October 8, 2014 / 3:36 PM / 6 years ago

Global sugar mills retrench as depressed prices take toll

* More Brazilian mills likely to close

* Cane crush likely delayed in India’s main sugar state

* Increased consolidation seen in EU

By David Brough and Reese Ewing

LONDON/SAO PAULO, Oct 8 (Reuters) - Squeezed margins in sugar mills, caused by depressed prices after years of global over-supply, are hastening closures and consolidation in the sector, potentially eroding global output and supporting prices.

The world is eating through a huge overhang of stocks after four straight years of surpluses that have driven prices of the sweetener to four-year lows, eroding mills’ financial margins.

Faced with declining revenues, more sugar mills in top producer Brazil are expected to shut in the coming months, while facilities in number two producer India are threatening not to crush cane this year.

Mills in Thailand, the world’s second-biggest sugar exporter, are faring better than those in other leading origins. They have expanded at a more moderate pace than Brazilian mills in recent years, while also benefiting from cheap labour and land, and growing regional markets such as China.

However, margins are suffering in Thailand too, due to low sugar prices.

Benchmark sugar prices fell to a more than four-year low last month with the decline driven by several consecutive seasons where production outstripped demand.

The milling crisis is most acute in top exporter Brazil.

“Why would you take a bankrupt mill and invest more money into a sugar market that does not pay,” Claudiu Covrig, a senior agricultural analyst with Platts Kingsman, said on the sidelines of London sugar week as traders gathered for a biannual dinner.

With prices well below production costs and government prices for gasoline keeping a cap on ethanol margins, mills are likely to continue closing and enter bankruptcy protection or debt restructuring, industry and trade sources said.

“Mills are shutting down, and there may well come a time when there is under-capacity in Brazil,” said Tom McNeill, who heads Australia-based Green Pool Commodities.

“Chances are that there could be another five to 10 Brazilian mill closures next year,” he added.

Under-capacity would mean that cane in the fields would be left uncut and unsold, reducing farmer income and global output while potentially underpinning the global market.

Brazilian under-capacity could also create opportunities for other origins such as Thailand to seize Brazilian share of the global export market.

Since the 2008 financial crisis some 50 mills have shut of the 430 total in Brazil, while around 60 have entered court-protected restructuring.

Another dozen or two are expected to enter court-protected restructuring if the current low point in the cycle drags on for much longer, industry leaders in Brazil said.

“Big players that were traders, for example, and had little management culture in running a mill won’t likely get any bigger,” said Paulo Frank Coelho da Rocha, an M&A specialist at law firm Demarest Advogados which handles cane sector business.

During Brazil’s ethanol boom, large agricultural traders such as Bunge and Louis Dreyfus acquired local milling capacity that transformed them into some of the country’s leading producers of sugar and ethanol almost overnight.

These traders have suffered chronic losses over the past several years and have sought out banks to try to find buyers for at least some of their assets.

THREAT TO INDIA CANE CRUSH

In India, the world’s biggest sugar consumer, mills have been making losses due to the drop in global prices.

The central and state governments set cane prices that mills must pay farmers, but farmers are not ready to accept lower returns.

Most mills in India’s northern state of Uttar Pradesh, the country’s biggest cane producer, have said they will suspend cane crushing in the 2014/15 season unless the state government lowers the price of cane that mills must pay growers.

The state government is yet to announce the cane price for the 2014/15 season.

“Mills won’t start crushing unless the state government rationalises sugar cane pricing policy,” Abinash Verma, director general of the Indian Sugar Mills Association, told Reuters.

“They won’t operate to make more losses.”

If the mills do not produce sugar, India would use up stocks faster and could raise imports, depending on duties, absorbing some of the global over-supply, supporting the global market.

Usually by this time of year, mills start cleaning and maintenance operations before crushing cane from November.

This year, due to lower cane prices, most mills have not started cleaning and maintenance.

This will certainly delay cane crushing in Uttar Pradesh in the 2014/15 season that started on Oct. 1.

F.O. Licht analyst Stefan Uhlenbrock said he expects a trend towards further concentration of sugar producers in Europe but this was more due to the EU sugar reform in 2017 which will create more freedom to produce than to current low sugar prices.

“With the end of sugar quotas in 2017 I expect to see a further concentration process in the EU industry as producers seek greater size to deal with the challenges of producing without quotas in a market where lower prices could be expected,” he said. (Additional reporting by Rajendra Jadhav in Mumbai, Michael Hogan in Hamburg, and Kaweewit Kaewjinda in Bangkok; Editing by Pravin Char)

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