The global credit crunch delivered the latest punch to the gut of Brazil's ethanol and sugar industry, which has been struggling with low margins over the past couple of years. The bright prospects of some years ago seem to have folded according to producers and analysts participating in the annual Datagro Sugar and Ethanol Conference in Sao Paulo this week.

They still believe in the sector's potential in the long term but also expect pain to deepen in the short term.

"The sector was already in its own crisis before the credit turmoil, due to oversupply (of sugar), falling prices and rising input costs," said Jose Pessoa de Queiroz Bisneto, president of the family-origin Pessoa group of mills.

His group was in talks to sell its 50-percent share in a mill in Penapolis, in Sao Paulo state, but sees the deal as unlikely for a while due to the financial turmoil.
"Now, there are more people who want to sell (companies), and less people who want to buy," he said, adding that the arrival of large groups in the sector has driven up equipment, land and input prices, consuming the group's margins.
Cosan, one of Brazil's largest sugar and ethanol companies, could be one of the groups interested in takeover opportunities during the crisis, said chief operating officer, Pedro Mizutani.

But Cosan is also facing a hard time financing trade. And investment plans for 2010, including the start-up of two new mills in Goias state, could be delayed or even canceled depending on market conditions.

Mizutani said Cosan has easier access to credit than most of its rivals but this does not mean that the financial turmoil does not affect the group that saw its shares go down sharply in recent months as investors opted for safer investments.
"If you take Cosan's current share price, they do not reach one quarter of our assets," he said. Investors are confused about companies' prices.

MERGERS AND ACQUISITIONS
Brazil's sugar and ethanol industry has been in rapid expansion over the last few years, and companies have been leveraging strongly to invest in future capacity.
Many also face losses from the depreciation of the real to the dollar, as much of their debts were dollar-denominated.

"It's a complicated moment," said analyst Datagro's president, Plinio Nastari. "They leveraged to invest. Investments were greater than their cash flow."
Now, with the credit constraints, producers who are weaker financially could be forced to sell their product at any price to make money, causing price volatility to grow, he said.

This has already happened on the local ethanol market, where prices have fallen recently despite the prospect of low supplies in the interharvest period - January to March 2009.

The head of the Sugar Cane Industry Association (Unica), Marcos Jank, said that the credit crisis has also strongly reduced the capacity of Brazil's cane sector to get trade financing as well as blocked investment credit.

"We need money to finance ethanol stocks during the interharvest period and to satisfy the world sugar demand," Jank said.

Analysts and producers say the sector will see a strong rise in mergers and acquisitions, as weaker companies become takeover targets and expansion will come at a slower pace.
"The biggest consequence from the financial crisis is consolidation replacing expansion," said the head of the International Sugar Organization (ISO), Peter Baron, adding that this may not be unhealthy.

"Money is difficult to get, everything will be a bit slower. Some projects may not materialize at all," Baron said.

"I think what is happening now is a lot of panic reaction, it doesn't have anything to do with the real situation. Fundamentals of the market are quite OK," he said.
After some years being a net exporter of sugar, India is expected to import 1 million tonnes of sugar in 2008/09 and 4 to 4.5 million tonnes in the following season, Nastari said.

Even if the credit crunch hits car sales in Brazil, demand for ethanol is expected to remain strong. (Editing by Reese Ewing and Marguerita Choy)

(Por Inae Riveras, Reuters, 28/10/2008)