RIO DE JANEIRO, BRAZIL – A quarter of the sugar and alcohol plants in operation in the country risk closing their doors by the end of the year because of the coronavirus crisis, according to experts. With no working capital to pay short-term bills, a portion of these companies has been hit by a sharp drop in demand for fuel.
The case has been further aggravated by the collapse in the price of oil – the price of ethanol is based on gasoline. “These are two shocks. The main one is the drop in consumption and then in prices”, says Plínio Nastari, partner of Datagro consultancy.
With some 350 sugarcane processing plants in operation in Brazil, the sector saw ethanol prices drop from R$2 to R$1.30 a liter (net value) and demand drop by more than 50 percent, says the Brazilian Sugarcane Industry Association.
The most capitalized groups have the room to store their ethanol production and even change the industry’s mix to produce more sugar, in order to survive the most acute moment of the crisis.
But this is not the case for almost a hundred production plants, which are unable to stock ethanol – and end up selling at low prices – and also do not have the financial means to withstand the coming months.
“A quarter of companies in the sector are going to face a lot of pressure to ensure their survival,” says Pedro Fernandes, agribusiness director at Itaú BBA.
In the Center-South region (Midwest, Southeast, and South), which concentrates most of the country’s production, sugarcane crushing began in April. However, it is now doubtful whether many companies will be able to continue.
Two weeks ago, the Adecoagro Group, which has three plants – two in Mato Grosso do Sul and one in Minas Gerais – issued a statement to its employees announcing that it would suspend contracts for part of them in Mato Grosso do Sul.
The situation is even more critical for plants that only have distilleries. Of the 267 production units in South-Central Brazil, 80 plants produce only ethanol. Of the total cane harvested in the country in 2019/20, about 35 percent was for sugar production, explained Antônio de Padua Rodrigues, director of Unica. This year, the share could reach 45 percent.
With revenues of around R$100 (US$25) billion, the sugarcane industry managed to reduce its debts in recent years – today it is around R$90 billion.
A large group of companies is responsible for most of these debts. In Brazil, there are 104 production facilities under judicial reorganization, 81 of which are in the Center-South, according to the Association. Since 2005, 95 plants have closed in the region.
With the uncertainties caused by the pandemic, most companies already in financial distress are heading in the same direction.
A reversal of optimism
Until February this year, the industry had a positive scenario ahead: sugar and ethanol prices were competitive. The most highly capitalized mills had already locked in sugar prices (hedge) and the demand for fuel was steady. “Sugar prices were at 15 cents per pound in February, up from an average of 12 cents last year. Today, the price is below 10 cents,” Nastari says.
Companies with greater storage capacity, such as Raízen (a joint venture between Cosan and Shell) and São Martinho, for instance, are managing to store their ethanol production to sell again when demand picks up.
Raízen’s president, Ricardo Mussa, said that the company has always had great discipline in risk management, and the fact that the group is integrated – Raízen is also a fuel distributor – helps in this current crisis. “At this moment, the importance of fixing commodity prices, not only sugar but also ethanol, becomes clear”.
According to Fábio Venturelli, CEO of the São Martinho group, the company set sugar prices when they were quoted at between 14 and 15 cents per pound. “The group also has a storage capacity for 70 percent of its production.”
No consolidation
In contrast to the consolidation movement the sector experienced between 2003 and 2010, large companies are not expected to absorb smaller companies in difficulty, said Fernandes, of Itaú BBA. “We don’t see a new wave of mergers and acquisitions. We can see the plants’ agricultural areas being acquired”.
For an industry specialist, the closure of loss-making facilities due to the crisis should be beneficial to the industry in the long term, with the rebalancing of the raw material supply in the country. Productivity may rise without increasing the planted area.
Assistance
The sugarcane sector is awaiting a rescue package for the plants to tackle the crisis caused by the coronavirus pandemic.
In addition to a financing line for ethanol storage, the plants are asking the government to increase the CIDE, a tax levied on gasoline sold, to R$0.40 per liter (today the amount is R$0.10), in addition to the temporary suspension of the collection of the PIS (Program of Social Integration) and COFINS (Contribution for the Financing of Social Security) taxes on hydrous ethanol, which are R$0.24 per liter. Measures were expected to be announced last week.
Source: Infomoney