Wednesday, October 15, 2008

"Investment decisions taken in the past will happen but it`s possible that from now on, there won`t be a flow of new projects, not only due to scarce credit but also to two years of low prices," Unica`s president, Marcos Jank, said.

"The sector is very leveraged and the credit crunch worries us," Jank told reporters on the sidelines of a seminar. 

Brazil`s cane ethanol sector has boomed in recent years due to growing domestic demand for biofuels and the prospect of rising exports.

Investments in the sector were estimated at $33 billion from 2005 through 2012 by a range of investors including private funds, trading houses, oil companies and chemical companies. This year, 29 mills have become operational out of the 80 mills planned through 2012.

An increase in mergers between ethanol companies is also possible, Jank said, as credit shortage makes some of them easy takeover targets.

"Every crisis leads to an increase in the concentration process. Companies have to regroup and improve management. In our case, logistics or canefield management could be improved," Jank said.

"But we understand sugar and ethanol fundamentals remain strong," he added. 

Low sugar and ethanol prices and rising input costs have been reducing Brazilan mills` margins in the last two crops, despite a record cane crush.

Lower industrial yields and the appreciation of the local currency against the dollar in recent months worsened their financial situation.

But traders and analysts expect more balanced supply and demand on the sugar market in the coming year as the world moves towards a deficit after two years of surpluses.

Jank also said an economic slowdown could reduce domestic ethanol consumption, but that the impact of the global crisis on Brazil`s economy was still unclear.

Boosted by the launch of flex-fuel cars, vehicles that can run on any mixture of gasoline and ethanol, Brazilian demand for the biofuel rose to 1.6 billion liters per month currently from 550 million liters five years ago.

Trading house ED&F Man said on Monday the expansion of the flex fuel vehicles fleet in Brazil could slowdown as most of car sales are funded by credit.

But Jank was a bit more optimistic.

"Brazil is one of the less affected countries (by the global financial turmoil), and the flex fuel fleet will continue to rise as long as economy grows 4 to 5 percent annually," he said.


© Thomson Reuters 2008