Regular revisions to gasoline prices by the Brazilian state-owned ethanol group will add an element of volatility to sugar prices, rating agency Fitch said, as it forecast rising sugar prices and ongoing deleveraging of the Brazilian sugar industry.
A key uncertainty in sugar prices is competition with ethanol, as higher production of the biofuel means less cane available for sugar production.
Returns from ethanol production, meanwhile, are dependent on gasoline prices, particularly then refinery-gate prices set by the state energy company Petrobras.
As gasoline prices rise, fuel retailers are incentivised to blend more ethanol into gasoline, for use in the country’s huge fleet of flex-fuel vehicles.
“Petrobras new policy approach to revise gasoline prices more frequently tends to add volatility to ethanol prices and its competitive position within Brazil,” Fitch said.
On Monday Petrobras announced an 8.1% increase of refinery-gate gasoline prices, as well as a 9.5%
Speaking to Agrimoney, a Fitch analyst said that the move was bullish for ethanol and sugar prices, but cautioned to expect more revisions of ethanol prices to come, one way or another.
Fitch forecast “positive fundamentals,” for sugar markets over the next two seasons.
“Sugar prices are embarking on a steep upward trend following a significant global deficit and increasingly long positions taken by investment funds in the commodity,” Fitch said.
The rating agency forecast increasing polarisation of the Brazilian sugar industry, as the financial situations of the best and worst companies diverges.
“This is due to the well-managed sugar and ethanol companies streamlining agricultural and industrial operations, allowing them to take advantage of higher prices to deleverage and increase liquidity,” Fitch said.
“Investments are expected to be concentrated on renewal of cane fields and small improvements of industrial operations.”
Industry to deleverage
The heavy debt levels across many Brazilian sugar companies will ease next year, Fitch said.
“Higher prices will contribute to higher operating cash flow generation across the board.”
But Fitch warned that “a further depreciation of the Brazilian real would hurt the sector’s ability to reduce leverage given the large presence of U.S. dollar-denominated debt”.
And the rating agency said that “companies with weaker positions will struggle to maintain adequate liquidity and deleverage.”