World’s biggest sugar producer says outlook for industry is sour

The world’s biggest sugar producer has lost its appetite for sugar.

Cosan, which controls top producer Raizen Energia in a joint venture with Royal Dutch Shell, is cutting investments in sugar cane amid a global glut of the sweetener and Brazilian government policies that hold down the price of ethanol, said chief financial officer Marcelo Martins.

Returns on capital from the company’s sugar and ethanol operations have plunged to below 10%, he said. “Reinvestment in the sector will be made only if returns become satisfactory and we don’t see it happening now,” Martins said.

“Returns need to rise to more than 15% to make investments attractive again.”

Cosan is hunkering down in the industry where it began as it carries out a four-year expansion into petrol and natural-gas distribution, service stations, and railroads. Sugar and ethanol account for about 20% of the Sao Paulo-based company’s earnings before interest, taxes, depreciation and amortisation now, down from about 73% in 2010. That will fall further after Cosan completes its $3bn (€2.2bn), all-stock acquisition of America Latina Logistica, Latin America’s largest railroad operator.

Cia de Gas de Sao Paulo, the gas-distribution firm known as Comgas, which Cosan bought control of in November 2012, accounts for the biggest stake at 35% of earnings.

Sugar futures in New York touched a four-year low in late January and have since rebounded 14%. While Martins sees global stockpiles shrinking and prices bottoming out, the fundamentals of the industry remain the same, he said.

“The sector is going through a very difficult phase, perhaps the worst in 15 to 20 years,” he said, adding that Cosan is weathering the downturn better than peers because it boosted cash generation through biomass power generation and ethanol trading. “We diversified our energy business and countered the volatility in sugar and ethanol.”

Cosan shares have lost 7.3% in the past year. Louis Dreyfus Holding’s Biosev, Brazil’s second-biggest sugar producer, has plunged 49% in the period, and third largest miller Tereos Internacional has declined 13%.

Sugar millers across Brazil, which makes up almost half of the world’s exports, are facing cash shortages after expansions overshot demand. While about two-thirds of the cars in Brazil can run on either ethanol or petrol, producers are limited in what they can charge for the alternative fuel because government policies keep petrol prices artificially low.

“There should be consolidation as this is a very fragmented sector, but there are no consolidators,” Martins said, adding that Raizen, which accounts for more than 50% of Brazil’s ethanol exports, is the only major potential consolidator.

— Bloomberg


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