LatinFinance - July 2013 - 41

Brazilian bioenergy

are set to increase perhaps three-fold in Brazil this year, says
Eduardo Saksida, head of capital markets at BER Capital, which
is setting up an agribusiness securitization firm Securitizadora do
Agronegócio.
Saksida points to the growth of Brazil’s real estate
securitization market. “The agribusiness market could be much
larger than that. The industry is worth 22% of GDP,” he says. Last
year around 283 million reais worth of agricultural securitizations
were sold, and he expects 1 billion reais in 2013.

Incentives

Brazil’s 2013-2014 sugarcane harvest is likely to be “too large”,
according to Itaú.
The forecast for Brazil’s South-Central region projects a crush
of 590 million tons, an increase of 10.7% over the previous year’s
533 million tons, according to April estimates from industry
association UNICA.
Itaú says government support measures introduced in the
first half of 2013 are essential balance to the ethanol market and,
ultimately, to the prices paid to producers. Among other changes,
the government cut taxes and raised the ethanol blend in gasoline
to 25% from 20%.
“Demand is always there,” says Aguiar.
“The problem is on the supply side of the
sector.”
Sugar was selling at $0.215 cents per
pound at its peak, and is now $0.16-$0.17,
he explains. Tonon expects a recovery in the
second half of the year, though likely not back
to $0.21. This is mainly due to lower supply,
Rodrigo Aguiar,
because ethanol production often takes
priority.
Ethanol producers pay more for sugarcane than sugar
producers do. They also pay up front, a benefit for some cashstrapped mills.
Ethanol is more profitable under the new rules, and this
is reflected in the producers’ mix. Around 54% of the current
harvest is expected to go towards ethanol production, compared
to 50.5% in the 2012-2013 harvest, according Fitch Ratings. Fitch
considers a 46% sugar and 54% ethanol mix to be consistent with
the companies’ relative production flexibility and the natural
dynamics of the sugar and ethanol industry.
“Those with a higher proportion of ethanol will benefit a bit
more,” says Araújo. Demand for ethanol is more robust in general,
and the new regulations support this.
The measures should boost cash generation. Aralco should
benefit most, Fitch says, as two-thirds of their cane goes to
ethanol, compared to 40% to 50% that others have.
Across the board, the government initiatives “will not
materially change industry fundamentals, as the limited size
of the proposed tax breaks can result in only minimal cash flow
improvement and marginal deleveraging,” Fitch says.
The agency expects that companies with a more flexible
production mix, and those whose strategy is more focused on
ethanol production should benefit more by the recent measure,
assuming sugar prices remain depressed.

“The companies’ strength is to increase ethanol,” says Flávia
Bedran, an analyst at Standard and Poor’s. They can produce
65% to 70% of total crush into ethanol, compared to last year’s
50%.
The use of flex-fueled cars is still growing, Bedran says,
explaining that there is little risk to the higher ethanol
production. Weather and the output of the current crop is
really the big risk for the producers.
Brasília is also offering expanded credit lines at lower cost
through BNDES to renew and expand sugarcane crops. Credit
lines worth 4 billion reais should be available to finance crop
investments at 5.5% per year for up to six years. Inventory lines
of credit costing 7.7% per year have been also announced.
Companies with higher financial flexibility such as USJ and
Cosan’s Raizen – a joint venture with Shell – are more likely to
benefit from the long-term, lower cost facilities, Fitch says.

Room to consolidate

Greater ethanol production is expected to hasten foreign
investment and consolidation. Investments in Brazil’s ethanol
sector should reach $20 billion in the next five years, according
to a report by the Economic Commission for
Latin America and the Caribbean (Eclac).
Increased investments from multinational
firms mean 40% of Brazilian biofuel
production should be in foreign hands by
2018.
“There are many companies with
difficulties,” Araújo says. “The market is
more consolidated than five years ago, but it
Tonon
remains very fragmented.”
Fitch expects this to change in the
medium term, he says, because scale is necessary to survive.
Access to capital markets will be key for Tonon, USJ and other
companies in their group staying alive.
The high number of small and family-owned businesses
leaves room for consolidation, says S&P’s Bedran. “But at
current sugar prices it would not be very profitable.”
Tonon’s Aguiar compares the sector to US oil business 40
to 50 years ago, noting that in 10 to 20 years much more of it
could be owned by big companies, just as happened with oil in
the US.
“We will see some natural selection so the smaller and
financially distressed companies will be driven out of business,”
Aguiar says. “Some companies in the state of São Paulo will
get bigger. Companies that have the power to invest in the
mills and make them bigger and take advantage of financially
distressed mills in their region will still be in place.”
Partnerships may also be a way forward – even for bigger
Brazilian companies like Cosan.
USJ is in a 50-50 joint venture with Cargill to operate in
sugar, ethanol and electricity generation. The deal agreed in
2011 gave USJ additional funds needed to develop a mill, and
it only had to put two of its assets into the joint venture.
“The sector requires much capital,” USJ’s Ré says. “Growing
a lot is difficult to do by yourself.” LF

“Demand is always there.
The problem is on the
supply side of the sector”

July 2013

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