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The Takeover?

Analysis: Brazil’s shuttered sugarcane mills targets for takeover

ReutersBy Reese Ewing and David Brough | Reuters – Mon, Aug 6, 2012

SAO PAULO/LONDON (Reuters) – Brazilian sugar cane mills are vulnerable to a wave of takeovers in which deep-pocketed groups devour fragile neighbors, while soft sugar and ethanol prices weaken small mills and make building new ones too costly, industry analysts said.

Although efficient smaller mills will survive, more of the world’s sugar production is likely to fall into the hands of large traders such as Bunge, Cargill and Louis Dreyfus . Oil companies including Brazil’s Petrobras and traditional sugar giants such as Cosan will also expand by way of mergers and acquisitions of smaller rivals.

Newcomers may also enter the Brazilian cane business, albeit late, as the industry positions itself for Asian-driven growth in sugar demand.

“I anticipate consolidation,” Leonardo Bichara Rocha, a senior economist with the London-based International Sugar Organization (ISO), said. “The least efficient mills are not crushing enough to pay off their debt.”

In stark contrast to the boom years leading up to 2008, roughly 41 of the center-south’s 380 mills have been closed — 30 in the past year and a half, the leading labor union Forca Sindical said. Roughly 45,000 jobs have been lost, and some mills may never reopen, since opening would only dig them deeper into the financial hole they are in.

The closed mills are selling their cane to bigger neighbors to generate cash without incurring operating costs, which larger mills are better able to dilute. At least a dozen mills are looking for buyers or partners, leaders in the sector said.

After the 2008 credit crisis, many cash-strapped mills cut back on costly replanting, which has returned to haunt the industry with eroding yields. Drought over the past two years has exasperated the problem, saddling mills with a record idle crushing capacity of 20 percent. Brazil’s main center-south cane region harvested roughly 495 million metric tons (545.64 million tons) in 2012/13, but has sufficient capacity to crush around 620 million metric tons, a situation that has inflated mills’ operating costs.

The sector’s fragility has induced the big groups such as Louis Dreyfus’s Biosev, Brazil’s second-largest milling group, to raise capital for expansion.

Arnaldo Luiz Corrêa, head of local commodities consultant Archer, said the cane sector carries debts of roughly $21 billion (42 billion reais) with half of all mills facing some financial or cash-flow problem.

The sector is already highly concentrated. The ISO estimates the top 25 milling groups now crush more than 53 percent of Brazilian cane.

Mills will have to be more competitive. The emergence of bigger groups has already altered how the sector secures financing, which used to come from multinational trading firms.

Now big mills get direct credit lines from banks, which has also changed the game plan for commodities traders. Cargill, Bunge, Louis Dreyfus, Olam and others have started to buy up mills to maintain their share of the sugar business.

“Consolidation will be driven by the super farms, or very large groups, which will enjoy special negotiating power due to their scale and strong cash generation,” lead commodities analyst Giovana Araujo at local investment bank Itau BBA said.

But Araujo said consolidation would have limits. Takeovers will tend to occur in the vicinity of a large group’s existing operations, in what are called clusters, to keep costs down.

“Many small mills will continue to exist,” she added.

FOR SALE, NO BUYERS

The fragility in the sector has opened the door for late-comers to the Brazilian sugar cane business. During the peak of investment prior to 2008, companies were paying as much as $135 per tonne of crushing capacity for mills. Recently built mills crush between 3 million and 6 million metric tons.

Prices have come so far off their highs that potential buyers have remained largely on hold to get a better sense of the current market value of potential target mills.

Asian commodities trader Olam made one of the only acquisitions this year when it bought the 1.75-million-metric tons Usina Açucareira Passos sugar mill in Minas Gerais, a source close to the deal said, adding that the company paid just less than $130 million, or close to $75 a metric ton.

“It’s clearly a buyers market,” said Wilson Lucas, president of real estate classifieds MFRural, which lists a dozen mid-sized cane properties for sale.

For now, mills are focused on replanting fields to boost cane output and to return yields to optimal levels.

SUGAR

The ISO’s Bichara Rocha said growing Asian demand for sugar is a strong incentive to invest in crush capacity.

China surprised markets by becoming one of Brazil’s leading buyers of sugar over the past year, and increasing middle-class demand from other emerging markets will likely drive investments in sugar capacity going forward.

This is an about-face from the industry’s preference for ethanol capacity only a few years ago. Sugar cane is the feedstock for both Brazil’s sugar and ethanol industry.

Sugar production offers the best returns for mills, even though demand remains weak due to a global sugar glut of nearly 5 million metric tons. Prices are expected to fall further after slipping 40 percent from a 30-year high posted in February 2011.

The increased cost of sugar production due to poor yields as well as surging labor and equipment costs in recent years created opportunities for origins such as Thailand, Australia and Russia to increase output.

The 21 percent gain of the dollar against the real since March, which has boosted mills’ export revenues in local currency terms, has been one of the few bright spots for mills.

