Fitch: Sugar Prices Enable Limited Recovery for Brazil S&E
June 29 2016 - 2:10PM
Business Wire
The upward trend in sugar prices should improve cash flow
generation for the Brazilian Sugar and Ethanol (S&E) industry
over the medium term, but the ability of most companies to quickly
recover a stronger credit profile will be limited, according to
Fitch Ratings.
Supply and demand fundamentals suggest that the upward price
trend could be long term, although the recent spike in prices has
been fueled by excessive and unusual rains in Brazil's
Center-South, the country's largest producing region, it is also
attributable to a strong appetite from investment funds.
The 2015-2016 global season is expected to see the first
shortfall in output relative to demand compared with the past four
seasons. Global sugar stocks ended May 2016 at their lowest level
since 2011, pushing down the stocks-to-use ratio. The steady 2%
annual increase in global demand, combined with significant
reductions in India's and Thailand's sugar output due to El Nino
and the lack of crushing capacity expansion in Brazil, could also
be supporting factors for keeping international sugar prices on
their current upward trend.
The benefit of the recent price surge is not immediate as most
Brazilian S&E companies with access to the derivative markets
and/or credit limits at trading companies had already hedged their
sugar positions before the beginning of the Brazilian ongoing crop
season to end on March 31, 2017. The unfavorable sugar and ethanol
prices seen in past years have led several companies to file for
bankruptcy protection, which also makes the recovery scenario more
challenging.
International sugar prices have been rising robustly, ranging
from USD15 cents/pound-USD20 cents/pound since April 2016, 13%
higher than the average during the same period last year.
Nevertheless, the timing at which Brazilian S&E companies hedge
their sugar positions vary according to each company's commercial
and hedging strategy; Brazil's largest players have 50%-70% of
their expected sugar exposure hedged before the beginning of the
ongoing crop season. In BRL terms, international sugar prices are
currently trading at a quite attractive BRL1,400/ton (USD19
cents/pound) and companies with the most efficient hedging policies
entered the season with hedged sugar positions averaging
BRL1,200/ton (USD14 cents/pound).
Companies like Raizen Energia S.A and Jalles Machado S.A favor
sugar production and are expected to channel extra revenues to pay
down debt and initiate a deleveraging process. Despite the
challenging scenario in 2014 and 2015, they have not ignored
investing in fields and mills. The benefit for financially
distressed S&E companies will be limited as they continue to
favor ethanol production over sugar due to the much shorter cash
conversion cycle involved in fuel production. These companies will
have a restricted ability to deleverage as they may not have the
resources to pay down debt and resume investments in the field and
industrial assets.
Prices of hydrous ethanol have not kept pace with the spike in
sugar prices as the beginning of the current harvest season has
pushed hydrous ethanol prices down by 12% since April 2016. The
indirect cap imposed by gasoline prices is also a limiting factor
in achieving a more sustainable increase in ethanol prices.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch
Wire credit market commentary page. The original article, which may
include hyperlinks to companies and current ratings, can be
accessed at www.fitchratings.com. All opinions expressed are those
of Fitch Ratings.
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Fitch RatingsClaudio Miori, +55-11-4504-2207Associate
DirectorCorporatesFitch Ratings Brasil Ltda.Alameda Santos,700 -
7th floorCerqueira Cesar - Sao Paulo - SPorAlexandre Garcia,
+55-11-4504-2616Associate DirectororKellie Geressy-Nilsen,
+1-212-908-9123Senior AnalystFitch WireFitch Ratings33 Whitehall
StreetNew York, NYorMedia Relations:Elizabeth Fogerty,
+1-212-908-0526New Yorkelizabeth.fogerty@fitchratings.com