M&A in Brazil sugar cane sector passes peak

Consolidation in Brazil's cane sector has crested, after the 2008 global financial crisis unleashed a wave of mergers and acquisitions in the world's largest sugar industry. Despite a slowdown after the big deals of 2009 and 2010, milling groups have not announced new investments in greenfield projects.
Analysts say new mill investments have to start now to be ready by 2014-15, when the current excess crushing capacity will be exhausted by expansion in the cane crop. "Consolidation will continue but we are passed the 50-percent mark," Eduardo Leon de Souza, executive director of the cane industry association Unica, told Reuters on Monday.
Of the roughly 350-odd sugar and ethanol mills in Brazil, "far fewer than a hundred will still need to have their debt restructured or be bought up," he added.
The list of companies that have pulled off mergers or take-overs in Brazil's sugar cane sector over the past few years is a veritable who's who of the commodities world: Swiss-based Glencore, Asia's Noble Group, BP, Cargill, Royal Dutch Shell, Archer Daniels Midland, Bunge, France's Louis Dreyfus, Tereos and India's Shree Renuka Sugars. When credit dried up in 2008 after the collapse of investment bank Lehman Brothers, many mills with heavily leveraged expansion projects were caught overextended and were pushed to the brink of insolvency.
Soon after the expansion boom in cane fields and mills driven by record high oil prices ground to a halt, consolidation set in.
But demand for sugar and ethanol has continued to grow at a brisk pace. Ethanol prices reached a five-year high on the local market earlier this year and world sugar prices have been drawn to 30-year highs over the past couple years.
The main fundamental driver of these prices has been the lack of investment in new milling capacity and cane planting.
"Global demand for sugar is good as is local and international demand for ethanol. But when you look at the regular indicators for greenfield appetite like equipment suppliers, there are no investments in new mills," Souza said.
He acknowledged that milling groups were investing in expansion of existing mills, plans that were interrupted during the crisis.
Last week, Petrobras and Sao Martinho, as well as Bunge, announced big investments in expanding crushing capacity at their main milling assets.
Bunge even announced a new mill to be built in the northern state of Tocantins as well, but it was put on hold when the 2008 crisis hit despite being at an advanced stage in planning.
Currently, Brazil's cane industry has 100-120 million tonnes of idle crushing capacity, meaning there is insufficient cane production to meet mills' annual ability to produce sugar and ethanol. "These investments are moving ahead now. But it takes three to four years to get a mill built and it requires a lot more capital than simply expanding an existing mill because of infrastructure that is needed," he said.
"Investments in new mills need to start now. We are already far behind demand with both sugar and ethanol. When we get to 2014-15, new mills will need to be ready."