October 26, 2007 / 8:14 PM / in 12 years

Poor ethanol margins delay Brazil mill projects

SAO PAULO, Oct 26 (Reuters) - Tight profit margins in Brazil’s ethanol and sugar industry this year have led to delays in the projected startup of new plants that were scheduled to come on line in the next few years, specialists said.

The sector’s largest groups say they are maintaining investment and construction plans despite low sugar and ethanol prices with long-term perspectives still promising. Equipment suppliers say that sales are still heated.

However, many industry newcomers or companies which depend on their own cash flow to build new mills are preferring to postpone or even abandon projects.

“Investments will slow down until a signal of market recovery appears,” said Antonio de Padua Rodrigues, technical director from the Sugar Cane Industry Union (Unica).

In 2006, international interest to adopt ethanol as a fossil fuel substitute, strong sugar prices and growing demand for the biofuel in Brazil from a growing flex-fuel car fleet caused a flood of new plant projects.

But with ethanol and sugar prices below production costs in Brazil, the world’s most competitive producer, investors’ ambitions have cooled off.

“The future pace of investments will depend on domestic demand for ethanol, its price and on how logistics will improve to make biofuel exports viable, especially in Goias and Mato Grosso (states in Brazil center-west),” Padua said.

Around 138 projects were announced to come on stream in the coming years in the center-south, according to analyst Datagro. But about 30 of them are unlikely to materialize.

“In general terms, there was a one-to-two-year delay in the development of these projects due to lower prices,” said Datagro’s president, Plinio Nastari.

But most of the announced projects are expected to become reality, specialists said.

Datagro says 79 projects out of the 138 scheduled are “highly probable.” They would represent an additional cane crushing capacity of 30.8 million tonnes in the center-south region by 2008. This would then rise to 162.5 million tonnes by 2018.

“Prices influence those companies that depend on their existing mills’ cash flow to invest in new ones ... Large groups’ projects, some of them financed by funds, are not set by current prices,” Padua said.

Brazil’s largest sugar and ethanol producer, Cosan (CSAN3.SA) is one of the companies which is maintaining its investment plans despite low margins.

Cosan raised about $1 billion through an initial public offering in New York and Sao Paulo in August to fund expansion, and intends to invest $1.7 billion in four years to build new mills and expand existing ones.

“Our investments will continue. We already have the money to do so, and market perspectives remain very positive,” Cosan’s President Rubens Ometto said.

Equipment sales to mills have been on a scale not seen since the launching of the government’s Pro-ethanol Program in the 1970s, according to suppliers. But clients appear to be increasingly cautious.

“We haven’t had any impact in terms of sales yet, (but) some clients did comment... If ethanol prices continue at these low levels, we believe new projects, newcomers will slam on the breaks,” said Jose Francisco Davos, Dedini’s business vice president.

Dedini supplies nearly all mills in Brazil with milling and cogeneration equipment as well as technical assistance.

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