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Sao Martinho sees recovery in sugar prices from 19-month lows

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Sugar prices are poised for recovery, after falling to levels which will encourage mills to ramp up volumes of cane diverted to producing ethanol, Sao Martinho said, amid talk that rival Biosev is already altering its mix.

Fabio Venturelli, the Sao Martinho chief executive, acknowledged the "pressure on prices in recent months" which saw New York futures close on Monday at 12.85 cents a pound for October delivery, the weakest close for a nearest-but-one contract since September 2015.

The October contract stood at 12.88 cents a pound in early deals on Tuesday.

Prices had been undermined by "apparent weaker sugar consumption" in India, the biggest user of the sweetener, higher duties on sugar imports to top buyer China and to lower oil prices, Sao Martinho said.

Weaker oil values, in lowering the value of ethanol, undermine sugar too, which needs to compete less hard in price terms to ensure its share of cane, and beet, harvests.

'Very optimistic'

However, the group added that it was "very optimistic" in sugar price terms "on the supply and demand scenario for sugar in the medium and long term", given the disincentive to investment provided by weaker values.

"The main producing regions are not expected to make new investments and consumption should continue to grow at an average rate of 2% per annum."

And shorter term, "given the magnitude of the drop in sugar prices… there is a strong likelihood that producers will migrate part of their sugar production to ethanol, given the very similar profitability and the much shorter ethanol cash conversion cycle".

Mr Venturelli said: "We believe futures prices should return a level more conducive to the true fair scenario for global sugar supply and demand."

Ethanol vs sugar

The comments come amid a growing debate over whether prices have fallen by enough to encourage cane mills in Brazil, the top sugar producing and exporting country, to switch more cane to making ethanol rather than the sweetener.

In falling below 13 cents a pound, "sugar prices seem to have reached the zone where ethanol begins to be more lucrative", said Tobin Gorey at Commonwealth Bank of Australia.

So-called "ethanol parity", the level at which the biofuel or sugar offer equal financial incentives for Brazilian mills, is broadly reckoned to be a bit below 13 cents a pound in sugar terms.

There are reports that Biosev, Brazil's second biggest cane miller, has switched to making ethanol rather than sugar at one plant in Mato Grosso do Sul, a change which would also be a reflection of the site's relative distance to port, making its sugar relatively uncompetitive for exports.

Brazil exports the bulk of its sugar, while using most of its ethanol domestically.

Sao Martinho forecasts

Sao Martinho, in its first forecasts for 2017-18, estimated that it would convert 49% of its cane into sugar for the season – a drop of 5 points on last season, which ended in March.

However, this change was largely down to the increased ownership of the ethanol-only Boa Vista mill in Goias, which will now be consolidated completely in the group's results.

In the group's Sao Paulo mills, in the heart of Brazil's key Centre South cane-growing region, the proportion of cane dedicated to sugar will ease by only 1 point to 62%.

The company also estimated that its overall cane processing volumes would jump by 15.7% to 22.3m tonnes this season, although that is a reflection of the Boa Vista deal and other investments, as well as a recovery in the Sao Martinho cane crop, of which some 40,000 hectares was "severely damaged" by frost last season.

The cane harvest in Brazil's Centre South region is overall expected by industry group Unica to fall by 3.7% to 585m tonnes in 2017-18.

Broker reaction

Sao Martinho made its forecasts as it unveiled a 66% jump to R$119.4m in earnings for the January-to-March period, on revenues up 9.3% at R$894.3m.

BTG Pactual, terming the results ahead of its expectations, restated a "buy" rating on Sao Martinho shares, with a price target of R$26.00, saying that

The broker which also noted that Sao Martinho debt ratio had fallen to a five-year low, concurred with ideas of a rise in sugar prices ahead, saying that global stock-to-use calculations were "still signalling a much higher equilibrium price, of 16-18 cents a pound".

Bradesco BBI cut its target price for Sao Martinho shares to R$20, but restated an "outperform" rating, also seeing some scope for a sugar price recovery.

"We believe sugar prices have upside risks – we estimate a fair value of 14 cents a pound if it were to reflect more accurately the current supply-demand fundamentals."

By Mike Verdin

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