Record ethanol consumption in Brazil, surging exports of the biofuel to the United States and a recovery in sugar and ethanol prices will not be enough to pull local mills' margins out of the red, producers said.
Sugar and ethanol prices have started to improve since December as investment fund buying stormed into commodity complex after a gloomy period of low profitability mainly due to a huge global surplus of sugar.
But this will be offset by a strong surge in costs and the local currency against the dollar, and new investments in production in the world's top sugar and second largest ethanol producer, are unlikely under current market conditions.
"People talk about a commodities boom. But high commodities prices in dollars do not mean a boom," said Carlos Murilo Barros de Mello, commercial director at Cosan (CZLT11.SA: Quote, Profile, Research) (CZZ.N: Quote, Profile, Research), Brazil's largest sugar and ethanol producer group.
Brazil, already the world's top ethanol exporter, is expected to export a record 5 billion liters of the biofuel this year, after U.S. ethanol prices rocketed due to flooding that hurt the Midwest corn belt. Europe and Japan are also poised to begin importing more of the Brazilian biofuel.
Meanwhile, demand for ethanol in Brazil is expected to eclipse gasoline as the main automobile fuel this year due to growth in the flex-fuel cars fleet that can run on any combination of gasoline or ethanol.
"It will be a boom when producers' profit margins rise, and this is not the reality now. Maybe it is to energy and metals, but not for sugar and ethanol," de Mello said.
Costs to produce anhydrous ethanol, which in Brazil is made from sugar cane, rose 20 percent in reais from February 2007 through April 2008, according to Datagro analysts, who forecasts a new increase until July.
During the same period, anhydrous ethanol prices on the local market fell 20 percent, on average.
"Practically all the commodities rose and it was possible to compensate all the increase in costs. In ethanol and sugar, prices would need to rise much more to reach this level," said Antonio de Padua Rodrigues, technical director at the Sugar Cane Industry Association (Unica).
As in other sectors, Brazilian sugar and ethanol producers' profitability has been hit not only by a surge in production costs such as the price of fertilizer which has doubled in the past year but also a strong appreciation of the local currency against the dollar.
The real BRBY has rose 27 percent since April 2007, when the 2007/08 sugar cane crop began.
"The real problem is not the price, but costs and the currency exchange," said Luiz Guilherme Zancaner, president of Unialco sugar and ethanol group. He said fertilizer prices rose 64 percent from a year ago.
Rising fertilizer and diesel prices, and growing labor costs hit mills' results hard in the past year or so, Padua said, adding that poor cane quality this crop has also hurt.
Cane industrial yields — the amount of sucrose per tonne of cane — are lower than the same time last year, when the dry weather contributed to sugar concentration in cane.
Poor sugar content means a rise in transport and production costs as mills get less product from each tonne of cane they harvest, transport and crush.
A 8-kg (17.6 lb) reduction in sugar concentration is equivalent to 8 kilograms less sugar or 5 liters less ethanol per tonne of cane processed, Padua said.
