SAO PAULO (Reuters) - A steep decline in sugar and oil prices over the last six months has diminished the hope of financial recovery for a number of Brazilian mills, and could put new dealmaking in the sector on hold, according to industry experts.
Raw sugar prices in New York SBc1 were hovering around 13 cents per pound, down around 40 percent since the fourth quarter of 2016 to a level analysts and millers say is close to production costs in Brazil's centre-south.
At the same time, an ongoing slump in oil prices CLc1 LCOc1 has led state-controlled oil firm Petrobras (PETR4.SA) to repeatedly cut gasoline prices domestically.
That has in turn pressured ethanol producers to follow suit since the two fuels were sold side by side at the pump.
The price pressure on sugar and ethanol could cut short a nascent financial recovery for many Brazilian mills during a global sugar supply deficit in 2015 and 2016. It could also slow down talks between millers and potential investors and lead to more closures of indebted firms.
"We can't deny that the current situation strongly impacts our liquidity," said Tony Rivera, a director at Renuka do Brasil SA, the local unit of Indian sugar maker Shree Renuka Sugars (SRES.NS).
Renuka has four mills in Brazil and is one of dozens of companies that have filed for bankruptcy protection. The company has plans to sell two of its mills to pay debt and raise working capital to continue operations in the country, even at a smaller scale.
But Rivera says falling sugar and ethanol prices also impact that plan.
"The current outlook is a problem, because on one side it scares those who are not fully convinced to invest in the sector. And on the other side, it brings down the price investors are willing to pay for the plants," he said.
A combination of weak sugar and ethanol prices in Brazil from 2010 to 2014 wreaked havoc on the sugar industry, triggering the closure of dozens of mills and leading many others to seek bankruptcy protection, a process that is ongoing.
At the time, the government kept gasoline prices artificially low to fight inflation, consequently cutting margins on ethanol sales, while a multi-year global sugar surplus depressed sugar values. Cane industry group Unica said 80 plants have been idled in Brazil since 2010.
The closings reduced spare cane crushing capacity, limiting growth in the industry. According to Unica, sugar output was 35.6 million tonnes last season, up only slightly from 33.5 million tonnes in 2010/11.
Some of the hardest-hit firms have been snapped up by players with stronger capital structures.
Last November, Glencore Plc (GLEN.L) bought the Guararapes mill to add a second plant to its operations in the main cane belt of Sao Paulo state, in a judicial auction.
Renuka will try to sell its Brejo Alegre mill in a judicial auction as well on Sept. 4. Rivera said there were companies looking at data provided before the auction, but he declined to name them.
Dario Gaeta, chief executive officer at Tietê Agroindustrial, the firm managing the two mills bought in 2015 by Cargill's Black River Asset Management LLC from distressed group Ruette, believed dozens of mills were up for sale, but that willing buyers were scarce.
"Some mills are so heavily indebted that they would need to sell themselves for 1 dollar and hope banks will accept a large haircut to allow new owners to invest and revamp operations."
Brazilian investment bank Itaú BBA said 15 percent of Brazil's mills were struggling with excessive debt loads. Sao Paulo-based Archer Consulting estimates the sector's total debt at 86 billion reais ($26.4 billion).
"For those firms still struggling with non-operational difficulties, the new market situation certainly does not help," Pedro Barreto, Itaú BBA's Agribusiness director, said in an interview.
Fitch Ratings questioned the chances for troubled mills to recover, such as the ones under bankruptcy protection.
"Positive outcomes depend largely on a successful operating environment, higher sugar and ethanol prices, and unhindered access to funding given the capital-intensive nature of the business," the debt rating agency said in a research note.
International bond markets are unlikely to offer much in the way of alternatives for Brazilian mills, and funding from the domestic capital market is not a realistic option for most companies in the sector, Fitch added.
Itaú BBA's Barreto sees merger and acquisition talks cooling under the current situation, since the distance between what sellers want for assets and what buyers are willing to pay tends to increase as sugar prices fall.
Additional reporting by Luciano Costa and José Roberto Gomes; Editing by Christian Plumb and Bernadette Baum