Brazil Sugar-Mill Shutdowns Seen Enduring After Fuel Subsidy CutIsis Almeida
Sugar and ethanol mills in Brazil probably will keep shutting even after the government raised prices for gasoline, because it won’t be enough to lift demand for the competing biofuel.
About 20 mills are likely to shut in the next two to three years, after more than 50 closed since 2007, says Datagro Ltd., a consultant to the industry. The center south, the largest producing region, has about 350 mills, according to London-based Czarnikow Group Ltd., which traded 2.4 million metric tons of raw sugar last year.
“The reasons that are leading to consolidation and mill closures in the sector remain unchanged despite the gasoline price increase,” said Plinio Nastari, the president of Datagro, which is based in Barueri, Brazil. “The price increase is insufficient to extend the life of such mills.”
The Brazilian government caps the price of gasoline in a bid to control inflation. Gasoline competes with ethanol, the price of which isn’t controlled, because almost all cars in the country are able to run on both fuels. Mills also are making less money from sugar, as prices fall for a third consecutive year amid a global supply glut.
Petroleo Brasileiro SA, the state-controlled oil company known as Petrobras, said Nov. 29 it would increase gasoline prices at refineries by 4 percent. That was less than the 5 percent some traders had anticipated, according to Marex Spectron Group. The company also failed to announce a mechanism that would regularly adjust gasoline costs.
The benefit of the gain in gasoline to ethanol producers will be curbed by an 8 percent advance in costs for diesel, which the mills use in transport and to power harvesting equipment, said Patricia Luis-Manso, an analyst at Kingsman SA, a research unit of McGraw Hill Financial Inc.’s Platts.
The “diesel price increased even more than gasoline and that will boost the cost of production for mills,” Luis-Manso said by phone from Lausanne, Switzerland. “The fact that we don’t have any announcement on the formula is bad news because to invest in the sector one needs to be able to plan, to have some certainty about conditions.”
Ethanol cost about 68 percent of the price of gasoline on Nov. 29, according to Kingsman. The biofuel needs to fall below 60 percent for Brazilian motorists to switch, Nastari of Datagro said in an interview in London last week.
About 24 percent of the nation’s flex-fuel cars are currently filling up with ethanol compared with 82 percent in 2009, when the biofuel’s relative cost to gasoline dropped to 54 percent to 56 percent, he said.
“The Brazilian cane industry really is suffering,” Robin Shaw, an analyst at Marex Spectron, said in a report today. “As we have seen in the past, this does not mean that they will plant less, but it does mean they will spend less on husbandry, so yields will fall.”