👉 How do Brazilian banks expect a reduction in the sugar sector in the country due to financial problems?

Investment banks working in the agricultural sector of Brazil see a potential reduction in the country’s sugar cane processing industry, as many companies do not get enough money to pay bills, and the best capitalized groups do not want to invest, Reuters writes.

According to the estimates of the Brazilian investment bank Itaú BBA, 18 sugar companies in the main reed belt of the country are not currently receiving enough cash to support their activities, the head of the agricultural enterprise of the bank, Pedro Fernandez, said on Tuesday.

 Another 22 companies are unlikely to generate enough cash to service debt and provide an adequate level of renewal of cane plantations, Fernandes said in a presentation at the Novacana Ethanol conference in São Paulo.

The conclusions were derived from an assessment made by Itaú BBA on the financial situation of 75 sugar and ethanol producers in the south-central Brazil region, with a total processing capacity of 475 million tonnes of the approximately 560 million tonnes that are expected to be processed this year in the region.

According to Fernandez, only 35 companies in this group had a stable financial situation, taking into account the debt per ton of processing capacity for cane and profits after proper reed field renewal.

Fernandez said that the situation led to a reduction in reed processing, as many plants can not invest in cane plantations, and because of the poor market outlook for companies with a better capital structure, there is not enough interest in investment.

World sugar prices have reached the lowest level in the past 10 years amid a surplus supply.

“We see consolidation from the point of view of reed processing. More than 70 plants are closed. Others, who distributed 12 million tons, will process 6 million. Some groups with five or six plants were idle for one or two jobs to optimize the processing, “said Manoel de Keyiros, manager of Rabobank in São Paulo.

In 2018 – during the third year in a row the harvest of reed of Brazil is decreasing. Most analysts do not expect recovery in the next year, as the area of planting reeds is reduced. 

“The harvest may soon be reduced by another 100 million tons. There is no appetite for expansion, “Keiros said.

William Hernandez, an analyst at the consulting company FG / A, said that the return on capital observed in Brazilian sugar companies is currently too low to attract investment, which undermines any idea of expansion.

“Right now, the return on capital invested in the sector is lower than the cost of capital itself. There are many people who lose money, “said Thiago Duarte, an analyst at BTG Pactual, an investment bank.