NEW YORK (Reuters) - Brazilian sugar and ethanol companies are going into survival mode, cutting back harvest operations and tapping into credit lines to weather the slump in fuel demand caused by the coronavirus pandemic.
Government restrictions on movement and businesses to stem the spread of the virus have undercut global demand.
In Brazil, where most cars can run on gasoline or sugar-based ethanol, the fall-off has hit hard, with ripple effects across Latin America’s largest economy.
The country is the world’s No. 2 producer of ethanol behind the United States, with output of 35 billion liters (9.24 billion gallons) last year.
Ethanol sales in Brazil’s top fuel consuming central-south region dropped 20% in the second half of March, according to sugar industry group Unica.
Given the downturn, some sugar companies have decided to delay harvest operations. Others are rushing to expand ethanol storage as mills tap additional, costlier credit lines and cut back on some crop care practices, which could hurt next year’s cane production.
“We expect to sell only 30% or 40% of normal volume in April, and maybe 60% of normal in May,” said Fabio Montechi, chief financial officer at Santa Isabel, a sugar company with two plants in Sao Paulo state that crush about 6 million tonnes of cane per year. The company is building an additional tank to store ethanol and is setting up a revolving credit line.
Itau BBA, the investment bank controlled by Brazil’s largest private bank Itau Unibanco Holdings, estimates that up to 30% of Brazilian sugar and ethanol companies are struggling financially and may have to halt operations.
“Every year, those mills with difficult capital conditions produce more ethanol at the harvest kick-off, to sell the fuel and raise cash to pay harvest costs,” said Pedro Fernandes, agribusiness director for Itau BBA, adding that the drop in ethanol demand would hamper that business model.
Hydrous ethanol prices are down by 31% this year in Sao Paulo state, according to the Cepea/Esalq research center, having fallen from 2.04 reais per liter to 1.39 reais per liter. Sugar prices touched a 1-1/2 year low this week as Brazilian mills shifted production from ethanol to sugar, boosting that supply.
(GRAPHIC: Brazilian ethanol prices plunge: reut.rs/2K998jn)
Even before the coronavirus crisis, some Brazilian sugar mills were still struggling to recover from a long period of subsidized gasoline prices between 2012 and 2016, when the government tried to control inflation. More than 80 mills filed for bankruptcy protection during or right after that period.
The Itajobi mill in Sao Paulo state is one of those financially troubled. Itajobi’s director, Henrique Dalkirane, said the mill kicked off cane crushing late last month. Itajobi is looking to crush 2 million tonnes of cane this season, but it is struggling to pay bills, he said.
“It is a straight blow to cash flow,” said Dalkirane, adding that for every 10-cent decline in ethanol price, annual revenues fall 10 million reais ($1.95 million).
The company recently restructured its debt to extend maturities for repayment. Now, Dalkirane said, the mill may halt harvesting and any debt service payments are unlikely to be made this year.
Larger groups such as Raizen, Sao Martinho and Bunge BP Bioenergia will likely weather the declines by making as much sugar as possible and stocking ethanol for later sales, said Fabio Meneghin, an ethanol analyst at Agroconsult.
But that is not an option for everyone. Fernando Perri, a director at Grupo Farias, which has five ethanol plants in Brazil, said his company is postponing harvesting for at least a month to see if prices improve, rather than produce ethanol that goes unsold.
“We risk ending up leaving cane in the field, but I guess that is better than running the plant only to fill out ethanol tanks,” he said.
Reporting by Marcelo Teixeira; Editing by Tom Brown