Analysts estimate average local sugar production costs for existing mills at 19 to 20 cents a lb, but with the closing of the idle capacity gap this should fall to 17 to 18 cents and restore Brazil as the world’s lowest-cost producer. ICE benchmark raw sugar futures are trading at around 22 cents a lb.

The government continues to cap gasoline prices at the pump, which has squeezed nearly all profit from cane mills’ ethanol operations, and it shows little sign of change.

Analysts estimate building a new mill from scratch, which is known as a greenfield project, would require sugar prices at 25 cents a lb for an extended period. But expanding existing mills still makes financial sense.

One of Brazil’s biggest ethanol producers, ETH, which has only modest sugar production capacity, posted a 790 million real ($350 mln) loss in the most recent quarter.

“The mills that bet all their chips on ethanol are going to have to come back to the table and put up more money to build sugar capacity if they want to survive,” an executive at a multinational sugar trader with mills in Brazil said.

(Writing by Reese Ewing; Editing by Jim Marshall and Maureen Bavdek)

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Houston Strengthens Ties to Brazil

Houston Strengthens Ties to Brazil

March 26, 2012

by: Laurie Johnson

Mayor Annise Parker is leading a Houston trade mission to Brazil this week with representatives from the Greater Houston Partnership.

 

This is just the second time Mayor Parker has led a trade mission. The first time was in 2010, when she took a team to three cities in China. This week, the delegation is in Brazil. Speaking on a cellphone connection from Sao Paulo, Parker says Brazil is the third largest trade partner with Houston.

“And Houston is the largest U.S. trading partner for Brazil. There’s a tremendous amount of business going back and forth and we want to make sure that we continue to be the center of focus for Brazilian business.”

Parker spent time yesterday touring the public transit system in Sao Paulo and met with the mayor there today to sign a memorandum of understanding to promote business and tourism between the two cities. The delegation will travel to Rio de Janeiro next to meet with city and national officials there.

“One of the interesting things about this trip is that the Brazilian government has embarked on a plan to send 75,000 scholarship students to out-of-country universities. And so we are doing our best to capture a number of those for Houston.”

Total annual trade between Houston and Brazil has increased to $15.5 billion in 2011, according to numbers provided by the City of Houston.

 
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Exclusive: India seals deals to export 60,000 tons sugar to Iran

(Reuters) – Indian traders have struck deals to export 60,000 tons of raw sugar to Iran for March-April delivery, three trade sources said on Monday, marking their first sales of the sweetener to Tehran since western sanctions were tightened at the start of 2012.

The exports are within the ceiling of two million tons of sales already allowed by New Delhi under the open general license (OGL) scheme.

“Traders have contracted exports of 60,000 tons of raw sugar to Iran and the first vessel of 19,800 tons is being loaded at a Mumbai port,” a source with the Indian unit of a global trading company told Reuters.

Confirming the deal, another source said Iran would receive the entire quantity between “now and end-April.”

They said Iran could buy more sugar from India, the world’s top consumer and the biggest producer behind Brazil.

“Until September, Iran needs to import about 324,000 tons of raw sugar,” the first source said.

Iran is expected to import 1.6 million tons of sugar in the 2011/12 year, according to the International Sugar Organization (ISO), around 31 percent of the global surplus of 5.17 million tons estimated by the London-based agency.

The Islamic nation bought 1.8 million tons of the sweetener in calendar 2010, the ISO said.

New Delhi and Tehran have set up a mechanism to use the rupee, which is not freely traded on global markets, for 45 percent of oil dues and to pay Indian exporters in order to skirt western sanctions.

India is Iran’s second-biggest oil client after China, buying around $11 billion a year, but its own exports to Tehran are worth only about $2.7 billion.

A delegation of Indian exporters has just returned from a trip to Tehran which aimed to boost overseas sales and partially redress the imbalance in trade between the two, but with no major success.

The sugar export deal, however, is in dollars through Dubai-based middlemen, the sources said.

Iran is increasingly finding it difficult to pay in dollars for its crude oil exports, its major foreign currency earner, as the United States and the European Union tighten financial sanctions in an attempt to curb its nuclear ambitions.

As an alternative, Iranian buyers are channeling import payments through unofficial routes involving several layers of middlemen based in Dubai.

Rice exporters from India, Iran’s top supplier of the grain, have used the same route but some buyers in the Islamic nation have defaulted on payments.

For the sugar sales, Indian exporters have already received payments from the middlemen involved, these sources said.

Indian sugar mills produced 21.2 million tons of the sweetener between October 1 and March 15, up 14 percent from a year earlier and total output is expected to top 25 million tons. Demand is estimated at around 22 million tons for the year.

The government is considering allowing exports of another 0.5-1 million tons of sugar because of the higher output, after permitting two million tons so far in the 2011/12 season.

