ANALYSIS-Brazil ethanol, sugar mills miss the commodity boom

By Inae Riveras

SAO PAULO, July 7 (Reuters) - 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 ethanol.

"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.