Nearly one-third of
Brazil sugar mills in financial trouble
The head of
Brazil's largest cane co-operative issued a reminder of the financing
difficulties facing the sugar industry in the world's top producing country,
warning that one-third of mills are at risk of insolvency, or even closure.
the president of Coplacana, whose members account for nearly half Brazil's 8.2m
hectares of cane production, said that prospects for the sector were
"We know that
Brazil has to grow [in sugar] and will grow," he told an industry meeting.
required overcoming the challenge of finding funding for operations still
suffering from an overhang of debts run up in an expansion spree which left
them poorly positioned when the global financial crisis hit.
While many mills
have found relief in takeovers by foreign group, such as Bunge, Louis Dreyfus
or Noble, which are expanding in Brazilian cane, independent mills were
continuing to struggle to find funding for existing operations, let alone
'Some may even close their doors'
Of the more than
400 mills with which Brazil entered the financial crisis "today some 30%
of them suffer from insolvency or bankruptcy and some may even close their
doors", Mr Bortoletto said.
difficulties were being exacerbated by overcapacity, with the expansion drive,
which drove mill numbers to 432 in 2010, with a handful of openings since,
creating cane crushing capacity of some 700m tonnes a year.
However, the cane
harvest is only expected to come in well below 600m tonnes, including the crush
in both the main Centre South region, pegged by many analysts at roughly 510m
tonnes, and the North East, which is expected to process some 65m tonnes.
'Financial situation getting worse'
The caution is the
latest in a series over the financial state of the Brazilian sugar industry,
now facing a period of low sugar prices, which closed on Wednesday within
$0.20 a pound of a two-year low on New York's Ice futures market.
Macquarie in June said, after a field trip to Brazil, that "the biggest takeaway from our
visit to Brazil's sugar heartland was that the financial situation of most
mills was getting worse, not better," despite three years of very
attractive high prices".
in the years preceding 2008 and the subsequent credit crisis has left mills
struggling to pay off debts.
of production since then - wage and land inflation, cane costs and rising
borrowing costs - have hit margins, whilst yield losses stemming from adjustment
towards mechanisation and adverse weather have hit production volumes."
According to sugar
merchant Czarnikow, the expansion drive between 2005 and 2009 saw industry debt
levels soar from R$8bn to R$42bn in Brazil, "the equivalent of an
increase from R$25 per tonne crushed in 2005 to R$75-80 per tonne crushed in
more-leveraged groups reached indebtedness levels as high as R$100-120 per
tonne crushed - debt levels greater than a full year of net revenues."
However, crop scout
Michael Cordonnier, who has close ties with Brazil, said while the short term
prospects for Brazil's sugar industry were "not encouraging, the long term
view is more optimistic", given the potential for ethanol based on the sweetener
to support cane production.
"Over 90% of
new cars in Brazil are flex fuel," able to operate on gasoline or ethanol.
"So the demand
for ethanol will continue expanding if the price of the fuel can be kept below
70% of the price of gasoline," he said.