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Sao Martinho favours sugar over ethanol - despite price outlooks

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Sao Martinho revealed it was following rival Cosan in bucking the trend expected for Brazil's cane processors and raising output of sugar, rather than ethanol – despite being more upbeat over prices of the biofuel.

The sugar and ethanol group said that it was planning to lift its cane crush by 4.2% to 19.50m tonnes in 2015-16, which started in April – enough to raise to 97% the utilisation of processing capacity at its mills.

However, contrary to the trend expected for cane crushers in Brazil's key Centre South region, the group will increase the proportion of crop going to make sugar, rather than ethanol, to 52% from 49% last season.

That will lift output of sugar by 5.2% to 1.30m tonnes, while production of ethanol will drop by some 8% to 727,000 cubic metres.

Brazilian cane industry group Unica expected the proportion of cane turned into sugar in the Centre South overall to fall to a seven-year low of 41.9% in 2015-16.

Sugar, ethanol price outlooks

Sao Martinho's decision comes despite expectations that sugar prices, trading near six-year lows on New York's futures market, will remain depressed, with the group stressing the impact of Indian and Thai support, and a stronger dollar, in underpinning output.

"The strengthening of the US dollar against the main currencies of sugar producing countries, effectively maintaining an incentive for the commodity's supply in the coming crop years," Sao Martinho said.

For Brazil's Centre South, the group highlighted a forecast from Unica that the region will see sugar output remain stable this season at 31.8m tonnes, a figure which, given levels of "global supply and demand, "leads us to believe that sugar prices will not post a significant recovery by the end of the 2015-16 crop year".

However, the group forecast that ethanol prices would "improve over the season, given the potential increase in the [Brazilian] gasoline price of around 9.1%", as expected by the country's influential Copom monetary policy committee.

"Stronger demand for ethanol [in Brazil] in the first few months of 2015 already reflects its higher competitiveness against gasoline."

'Accelerated sugar hedging'

However, the group has already built up sizeable inventories of ethanol, of nearly 82,000 cubic metres as of the end of March – triple those a year before.

Sao Martinho's sugar stocks, meanwhile, were 7.8% lower at 6,659 tonnes.

The company, forecasting continued pressure on sugar prices, has also hedged significant supplies of the sweetener ahead too, at prices well ahead of the futures curve.

"São Martinho accelerated its sugar hedging operations, particularly for periods with higher pressure from supply, ie, July and October," the group said.

As of the end of March, the company had hedged forward 770,672 tonnes of sugar for 2015-16, equivalent to 57% of total cane volumes.

A year before, 648,848 tonnes were hedged ahead, equivalent at the time to 48% of total cane volumes.

Earnings rise

The comments came as Sao Martinho unveiled a jump in earnings for the January-to-March quarter to R$56.57m, from R$6.43m, on revenues up 64% at $718.3m.

The increase in revenues reflected, besides acquisitions, increased sales volumes of sugar and hydrous ethanol to both domestic and export markets.

Domestic sales prices of sugar were, at R$1,022 a tonne, up 21% year on year, protected by the weak real from the pressure on international, dollar-denominated values.

Sao Martinho's results were released before data from industry group Unica showed a continuing preference by Centre South mills for producing ethanol, rather than sugar, from cane in the first half of June.


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