Brazil's Biosev mill closing reflects deepening cane industry woes

SAO PAULO/NEW YORK, March 21 Fri Mar 21, 2014 1:19pm EDT

SAO PAULO/NEW YORK, March 21 (Reuters) - Plans by Biosev SA , Brazil's No. 2 sugar and ethanol producer, to slash costs and idle a mill due to a prolonged sector downturn are the latest sign of the industry's crisis amid weak prices and global oversupply.

Biosev, controlled by French commodities trader Louis Dreyfus, said on Thursday it plans to suspend operations at its Jardest plant, one of its 12 mills, and transfer the plant's cane to be processed at nearby mills.

A series of droughts and frosts in recent years have cut yields and left Biosev with insufficient cane to feed its mills. With sugar and ethanol prices weak, Biosev is opting to shut one plant and run the rest longer rather than boost acres.

It marks the latest move to unwind nearly a decade of rapid expansion by large milling groups that expected ethanol to generate big returns. Efforts by the government to cap fuel prices have reduced producer profitability.

"There's too much capacity, and Brazil is the country that expanded the most, mainly due to forecasts of ethanol demand that didn't pan out," said Michael McDougall, senior vice president at brokerage Newedge USA.

Biosev also plans to scale back investment to align itself with what it considers "a prolonged downward cycle ... and depressed prices" in the sector.

While Jardest represents a small portion of the company's estimated 38 million tonnes of annual crushing capacity, the plans by Biosev, one of the world's biggest commodities merchants, underscore the problems facing Brazil's sugar and ethanol producers as prices languish near 3-1/2-year lows.

At about 17 cents per lb, raw sugar prices are close to or below breakeven, and a recent rally has stalled on renewed demand worries. When debt financing costs are factored in, nearly all Brazilian mills are losing money, according to analysts.

Front-month prices on ICE Futures U.S. tumbled on Friday after data from China showed buyers in the world's No. 2 consumer cut imports by nearly half last month due to higher international prices and record high stocks.

McDougall, the analyst, estimated the closing of a handful of mills so far this year will take some 12.3 million tonnes of cane crushing capacity offline. That is just 2 percent of the country's crush last season, according to Reuters calculations.

COST CUTTING

Biosev also plans to slash its executive staff by 20 percent to reduce fixed costs and restrict short-term discretionary investments, and shuffle some mill management teams.

The company's board has approved a revised business plan that will result in a non-cash charge of 740 million reais ($318 million), according to a securities filing.

The precise impact of the shift in plans will show up on its results for the quarter that closes on March 31. The value of its cane assets is also expected to suffer a downward revision of between 120 million and 180 million reais.

Biosev's rivals are also taking measures to curb exposure to the struggling sector. Bunge Ltd said in late 2013 it was considering options, including sale of its $2 billion Brazilian sugar cane business.

Raw sugar prices on ICE Futures U.S. have rallied 14 percent from a 3-1/2-year low of 14.70 cents a lb in late January, largely on expectations that dry weather in Brazil, the world's top producer and exporter, would cut output.

But the run-up has stalled as higher prices have crimped demand and the world remained awash in inventories after back-to-back surplus years.

The weak market conditions do not bode well for the Brazilian crushers and the world's refiners.

"There is talk of others joining," said McDougall. ($1 = 2.33 reais) (Reporting by Reese Ewing in Sao Paulo and Chris Prentice in New York; Editing by Jeffrey Benkoe)

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