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A quarter of the sugar and alcohol plants operating in the country are in danger of closing their doors by the end of the year due to the coronavirus crisis, according to experts heard by the You are. With no working capital to pay bills in the short term, some of these companies have been affected by the sharp drop in fuel demand. The case was further aggravated by the melting of oil prices: the price of ethanol is based on gasoline. “These are two shocks. The main one is the fall in consumption and then in prices,” says Plínio Nastari, a partner at the consulting firm Datagro.
With some 350 sugar and alcohol plants operating in the country, the sector experienced a drop in alcohol prices from R $ 2 to R $ 1.30 per liter (net value) and demand fell by more than 50%, he says. União da Indústria Caña de Azúcar (Unique). The most capitalized groups have the strength to store their ethanol production and even change the mix of the industry, starting to produce more sugar, to pass the most acute moment of the crisis.
But this is not the case for almost a hundred production units, which cannot store ethanol, and end up selling at low prices, and also lack the financial health to withstand the coming months. “A quarter of the companies in the sector will be under a lot of pressure to guarantee their survival,” says Pedro Fernandes, director of agribusiness at Itaú BBA.
In the Central-South region (Midwest, Southeast and South), which concentrates most of the country’s production, the crushing of sugar cane began in April. However, there are already doubts about whether many companies will have the encouragement to continue. Two weeks ago, the Adecoagro group, which has three plants, two in Mato Grosso do Sul and one in Minas Gerais, issued a statement to its employees informing that they would suspend contracts on their part from Mato Grosso.
The situation is even more delicate for plants that only have distilleries. Of the 267 production units in the Central-South, 80 plants only produce ethanol. Of the total cane harvested in the country in 2019/20, around 35% was used for sugar production, explained Antônio de Padua Rodrigues, director of Unica. This year, the portion can reach 45%.
With revenues of around R $ 100 billion, the sugar and alcohol sector has managed to reduce its indebtedness in recent years; today it is around R $ 90 billion.
A large group of plants accumulates the majority of these debts. In Brazil, there are 104 production units under judicial recovery, of which 81 in the Center-South, according to Única. Since 2005, 95 plants have been closed in the region. With the uncertainties caused by the pandemic, a good part of the companies that are already in financial difficulties follow the same path.
Reversal of optimism.
Until February of this year, the sector had a positive scenario ahead: sugar and ethanol prices were competitive. The most capitalized mills had already blocked sugar prices (coverage) and the demand for fuel was firm. “Sugar prices were 15 cents a pound in February, up from an average of 12 cents last year. Today, the price is below 10 cents,” says Nastari.
Companies with higher storage capacity, such as Raízen (a joint venture between Cosan and Shell) and São Martinho, for example, are managing to curb their ethanol production to resume sales when demand resumes.
For Estadão, the president of Raízen, Ricardo Mussa, said that the company has always been highly disciplined in risk management and the fact that the group is integrated, Raízen is also a fuel distributor, helps in this current crisis. “Right now, the importance of setting prices for the product is clear, not just sugar, but also ethanol.”
According to Fábio Venturelli, president of the São Martinho group, the company set sugar prices when they were quoted at between 14 and 15 cents per pound. “The group also has the capacity to store 70% of its production.”
No consolidation
Unlike the consolidation movement that the sector experienced between 2003 and 2010, large companies should not incorporate companies in difficulties, said Fernandes, from Itaú BBA. “We don’t see a new wave of mergers and acquisitions. We can see the acquisition of agricultural plant areas.”
For an industry specialist, closing the units with losses due to the crisis should be beneficial for the sector in the long term, with the rebalancing of the supply of raw materials in the country. Productivity can increase without expanding the planted area.
The sector asks the government for help
The sugar and alcohol sector is waiting for the definition of a package to help plants to face the crisis caused by the coronavirus pandemic. In addition to a financing line for the storage of ethanol, the plants are asking the government to increase Cide, a tax on gasoline sold, to R $ 0.40 per liter (today, the value is R $ 0.10 ), in addition to the temporary suspension of the PIS and Cofins collection in hydrated ethanol, which is R $ 0.24 per liter. The expectation was that the measures would be announced last week.
