| SAO PAULO, July 7
SAO PAULO, July 7 Record ethanol consumption in
Brazil, surging exports of the biofuel to the United States and a
recovery in sugar and ethanol prices will not be enough to pull
local mills' margins out of the red, producers said.
Sugar and ethanol prices have started to improve since December
as investment fund buying stormed into commodity complex after a
gloomy period of low profitability mainly due to a huge global
surplus of sugar.
But this will be offset by a strong surge in costs and the local
currency against the dollar, and new investments in production in
the world's top sugar and second largest ethanol producer, are
unlikely under current market conditions.
"People talk about a commodities boom. But high commodities
prices in dollars do not mean a boom," said Carlos Murilo Barros de
Mello, commercial director at Cosan CZLT11.SA (CZZ.N), Brazil's
largest sugar and ethanol producer group.
Brazil, already the world's top ethanol exporter, is expected to
export a record 5 billion liters of the biofuel this year, after
U.S. ethanol prices rocketed due to flooding that hurt the Midwest
corn belt. Europe and Japan are also poised to begin importing more
of the Brazilian biofuel.
Meanwhile, demand for ethanol in Brazil is expected to eclipse
gasoline as the main automobile fuel this year due to growth in the
flex-fuel cars fleet that can run on any combination of gasoline or
"It will be a boom when producers' profit margins rise, and this
is not the reality now. Maybe it is to energy and metals, but not
for sugar and ethanol," de Mello said.
Costs to produce anhydrous ethanol, which in Brazil is made from
sugar cane, rose 20 percent in reais from February 2007 through
April 2008, according to Datagro analysts, who forecasts a new
increase until July.
During the same period, anhydrous ethanol prices on the local
market fell 20 percent, on average.
"Practically all the commodities rose and it was possible to
compensate all the increase in costs. In ethanol and sugar, prices
would need to rise much more to reach this level," said Antonio de
Padua Rodrigues, technical director at the Sugar Cane Industry
As in other sectors, Brazilian sugar and ethanol producers'
profitability has been hit not only by a surge in production costs
such as the price of fertilizer which has doubled in the past year
but also a strong appreciation of the local currency against the
The real BRBY has rose 27 percent since April 2007, when the
2007/08 sugar cane crop began.
"The real problem is not the price, but costs and the currency
exchange," said Luiz Guilherme Zancaner, president of Unialco sugar
and ethanol group. He said fertilizer prices rose 64 percent from a
Rising fertilizer and diesel prices, and growing labor costs hit
mills' results hard in the past year or so, Padua said, adding that
poor cane quality this crop has also hurt.
Cane industrial yields -- the amount of sucrose per tonne of
cane -- are lower than the same time last year, when the dry weather
contributed to sugar concentration in cane.
Poor sugar content means a rise in transport and production
costs as mills get less product from each tonne of cane they
harvest, transport and crush.
A 8-kg (17.6 lb) reduction in sugar concentration is equivalent
to 8 kilograms less sugar or 5 liters less ethanol per tonne of cane
processed, Padua said.
"I would say profit this season will likely be lower than in the
previous one, which was already difficult. (Sugar and ethanol)
prices will possibly be higher (than in 2007/08) but costs will be
even higher still," Padua said.
High costs are not sufficient to cause cancellations of new
plants, but have been delaying some projects. Investors do not look
as enthusiastic as they did a few years ago, producers said.
"Projects that are being built were decided in 2006, 2007. You
don't see any new investment, to be ready around 2011, 2012," Padua
A new mill usually takes three years to begin operations.
"Prices have to reach 17 cents (per lb) for Brazil to resume
planting cane. At 15 cents, no mill will be built," Cosan's de Mello
Hedge funds, private equity funds and multinational companies
are the majority of investors now in the sector and if prices do not
compensate production costs and invested capital, "there won't be
more production," he said.
But de Mello added that this situation would help boost sugar
prices to around 17-18 cents per lb in the next two years.
(Editing by Reese Ewing and Marguerita Choy)