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Sugar rally won't bring extra Brazil investment - Sao Martinho

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Sao Martinho sounded an upbeat note on ethanol prices, rather than sugar, as it revealed its had bucked the trend in its processing strategy, in a statement which cautioned against expecting higher crushing returns to boost mill investment.

The Brazilian sugar and ethanol producer revealed that like peers operating in the Centre South region, which is responsible for some 90% of domestic production, it had enjoyed a strong start to the 2016-17 crushing season, which began in April.

The group raised by 10.5% to 8.2m tonnes the volume of cane processed during the April-to-June period, in line with the average for the region, as benign weather made for more rapid harvesting.

"The drier weather at the start of the crop year… enabled the company to accelerate its crushing activities in the period," Sao Martinho said, also noting a boost from higher sugar content in cane.

'Trend of higher prices to prevail'

However, unlike peers, it marginally increased, by one percentage point to 50%, the proportion of cane it converted to ethanol, rather than being turned into sugar.

On average, Centre South mills have cut the proportion of cane being turned into ethanol by 4 points, albeit to a figure, at 55.8%, higher than Sao Martinho is running at, according to industry group Unica.

While sugar prices, in Brazil and worldwide, have seen a well-documented rally - with New York raw sugar futures rising by more than 30% during the quarter to top 20 cents a pound for the first time since 2013 – Sao Martinho flagged improvement in domestic ethanol values.

"Average prices at the start of this crop year are better than last season, reflecting the better balance between supply and demand," said the group which, at 22.7%, reported a marginally stronger increase in its ethanol sales prices in the April-to-June period than in values achieved for sugar.

"Assuming gasoline prices will not be adjusted before March 2017, we expect the trend of higher [ethanol] prices than last season to prevail through the end of the crop year," the group said, with Brazil's regulated gasoline market having a key influence on values of rival biofuels.

Sugar hedges

While Sao Martinho did tap higher sugar prices too, near-doubling net revenues from the sweetener to R$387.4m in the April-to-June period, the increase came largely thanks to selling down inventories which, at 180,164 tonnes, ending the quarter down 21% year on year.

Its pace of hedging sugar for the rest of the season remained largely in line with last year, at the equivalent of 65% of total cane volumes expected for the season, compared with a comparable figure of 68% a year ago.

For 2017-18, starting in April next year, it revealed it had hedged 150,600 tonnes of sugar forward at R$1,565 a tonne.

While Sao Martinho did not publish a comparable figure a year ago, the rate of hedging is far smaller than that revealed last month by rival Biosev, which said it had already sold forward the equivalent of about 40% of 2017-18 volumes.

Brazilian investment prospects

The group made no forecast for sugar prices, whose recent strength it attributed to "lower production in certain countries in the northern hemisphere, mainly India and China, due to adverse weather and the low prices of recent years".

However, Sao Martinho did undermine ideas that the sugar price revival would support fresh investment in mills in Brazil, the top sugar producer and exporter, despite the relatively low cost of output in the country, meaning the recent rally has pushed many operations well into the black.

Brazil… is unlikely to add significant new production volume in the coming years," the group said.

"The cost and scarcity of capital for projects, combined with the long maturation cycle of a greenfield project, will continue to postpone any investment decisions."

While the group did "envisage one-off investments in bottlenecks on sugar production" as some mills, that would have only a limited impact on the country's overall output.

'Bullish stance'

The comments came as the group unveiled a 26% rise to R$39.7m in earnings for the April-to-June quarter, on underlying revenues up 42% at R$667.9m.

The results were termed by Itau BBA as a "good start" to Sao Martinho's financial year, which started in April, with the broker flagging that hedging for 2017-18 had "started off well".

Itau BBA kept a target price of R$60.00 on Sao Martinho shares, with an "outperform" recommendation.

BTG Pactual restated a "buy" rating on the stock, in which it raised its target price by R$6 to $71.

"Ultimately, we reiterate our bullish stance on both sugar and ethanol prices in the belief that we're now starting to see a prolonged upward sugar price cycle based on an acute global supply-demand deficit," BTG Pactual said.

"Ethanol will likely follow suit, with demand growing recently, and with Brazil's supplies still capped by low idle production capacity."

By Mike Verdin

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