São Paulo – Consolidation, through mergers and acquisitions, has also become a tendency in the Brazilian sugar and alcohol sector, traditionally dominated by smaller family companies. According to the president of the Brazilian Sugarcane Industry Association (Unica), Marcos Sawaya Jank, says that the movement is necessary to guarantee to companies in the field better structure to overcome difficult moments, like the international financial crisis.
“We are going to have a lower number of companies, companies with better capital structure to face the hard moments, to gain economy of scale, some of them international, but also national groups,” said Jank in an exclusive interview to ANBA.
According to him, currently, the great novelty is the entrance into the sector of Brazilian and foreign companies that operate in other sectors, like Odebrecht and Shell, as well as large trading companies that operate in other sectors of agribusiness. Jank pointed out, however, that there is space for medium companies. “I see great opportunities for national groups that are well structured,” he said.
On speaking about the foreign market, the executive evaluated that this year should be good for sugar, but bad for ethanol. To him, the global alcohol market may improve in 2011, in case the United States decides to repeal the barrier placed a while ago against the Brazilian product. Read the main stretches of the interview below:
ANBA – How is the foreign scenery for the sector this year?
Marcos Sawaya Jank – I think that for sugar it will still be good. We had a good year in which exports rose, but there is still global demand that has not yet been supplied, so it is going to continue rising. Ethanol should drop at least 35% this year, due mainly to the fact that there is currently not much market abroad, as there was a great crop in the United States and afterwards, here, we had a supply problem recently, which in fact resulted from the global financial crisis and rain. So most of the ethanol should be used domestically, which in fact is already taking place. We are not yet going to have export growth.
You spoke about domestic supply, and there was a great price increase early this year. How is it possible to avoid that happening? The press today (15) showed something about a request for government credit…
In truth it is the following: ethanol is a commodity like others, the price fluctuates as a function of supply. It was a very atypical year, in which there was a financial crisis like never before, one which directly affected many companies which were out of cash and which, early in the crop, in order to make money, sold alcohol for a very low price. There was, therefore, great oscillation. The prices charged at the mill [per litre of the commodity] were 0.50 Brazilian real (US$ 0.28). Later on, the price rose to over one real. At the height, in the period between crops, appreciation was over 100%. The price was actually high between the second half of January and March. In that period, there was also a reflex of excessive rains, but the crop is already in full progress. We did not return to talking about credit to make storage available because this is a program that the government should have every year, allowing companies, at the start of the crop, not to have to sell the commodity for a low price, storing the product for the period between crops. We are discussing subsidies, speaking about a program with market interest rates to make it possible for part of the alcohol to be stored by mills early into the crop.
Brazil plans to push for ethanol to be made into a global commodity. Doesn’t this kind of price and supply fluctuation affect a plan like that?
I believe not, as, in truth, we are talking about a very short term situation, which happened now, in the last crop, and that should normalise now, this month, within a scenery in which, in truth, 85% of alcohol remains in the domestic market. Alcohol exports are practically non-existent today. It is a very small and volatile market, that starts and stops exporting according to the year. Certainly, 2010 should be one of the worst years for exports, different from 2006 and 2008, which were very good years as there were several opportunities, mainly in the American market. There is currently no regular flow as alcohol has not yet been consolidated as a commodity with regular purchases in the countries that have alcohol programs. For example, we currently export 70% of our sugar and less than 15% of our ethanol. I think that starting in 2011, with the recognition we got in the United States that shows that sugarcane ethanol is an advanced biofuel, which reduces emissions by over 60%, if American tariffs drop at the end of the year – as that is still a problem -, then we may have an investment flow that would allow greater exports. But, before anything, it is necessary for there to be signs of demand. It is no use saying: “You do not have enough offer to supply the US market.” If this potential does not present itself after tariffs are dropped and if we have a huge crop here, it means that income will drop drastically, as we will have nobody to sell to. We always say the following: “There is no offer if there is no clear demand.” And there is currently no clear demand for ethanol on the global market. There is, however, clear demand for sugar. This is the great challenge: we have been granted the passport, with recognition that Brazilian alcohol is three times better than maize ethanol, but we have not yet managed to buy the ticket to travel, as, to buy the ticket, the tariff must drop.
Is there a clear perspective for the tariff to drop?
The forecast is that the tariff should disappear naturally by December 31st, if it is not renewed by the Congress of the United States. The group of companies interested in the tariff have to try to renew it. That is why, over the last two weeks, there has been a serious debate about the tariff, and we are participating in it. We released a site in the United States this week, where we are defending ethanol as an alternative energy source for the United States, reducing dependence on fossil fuels, as an element to reduce the price of petrol in the country, as when alcohol is used the price of petrol may also drop, and as an additional form to protect the environment due to lower greenhouse gas emissions. The campaign shows an alternative. It is, in fact, called Sweeter Alternative, which is related to sugarcane. We feel that this debate should be very intense in the United States, and that there are many groups positioning themselves against the tariff, for it not to be renewed, and they range from users of maize to people concerned with the cost this process may have for US consumers, if tariffs and subsidies remain high. I would say that it is the great theme to be discussed in Washington from now to the end of the year.
