Sugar trading at 20% discount to value implied by ethanol

January 28th, 2015

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Category: Sugar

Sugar-Sacks450x299(Agrimoney) – Brazil’s increase to taxes on gasoline will lift above 18 cents a pound the value of raw sugar, in ethanol equivalent terms, bringing a “modest” boost to profitability at the country’s struggling cane processors.

Fitch Ratings said that the decision by Brazil’s government to raise the level of the so-called Pis/Cofins social tax on gasoline to R$0.12 per litre, and to reintroduce a Cide fuel tax of $0.10 per litre, would allow a smaller – but significant – rise in ethanol prices.

“They have the potential to increase hydrous ethanol prices by R$0.15 per litre,” Fitch said, a figure which factors in a discount of some 30% at which the biofuel tends to be priced at compared with gasoline.

The ratings agency flagged too a government move to lift from 25%, potentially to 27.5%, the proportion of ethanol which must by blended into gasoline, a move “which would further stimulate ethanol demand”.

Boost to sugar

The higher ethanol prices encouraged by the tax rises should spur Brazil’s cane processors to turn a bigger proportion of their crop into the biofuel rather than sugar, Fitch said.

This dynamic should in turn “benefit the recovery in sugar prices”.

Indeed, the level at which it makes equal financial sense for cane mills to manufacture ethanol or sweetener will rise to “over” 18 cents a pound from a current level of about $16.6 cents a pound, the agency said.

“This figure is about 20% higher than international sugar prices,” which were on New York’s Ice futures exchange on Wednesday trading at 15.23 cents a pound for March delivery, up 0.5% on the day.

‘Financial stress’

For Brazil’s cane processors, the higher prices will feed through into an uplift of about 15% to prospects for earnings before interest, taxation, depreciation and amortisation (ebitda) giving some support for a sector sapped by debts left over from historic investments, and years of low profitability.

Sugar and ethanol groups will “benefit modestly” from the tax changes, Fitch said.

However, the agency added that the tax increases “will not materially alleviate the financial stress of these companies in 2015”.

Fitch in November, taking a “negative” view of the sector’s outlook said that “downgrades are expected to outnumber rating affirmations, while no upgrades are projected for Latin American sugar and ethanol companies during 2015.

“Systemic risk in the Brazilian sugar and ethanol sector is expected to grow and reduce the availability of working capital financing following the financial distress of important domestic players.”

Petrobas factor

The danger to the picture of higher ethanol, and therefore sugar, prices stemming from the fuel tax rises is that energy giant Petrobas cuts the price at which it supplies gasoline, to reduce competition from supplies imported at cheaper prices, Fitch said.

“Limited storage capacity and logistics are the main constraints for a relevant increase in gasoline imports.”

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