South America Calling
Alastair Stewart South America Correspondent

Tuesday 12/18/12

Brazil's Sugarcane Consolidation Continues

The consolidation of the Brazilian sugarcane industry moved forward this week with the news that the Sao Martinho milling group bought a sugar and ethanol mill from Louis Dreyfus for R$200 million ($96 million).

Sao Martinho, Brazil's third largest sugar and ethanol producer, said it would close the Sao Carlos sugar and ethanol plant in Jaboticabal, Sao Paulo state, and redirect nearly 1 million metric tons (mmt) of sugarcane produced in the region to its Sao Martinho plant in nearby Pradopolis.

The deal helps out Sao Martinho and Louis Dreyfus, Brazil's No. 2 crusher who, like everybody, is suffering amid a shortage of sugarcane.

The Sao Carlos cane will take the Sao Martinho sugarcane crush to around 8.5 mmt in 2013, which is closer to its capacity of 10 mmt, thus making the unit more efficient. Meanwhile, Dreyfus will also increase utilized capacity with the Sao Carlos sale.

This business highlights the malaise in which the Brazilian sugar and ethanol industry finds itself.

As Roberto Uchoa of McKinsey & Company told the DTN Ag Summit last week, the Brazilian government's cap on fuel prices over the last couple of years has halted investment in sugarcane crops for ethanol, which is now being reflected in harvests that are coming in way below industrial capacity and also demand.

With little cane available, costs rising and prices capped, the industry estimates that around 30% of mills are now bust and are sitting takeover targets for the big boys, a group which includes Sao Martinho, Louis Dreyfus, Cosan and a couple of others.

It is a consolidation game that will dominate the industry for the next couple of years as current sugar and ethanol prices do not warrant investments in greenfield projects.

So sugarcane production and utilized capacity may rise, but most of the ethanol produced will go to the internal market, where there is a lot of repressed demand, rather than to the export market.

As a result, the Brazilian sugarcane industry will continue to largely pass up the opportunity created by California clean air rules and the U.S. ethanol mandate.


Posted at 12:31PM CST 12/18/12 by Alastair Stewart
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