February 2, 2016
Sugaronline | http://goo.gl/uZs1Xd
For international investors who missed out on the rush into Brazil's sugar sector a decade ago and have been waiting patiently for their next shot, they will have to be patient just a while longer, reports Sugaronline.
Though the lower Real makes assets more attractive for foreign investment, the current uncertainty of the domestic economy and what will happen to gasoline prices in the medium-term makes it impossible to calculate when a return can be expected, Gareth Forber, LMC International's Head of Sugar, told the Kingsman Platts Sugar Conference.
Investment in new production capacity has ground to a halt, partly due to the domestic ethanol market that is finally now starting to absorb more production along mixed with the heavy indebtedness of much of the industry. Even though the government has offered cheaper financing for ethanol and electricity production, there have been few takers.
Rui Chammas, president of BIOSEV, warned the conference against jumping into rescuing stranded assets like his company did during the last round of consolidation because of the mess often left behind by those assets: poor relationships with supplying cane farmers over lack of payment and ratoons left in poor condition due to lack of proper fertilizing and maintenance that later requires further investment to repair.
"Normally people talk in averages but it is impossible to see what is happening in Brazil by speaking in averages," he said.
Instead, he says there are four types of assets in the market: mills that are bankrupted or mothballed and out of the game, family-owned mills that are highly indebted with no access to international finance, somewhat indebted mills in good shape with access to international finance, and family-owned mills and major businesses with little debt and doing well.
Finding the right asset to invest in among the first two categories is a challenge, but there are some opportunities as well, he said, as there are still the possibilities of further bankruptcies before the industry truly enters the next up-cycle.
In the meantime, Brazilian mills will have to roll with the weak Real that some analysts said could go down to BRL5 to the dollar. Though it means more Reals earned for exports, servicing debt in dollars is a major challenge on fresh resources.
Importing inflation with dollars is also bound to impact operations, Forber says, with inflation hitting the field before the mill as inputs such as fertilizer and fuel are required more often while large machinery replacements is less often.
"Those with heavy exposure to ethanol and large debts will miss out on the benefits of the weak currency," he said, "and we will see a growing dichotomy over next few years between those who are heavily indebted and those who are not."