| SAO PAULO/NEW YORK, March 21
SAO PAULO/NEW YORK, March 21 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
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
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.
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)