Credit Crunch Seen a Boost to Brazil Sugar Sector M&A

Sao Paulo, Sept 29 - Brazil's sugar and ethanol industry could see an increase in mergers and acquisitions as credit shrinks in the wake of the global financial crisis, analysts and industry sources said on Friday.

Credit lines practically "dried up" this week and, although some see the squeeze as temporary, it will likely hurt some companies' cash flow as well as their capacity to move ahead with expansion plans, they said.

Despite a record cane harvest this season, low sugar and ethanol prices over the last two years have hurt profitability at milling companies while production costs have risen. The most vulnerable ones could be easy targets for deep-pocketed groups that have built up an acquisition war chest.

"The credit crunch will threaten the expansion plans of many companies. Some ongoing projects will have to be sold as resources are scarce to move them ahead," said Luiz Gustavo Junqueira, commercial director at Alta Mogiana mill.

"The good news is that there's also a lot of buyers around," Junqueira said.

Analysts say that, despite low prices in the last two years, the sector's outlook remains positive as demand for cane-based ethanol in Brazil is booming and exports of the biofuel are expected to rise.

Moreover, they predict a more balanced supply and demand on the international sugar market next season as the world moves toward a deficit after two years of surpluses.

"Credit availability is difficult at the moment, but from the fundamental point of view this is unjustifiable. The industry had a period of low prices but this is typically a short-term situation," said analyst Julio Maria Borges, director at consulting firm Job Economia.

About 85 new mills have come onstream since 2005 and 60 more are scheduled to begin operating by 2010, with total investments of around $22 billion.

Producers and analysts are still optimistic about the industry's growth and market potential but now fear credit restrictions could postpone this expansion.

Analyst Plinio Nastari, at consulting firm Datagro, said in a recent interview that the current liquidity crisis was "behind the delay" in new projects' coming on line. Only 20 new mills have become operational this year, out of 35 expected at the beginning of the season.

"I believe several greenfield projects could be abandoned as many mills are financially hurting and some of them are funding their expansion with their own cash flow," a senior industry source said.

"If a group intended to invest $130 per tonne of cane (in crushing capacity) in a greenfield project it could eventually withdraw it and buy a mill or a group of mills for less than that."

The financial crisis is also reducing credit lines that mills need to support their daily operations, producers said.

Since 60 percent to 70 percent of the current crop has already been sold, the main problem would be next season, with companies facing higher cost of credit.

source:flex-news