SAO PAULO, Feb 14 (Reuters) - Weak sugar prices, government fuel price controls and a year of frost and drought are forcing Brazil’s listed sugar and ethanol companies to cut costs and consider layoffs, as earnings reports this week have shown.
Local sugar and ethanol units controlled by Louis Dreyfus , Cosan, Bunge, Tereos and others see the cuts as essential, to stem losses until sugar prices recover from four-year lows and they can limit or reverse the negative impact of government policies on their profitability.
Takeovers and other alternatives to consolidate the industry are tough because of bleak market conditions and debt taken on during a decade of expansion. Offers from newcomers in Asia and Europe are often too low to let potential sellers recoup their investments.
Even the weather is not cooperating. Severe drought has already led analysts to cut their outlook for the harvest that begins in the coming weeks.
And there are no clear signs of imminent relief.
COMPANIES’ LOSSES GROWING
Brazil’s biggest sugar and ethanol milling group, Raizen Energia SA expects a loss for the quarter ending Dec. 31, of 115.4 million reais ($48 million), compared with a profit of 164.3 million reais in the year-ago period. Raizen Energia is part of a joint venture between Brasil’s Cosan SA and Royal-Dutch Shell, the Anglo-Dutch oil company.
In addition to smaller sugar sales volumes, Raizen Energia blamed a 5 percent decline in the value of Brazil’s real against the dollar for the bulk of the losses.
The company said it continues to make new investments in technology to improve efficiency, such as cellulosic ethanol production allowing the company to extract sugars from more of each kilogram of cane harvested. However, investments have slowed in the expansion of cane production, one of the most capital intensive aspects of the business.
Brazil’s second biggest milling group, Biosev, the sugar and ethanol spinoff of French commodities firm Louis Dreyfus, on Thursday reported a loss of 203.7 million reais in the last three months of 2013, 24 percent more than a year earlier. Last July frost hurt cane fields supplying some of the company’s 12 mills in Mato Grosso do Sul state and its cane crushing, sugar and ethanol output suffered as a result.
The 6 percent slide in sugar prices in the October-December quarter made Biosev’s business challenging, the company said.
Biosev’s capital spending in the nine months through December fell 21 percent to 681 million reais from a year ago.
White Plains-based Bunge Ltd said on Thursday that it had contracted investment bank Morgan Stanley to review options for its money-losing sugar and ethanol milling business in Brazil, which the company bought for $2 billion in 2009 and may now be prepared to sell.
Despite difficulties, some millers turned mild profits.
French milling group Tereos International SA, which controls Grupo Guarani SA, reported a profit of 19 million reais, down 10 percent from a year ago, in part due to a 20 percent increase in tax liabilities. The company also cut investments 24 percent in nine months to 588 million reais.
São Martinho SA was the only of the major groups to post consistently steady profits this season, including net income of 128.6 million reais in the quarter ending Dec. 31, according to a Thursday filing.