Fitch Ratings sees Brazilian mills continuing to focus on sugar despite ethanol demand

February 2, 2017 |

In Brazil, high sugar prices are expected to offset the potentially negative impact on profitability coming from higher taxes on ethanol in the Brazilian sugar and ethanol (S&E) Industry, according to Fitch Ratings.

World sugar prices are expected to remain high in 2017 due to positive industry fundamentals relative to increasing demand and declining production in countries like Thailand, the world’s second largest sugar exporter. In the international market, sugar is trading at USD21 cents/pound and exceeding by over 60% the average cash cost (recurring investments included) of some of the most cost efficient players in the Brazilian S&E industry.

In addition, recent Brazilian Real performance has enabled sugar mills to lock in attractive prices in BRL terms. Some Brazilian S&E companies have already hedged part of their expected 2017/2018 sugar output at BRL1,600 (USD513.44) per ton, compared with average prices of BRL1,000 (USD320.90) per ton reported in the 2015/2016 harvest.

Mills with higher sugar mix, like Raizen Energia S.A, Biosev S.A, and U.S.J – A Acucar e Alcool S/A, will benefit most while companies more focused on ethanol, like Jalles Machado S.A., will miss the opportunity to boost operating cash flow generation via higher sugar prices.

While tight ethanol market conditions have enabled the pass-through of the federal tax increase onto sales prices in the beginning of 2017, this should not be sustainable once the crushing season begins in 2017/2018.

Room for future ethanol prices increases will depend on the direction of gasoline prices and the new gasoline pricing policy established by Petroleo Brasileiro S.A. (Petrobras). As this policy caps ethanol price growth, increases in gasoline prices would make room for ethanol price increases and reduce the impact of the PIS and Cofins increase on ethanol producers’ margins. A sustained reduction in gasoline prices by Petrobras would have the opposite effect and could accelerate the margin decline to be reported by ethanol producers.

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