Solazyme, an algae company that has spent the last nine years focused on the food, nutraceutical, and specialty chemical markets, is now beginning to tackle the fuel industry. This week, the company broke ground on a large factory in Brazil that will produce biofuels.

Located next to a sugarcane factory owned by Bunge, the biofuel factory will create oil by feeding Bunge’s sugar stock to algae, and then extracting oil from the algae. The plant will begin operations in the fourth quarter of 2013, and will produce 30 million gallons of oil each year. The oil will be used both for specialty chemicals and biofuels.

In the past, algae producers like Solazyme have been hesitant to produce biofuels because of the challenge of competing with the price of oil; biofuels will need to be produced on massive scales to bring cost down. Oils for the specialty chemical market — like the polymers used in plastics or pharmaceuticals — can be sold at a higher price, and have been more common. One of Solazyme’s customers has been Unilever, which purchases algal oil as a replacement for palm oil, a source of deforestation.

Now, Solazyme is changing industry trends by scaling up biofuel production. Solazyme raised $198 million last year in its IPO, and used the proceeds to invest in the new factory. By partnering with Bunge, the sugarcane factory, they’ve helped mitigate risk. The company is aiming for a production cost of $60 to $80 a barrel.

Image credit Flickr user jurvetson