(Editing by Jo Winterbottom)

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Dance of the ethanol giants: US and Brazil in shuffle game

Dance of the ethanol giants: US and Brazil in shuffle game

Renewable Fuels Association
Dec. 19, 2011 2:07pm

Flawed carbon accounting schemes at both the federal and state level are creating a dynamic where the U.S. is importing ethanol from Brazil while simultaneously exporting greater volumes back to Brazil. This “ethanol shuffle” is occurring exclusively as the result of state and federal fuel regulations that “treat Brazilian sugarcane ethanol as if it were the Holy Grail of biofuels,” according to Geoff Cooper, the Renewable Fuels Association’s Vice President of Research and Analysis.

In his recent blog post, “The Ethanol Shuffle,” Cooper explores this convoluted trade relationship and how U.S. policy is turning world ethanol markets upside down.

The heart of the issue is how both the U.S. Environmental Protection Agency (EPA) and the California Air Resources Board (CARB) are calculating carbon emissions for corn-based ethanol and Brazilian sugar ethanol.  Under both the federal Renewable Fuel Standard (RFS) and the California Low Carbon Fuels Standard (LCFS), the carbon footprint of Brazilian based sugar ethanol is deemed far superior to corn-based ethanol.  This results in a growing incentive for imports of ethanol from Brazil to meet increasingly aggressive carbon standards.  At the same time, a struggling Brazilian ethanol industry cannot meet its own domestic demand.  As such, Brazilian ethanol producers are finding it more valuable to export their product to America (and the carbon emissions that go with ocean transport) and import growing volumes of U.S. ethanol (and the same carbon emissions).

As Cooper writes in his blog, “So, that’s how the “Ethanol Shuffle” works. California imports sugarcane ethanol from Brazil rather than corn ethanol from Nebraska or Kansas; and in turn, corn ethanol from the Midwest travels to Houston or Galveston via rail, then is shipped to Brazil via tanker to “backfill” the volumes they sent to the U.S. Picture the irony of a tanker full of U.S. corn ethanol bound for Brazil passing a tanker full of cane ethanol bound for Los Angeles or Miami along a Caribbean shipping route. Remember, this is all being done in the name of reducing GHG emissions.”

Cooper explores just how environmentally destructive this practice can be. Cooper  found that transportation-related GHG emissions more than double in the scenario where California imports Brazilian cane ethanol and Brazil “backfills” those volumes with U.S. corn ethanol imports. And the miles traveled in in this scenario are more than eight times the miles traveled in a scenario where California ethanol demand is met with corn ethanol from the Midwest.

There are economic ramifications to the shuffle effect as well. In concept, California gasoline blended with imported Brazilian ethanol has been 16 cents per gallon more expensive than gasoline blended with U.S. ethanol.

All of this is compounded by trade distorting practices that the Brazilians discretely engage in to disadvantage U.S. ethanol.  The RFA recently raised this point in a letter to the U.S./Brazil Council.

Cooper’s entire post, complete with detailed descriptions of the flawed science promoting this kind of trade, can be read here.

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The Modern Sugar Market: Who’s Growing & Who’s Using Sugar

Sugar is a major commodity being traded on the market internationally.  On average worldwide, over 101 million tons of sugar is produced and traded annually.  Nearly forty percent of the world’s sugar is produced by the countries of the European Union, India and Brazil, with Brazil leading the way in sugar production.

Sugar is cultivated in two forms — cane and beat.  Sugar is a perennial crop that bests grows in tropical and sub-tropical regions of the world.  Both refined and raw sugar are commodities that are traded on the world market.  When it comes to the trade of sugar on the commodities market, fifty percent of the sugar bought and sold is raw and fifty percent is raw.

On average, 16 million tons of sugar is produced annually by the European Union.  Just under 10 million tons of sugar is produced in India on an annual basis.  Just over 10 million tons of sugar is cultivated in Brazil each year.  In recent years, market analysts actually believe that Brazil has been “over producing” sugar in recent years which has resulted in an oversupply of the commodity and a lowering of the price of sugar on the international market.

Brazil is the major exporter of sugar in the world today.  Exports from Brazil have increased by four hundred over the course of the past thirty years.  Indeed, exports from Brazil outpace every other sugar exporting nation on the planet most significantly.  The other major exporters of sugar are Cuba, India, Thailand and Australia.

On balance, the cost of sugar on the world market has remained fairly stable over the course of the past couple of decades.  There have been minimal fluctuations in the price of sugar during this twenty year period.  Many industry experts believe that the price of sugar on the internationally marker should remain flat into the foreseeable future.

Many developing countries around the world — India, Thailand and Cuba as examples — rely heavily on sugar exports to keep their economies moving.  These countries do face some trade barriers in place in more developed nations which has limited the revenue that can be generated from sugar exports.

Some of these trade barriers are being stricken, which should benefit the developing nations in both the short and the long term.  For example, the European Union is gradually decreasing the tariff that has been in place on sugar imports to zero, the decrease to be phased in from 2006 through 2009.  This change will be of great benefit to the developing nations that export sugar and depend on sugar for their economic wellbeing.

There are six nations that are responsible for the importation of most of the sugar in grown in the world today.  These mammoth importers of sugar are:  Canada, China, Japan, Russia, South Korea, and the United States.  The European Union as a whole is also a major importer of sugar, particularly refined sugar.