Brazil’s sugar and ethanol group Biosev SA believes sugar prices will remain strong, the chief executive of the world’s second largest cane processor said on Friday, citing dismal prospects for expanding production capacity.
Biosev, controlled by French commodities trader Louis Dreyfus, posted on Thursday its first quarterly profit since 2013, as revenues from sugar and ethanol sales soared compared with a year earlier.
“When you look at the sugar production costs for the main producing countries, only Brazil has a cost that is below the international benchmark,” Biosev Chief Executive Officer Rui Chammas told Reuters in an interview on Friday.
“So, Brazil would be the country with an incentive to increase output. But this will take some time, allowing the positive cycle for sugar prices to last longer,” he said.
Brazil’s sugar industry is still heavily indebted and the lean years of low prices, which discouraged major investments, are still fresh in the sector’s memory.
Sugar prices recovered last year from a long downward cycle, when large annual surpluses kept prices low.
Moreover, the Brazilian government kept gasoline prices artificially low for years up to 2015, squeezing profit margins for ethanol producers.
Brazil’s investment bank Itau BBA estimates the sugar sector debt load at close to 100 billion reais ($25.1 billion).
Biosev says its sugar production cost is currently at 9.5 cents per pound, compared to New York’s 13.16 cents per pound in mid-day trading on Friday.
The average cost for Brazilian producers, according to Kingsman consultancy, is close to 12 cents per pound. Other producing countries have costs above 14 cents.
Brazil is expected to harvest a record volume of cane in 2016/17, after El Nino-related rains improved crop conditions.
The prospect of greater output knocked sugar prices from a peak above 15 cents late last year.
But Chammas said many mills will still opt to produce a lot of ethanol, looking for quick cash generation to pay their operations and service debt.
“Many say sugar prices pay mills a premium over ethanol and for that reason, the next Brazilian crop will have a production mix heavier on sugar compared to last year. I’m not sure about that,” he said.
“We’ve seen some mills making more ethanol than sugar even when sugar was paying more.”
The ethanol market in Brazil is extremely liquid, while mills selling sugar require more time for payment.