxide emissions against regular diesel. Particle emissions fell by 35 per cent, soot by 37 per cent and black smoke by 59 per cent.

These advantages were offset byfalls of 3.5 per cent in fuel efficiency and five per cent in engine torque and power. But Szwarc said the cost-benefit ratio of the proposed mix was still favourable, especially in view of the health benefits.

In the industrial capital Sao Paulo, for example, more than half the air pollution is caused by vehicles, the worst of which are buses using a low-grade diesel and spewing fumes into city streets daily.

The death rate always rises in winter months due to respiratory problems, particularly among children and the elderly. Legislation is already in force which forbids one-fifth of drivers to use their cars on weekdays.

City buses likely to be first vehicles to use new mix

Industry sources said the first vehicles likely to use the mix would be city buses, probably in Sao Paulo state, as they could be more easily monitored than long-distance trucks.

"I would say that our first market would be the urban bus...that's the first point of interest," Szwarc said.

"The whole programme should endin May...if then the conclusion's been reached that the mixture is perfectly viable, we'll start with the urban bus fleets in Sao Paulo state," said Claudio Manesco of the Union of Sugar Cane Agro industry (Unica).

Unica, the association of sugar and alcohol producers of the state of Sao Paulo, is sponsoring the project.

"We're still verifying what the utilization would be. It depends, it's the mix's viability... but the advances are big already. It reduces pollution and the costs are not that high. It's still theory... but it has great support from everybody."

New mix could cut diesel import costs, trim alcohol stocks

Brazil's alcohol industry hopes the new fuel will help cut down diesel imports, which account for 16 per cent of total fuel imports, or roughly $900 million annually.

It would also boost demand for alcohol, where excessive stocks have created a storage headache for producers.

Brazil consumes an average 555,000 barrels of diesel daily, equivalent to 88.25 million litres. Ofthis amount, it imports around 15 per cent.

The hefty imports make diesel the most widely consumed petroleum derivative in the country, where trucks and buses are the main form of freight and passenger transport.

Although the final mix ratio is not yet decided, the potential extra demand for alcohol could be substantial.

Based on a similar programme in Sweden, a mix of 85 per cent diesel and 15 per cent diesel could generate up to 4.5 billion litres of additional alcohol demand, analysts say. A 10 per cent alcohol mix could create a potential market for three billion litres.

But some industry members are sceptical of the results of the recent experiments and at least three mills in Brazil's southeast have chosen to run their own field tests with trucks using fuel mixes with alcohol at between five and 10 per cent.

"There have been a number of studies of what the effects would be of the diesel mix -- there have been mixed feelings about that," said an alcohol trader in Rio de Janeiro.

"Some millsare doing experiments... but this will take at least until the end of the year to have the results, to see the advantages and disadvantages and to see if anything happened to the motors," he said.

High sulphur content of Brazilian diesel could be problem

One possible snag for the project, analysts say, is the sulphur content of Brazilian diesel which can reach up to 1.00 per cent. European equivalents have only 0.02 per cent sulphur.

According to Christoph Berg of German sugar analysts FO Licht, Brazil's state oil concern Petrobras would have to invest 3.5 billion reais ($2.99 billion) to upgrade its diesel production lines to bring them up to European standards.

"The problem is with the Brazilian diesel specifications," Berg said.

"The main problem is that for Petrobras... to change the specifications they would have to set up a new refining line for diesel, bringing down the sulphur content in order to allow for a reasonable alcohol/diesel mix," he said.

However, with the deregulation andliberalisation of the energy sector, foreign oil companies that do not operate refineries inside Brazil should soon be able to import derivatives such as diesel to retail on the domestic market.

Last month, the energy sector watchdog National Petroleum Agency (ANP) said it could authorise imports of petroleum derivatives by foreign oil concerns as early as this year now that the domestic petroleum market was deregulated.

Import licenses are expected to be issued by product, beginning with naphtha, diesel and jet fuel -- effectively breaking the Petrobras monopoly on the local retail market.