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Sao Martinho hoards sugar foreseeing price revival

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Sao Martinho highlighted the extent of its bet on a revival in sugar prices later in the season as it unveiled a 75% jump in earnings, lifted by a jump in sales of electricity and ethanol, besides by an accounting change.

The Brazilian sugar and ethanol group said that its production of the sweetener in the April-to-June period – the first quarter of its financial year, and indeed of the Brazilian cane crushing season - had risen by 19.5% to 380,000 tonnes.

Volumes were helped by the inclusion of an extra slice of volumes from the Usina Santa Cruz mill, in which Sao Martinho has raised its stake, besides by boosts to cane processing from a large amount of crop carried over from last season, and by dry weather which enabled a speedy harvest.

Thanks to an increase of sugar concentrations in cane, the group's output of the sweetener rose a little faster than the 16.7% rise in cane processing volumes.

The proportion of cane processed by Sao Martinho into sugar, rather than ethanol, remained at 47%.

'Delayed sales'

However, by sales, the proportion gained from sugar dropped by 6 points to 40%, a reflection of, besides lower prices, hoarding of the sweetener by Sao Martintho in expectation of a market recovery.

Sugar revenues fell 11.0% to R$203m, a decrease "mainly explained by the lower volumes sold, due to the company's strategy to postpone sugar sales to future quarters".

Indeed, the group had, as of June 30, priced ahead 393,464 tonnes of sugar, 47% of its 2014-15 exposure, excluding volumes sold through a marketing agreement with Conesecana – down from an equivalent forward sales figure of 91% a year before.

Meanwhile, sugar inventories more than doubled to 153,184 tonnes.

'Entire sugar storage capacity'

The group said its strategy reflected widespread expectations of the strong start to the cane crushing season in Brazil's Centre South - the region in which it operates, and which is responsible for 90% of the country's output – giving way to a weaker finish, as crop damage from an early-year drought feeds through.

This scenario was reflected in an unusually large spread, equivalent to $35 a tonne, in the price between sugar delivered against October futures, and New York's March 2015 contract, Sao Martinho said. The steep sugar futures curve was highlighted last week by ED&F Man.

"In light of this scenario, São Martinho will concentrate its shipments in the second half of the 2014-15 crop year, making use of its entire sugar storage capacity," the group said.

São Martinho has also repurchased futures equivalent to 87,000 tonnes of sugar, thanks to the low current prices, according to Itau BBA.

Electricity surge

The comments came as the group unveiled earnings up 75% to R$60.7m for the April-to-June period, boosted in part by a change to accounting for depreciation charges, but also thanks to higher earnings from ethanol and power.

Cogeneration revenues soared 456% to R$49m, lifted by the start of an electricity project at the Usina São Martinho mill, and by high electricity prices, which have also been boosted by Brazil's drought, which has reduced hydroelectric power capacity.

Ethanol revenues rose 12% year on year to R$246m.


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