Decline in sugar prices diminishes recovery hope for Brazilian mills

Dhaka,  Thu,  21 September 2017
Published : 13 Jul 2017, 22:16:23
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Decline in sugar prices diminishes recovery hope for Brazilian mills

SAO PAULO, July 13 (Reuters): A steep decline in sugar and oil prices over the last six months has diminished the hope of financial recovery for a number of Brazilian mills, and could put new dealmaking in the sector on hold, according to industry experts.

Raw sugar prices in New York SBc1 were hovering around 13 cents per pound, down around 40 per cent since the fourth quarter of 2016 to a level analysts and millers say is close to production costs in Brazil's center-south.

At the same time, an ongoing slump in oil prices CLc1 LCOc1 has led state-controlled oil firm Petrobras to repeatedly cut gasoline prices domestically.

That has in turn pressured ethanol producers to follow suit since the two fuels were sold side by side at the pump.

The price pressure on sugar and ethanol could cut short a nascent financial recovery for many Brazilian mills during a global sugar supply deficit in 2015 and 2016. It could also slow down talks between millers and potential investors and lead to more closures of indebted firms.

"We can't deny that the current situation strongly impacts our liquidity," said Tony Rivera, a director at Renuka do Brasil SA, the local unit of Indian sugar maker Shree Renuka Sugars.

Renuka has four mills in Brazil and is one of dozens of companies that have filed for bankruptcy protection. The company has plans to sell two of its mills to pay debt and raise working capital to continue operations in the country, even at a smaller scale.

But Rivera says falling sugar and ethanol prices also impact that plan.

"The current outlook is a problem, because on one side it scares those who are not fully convinced to invest in the sector. And on the other side, it brings down the price investors are willing to pay for the plants," he said.

A combination of weak sugar and ethanol prices in Brazil from 2010 to 2014 wreaked havoc on the sugar industry, triggering the closure of dozens of mills and leading many others to seek bankruptcy protection, a process that is ongoing.

At the time, the government kept gasoline prices artificially low to fight inflation, consequently cutting margins on ethanol sales, while a multi-year global sugar surplus depressed sugar values. Cane industry group Unica said 80 plants have been idled in Brazil since 2010.

The closings reduced spare cane crushing capacity, limiting growth in the industry. According to Unica, sugar output was 35.6 million tonnes last season, up only slightly from 33.5 million tonnes in 2010/11.
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