But what we have seen up to now regarding the [Barack] Obama government, especially in the case of cotton – in which a [Brazilian] threat of retaliation was made before the government of the US made a decision -, is it possible to have hopes that the government of the US…
I believe that this issue is very strong in Washington because the tariff is an attribution of the Congress, rather than of the Executive, the debate will take place in the Congress. The case of cotton is completely different, it was actually a right that Brazil earned at the WTO (World Trade Organization) to retaliate. Brazil threatened to retaliate in terms of goods and intellectual property, and the North Americans made a counterproposal so that there would be no retaliation. What Brazil has in the case of cotton is not a negotiation with the US government for lowering tariffs, it is none of that, it is just a decision of the WTO that is being enforced, and which led to a compensation.
Outside of the United States, is there any market today that might demand ethanol in large scale from Brazil?
There are several markets. Our main importer is the United States, but we have the European market, which has been an important market for many years, there are several European countries that are good buyers of Brazilian ethanol; we have a market in Asia. Remember: ethanol is not sold only as fuel, we also export ethanol to the chemical industry, which uses it as plain alcohol, and even alcohol for beverages. These markets do exist, there is a large number of small countries that buy our alcohol, but those that attract the most attention is the United States and the European Union.
Some time ago there were several interesting announcements by foreign investors in the area, then things cooled down a little and we have now started hearing about new business taking place. Information regarding mergers has started showing up again. What do you think will happen to investment attraction in the near future?
We always have a moment of consolidation after a bad period. Consolidation results from the financial crisis and low prices, which have now risen, but that were very low early last year. Of course, when there are companies living a hard moment, movement is noticed. The news is that the movement is now attracting great consolidators. On one side, for example, you have a company like Cosan, which has not just grown, but established a strategic partnership with Shell, a new paradigm, a large operation between the largest sugar and alcohol company in the country and one of the largest oil companies in the world. There is another case of a company that was very strong in the area of chemicals and electricity, like Odebrecht group, and which is now entering the ethanol market to develop three things: fuel, electricity generation from biomass and bioplastics. There is also the case of Shree Renuka Sugars, from India, which entered the country as it is eyeing perspectives in the sugar market. There are large agroindustrial trading companies, like Cargill, ADM, Bunge, Dreyfus – mainly Dreyfus and Bunge -, that have now become large in the sector. That is, we are going to have a lower number of companies, companies with better capital structure to face the hard times, that are going to work with larger scales, some being international groups, but also some national ones. Obviously, what is very interesting is the arrival of groups in areas that previously had nothing to do with sugarcane, like, for example, oil and chemical companies.
Has the participation of foreign capital in the sector risen?
Yes. It was 7% but is now close to 22%.
How long [did this expansion take]?
Two years. But it is still a very national sector, despite foreign participation having risen, it is a sector where national capital is predominant and, especially that of family businesses. I think that some consolidation, as is taking place, is necessary. It is important to recall that it is not all foreign capital; it is also taking place here. I, particularly, believe that it would be very good if we also managed to develop stronger national capital, but all investment is welcome. In this more recent cycle, because of multinational agroindustries that began operating and of the Shell-Cosan operation, there has been an internationalization, but in my understanding, national companies will remain very strong, because they know cane like no one. A company such as Shell, for instance, knows the world of oil, but has no experience with sugarcane whatsoever, whereas Cosan has had it for several decades.
Are there many new projects, or does the bulk of it consist of company purchases?
During the growth cycle of 2006 and 2007 greenfields would be created, i.e. new processing plants in pasture or farming areas, and which therefore were favourable to cane. Right now, what we are witnessing is a consolidation of pre-existing companies because of their financial hardships. I believe that from now on, both things are going to happen. On the one hand, consolidation will go on, because there is a very wide range of heterogeneous situations in this sector. There are companies with lots of capital and companies in trouble, there are different situations in terms of costs, logistics, and even management, capital structures are very different from each other as well, and there are also succession issues in certain groups. I also think that as new markets come to being, in particular the international ethanol market, that may lead to growth in construction of new units.
Is there fear that this consolidation process may lead to a very strong concentration in the sector?
No, I believe that we are far from a concentrated sector. From whatever perspective, this is one of the most fragmented sectors in agribusiness/ The orange, soy, and fertilizer industries are much more concentrated. This one is a sector that is still changing, the dynamics have changed with new players coming in, but it still is a very fragmented sector.
The trend, however, is for the profile to change a bit.
I think so, but there will not necessarily be mega-operations. There are many medium-sized groups that might perfectly well undergo a regional consolidation process, making use of local efficiencies. Remember, cane is completely different from soy, for instance. Whereas in soy I can have a plant in one place and bring in the soy from further away, cane needs to be very close to the plant, because it is a more perishable product than cattle and soy, it has to be ground few hours after it has been harvested, and cannot travel farther than 30 or 40 kilometres. The efficient thing to do is not to have 20 plants at 20 different sites, but rather to have clusters of three, four, five plants operating in one given region. These groupings can be done by large or medium companies. I envision a great opportunity for well-structured national groups.
Are you aware of news of investment from the Arab world in Brazil?
There are Arab groups that buy Brazilian sugar and redistribute it. Case in point: one of the leading buyers of Brazilian sugar is a Dubai-based group that basically purchases our raw sugar, then refines it, manufactures sugar in small packages and takes advantage of the return freight of the containers that are sent there. We are seeing this type of opportunity be made use of, but as for the purchase of sugar-energy companies by Arabs, I am not aware of anything at the moment.
*Translated by Mark Ament and Gabriel Pomerancblum
