The sugar and ethanol sector went through several scenarios this year. After almost two harvests facing difficulties, in January and February this year we had a good perspective for the sector.

However, in March and April, we were in a completely different scenario, in which there were many uncertainties, both in price dynamics and in the agricultural part, and, in the light of what we had available, we prepared the report "Not everything is sweet for mills. sugar and alcohol".

Now, more than seven months have passed since the beginning of the pandemic, we can say that the sector has managed to go through the worst and we have a neutral perspective.

On the one hand, there are favorable prices for both commodities - ethanol and sugar - a fact that has rarely been seen in recent years. On the other hand, this positive factor can be negatively influenced by the dry climate of this crop. In this report, we will address these issues.

First, let's put the last few months in context and show why we had a more negative view in March and April, as well as the reason why this view has changed more recently.

Current scenario 

Ethanol - As widely publicized, due to social isolation measures, people have reduced their circulation and, consequently, fuel consumption. In other words, demand fell, increasing supply.

In March, there was a 14.2% drop in consumption compared to the same month of 2019; in April, this reduction was 31.3%; and in May, 25%. Even though in June, July and August the decline was lower than in March, in the accumulated result for the year, we still have a contraction of 12.8%.

Still in the dynamics of fuels, ethanol prices reacted to this excess supply, mainly in March and April, months when the mills still had uncertainties regarding their production mix (which may be more sugar-based or with a greater share of ethanol) .

You may be asking yourself: but why did ethanol prices rise again if consumption is still well below the previous year?

The answer to this question is linked to the exchange rate, which was one of the main protagonists of this harvest. With the exchange rate depreciation, we had three effects:

1. Increase in the price of sugar in reais.

2. Increase in the price of gasoline.

3. Negative effect of the increase in the dollar-denominated debt of the plants, with a cash and non-cash effect.

However, the latter has a limited effect for plants that have a high percentage of dollar-denominated debt, which can be amortized by the higher cash generation this year.

Sugar - We note that, even with a sharp drop in price in February 2020, prices were sustained above what we observed in the last two harvests. In addition, the current price approaches historical highs. The price above R $ 1,300 / ton is very positive for the sector, better remunerating the plants.

With the increase in sugar prices, the mills adopted a more sugar mix, which contributed to the lower supply of ethanol and the maintenance of higher fuel prices as of July.

Still on sugar, we also highlight that, despite the high price on the sweetener spot, the price of futures contracts is also positive for the sector. This contributes for the mills to advance in price fixing, ensuring a healthy and predictable cash generation for the coming years.

However, we emphasize that, in order to advance in fixations, the mills need lines of credit and, therefore, some companies with a slightly lower credit quality are unable to have a high percentage fixed and, if they have, it tends to be for smaller horizons.

Finally, another factor that helped the sector here in Brazil was that the price of sugar - in USD cents per pound weight - is not at such a high level.

Despite Brazil adding almost 5 million tons of sugar this season, despite a contraction in world consumption, Thailand and the European Union will reduce production, and China is increasing its purchase to strengthen the local stock. Thus, the sugar price level does not encourage an increase in production in other countries in the short term, due to the cost of production.

The companies 

Although there are impacts that we see for the sector as a whole, each plant has its own characteristics and different financial capacity to go through this moment.

Below we present a summary of the most relevant leverage and liquidity indicators of the main companies we look at in the sector and which have public information.

Coruripe - Coruripe has financial covenants with its creditors and due to the high dollar indebtedness (42% of the total), depending on the level of exchange, it may not comply with these limits.

Coruripe reported a net debt of around R $ 3 billion at the end of the first quarter of the 2020/21 crop, a position 6.23% higher than that recorded during the 2019/20 crop. This amount corresponds to a multiple of 2.99 times the EBITDA for the year.

On August 11, banks Itaú and Rabobank agreed with Usina Coruripe to extend the payment period for part of their debts. As a result, the debt term of R $ 1.7 billion was extended from 3 to 5 years.

The payment schedule has also been changed: 10% of the amount will still be paid in the current harvest, four installments of 15% will mature in each of the next four seasons and the remaining 30% will be paid in 2025.

Thus, the cash flow gains more slack, since there was a reduction of R $ 400 million in the portion related to the current harvest.

However, it is possible to observe from the graphs that, even with the re-profiling, the company remains at risk of refinancing in the short term, since the debts falling due in the current harvest exceed the cash position.

As a mitigator, the Company had already set about 75% of its sugar production at approximately R $ 1,400.00 / ton, bringing some security in the short term.

São Martinho - Based on the closing of June 2020 (1Q20 / 21), even carrying a large inventory, São Martinho has enough cash to honor its debt maturities until 2023.

In addition, the Company is poorly leveraged (net debt / EBITDA of 1.47x in Jun / 20) and since the beginning of the year it had already set prices for almost all sugar production for the 2020/2021 harvest, reducing the relative risks to the commodity's fluctuation.

Tereos - At the end of March 2020, Tereos had R $ 1.7 billion in debt to mature in the short term, against a cash position of R $ 1.6 billion, generating a potential need for refinancing in a context of a certain aversion. risk by the market.

However, on June 15, 2020, Tereos announced the issuance of US $ 105 million (about R $ 525 million) in "green" bonds, that is, which observe socio-environmental and governance factors. By securing this financing, the company partially eased its short-term refinancing pressure.

Vale do Tijuco (CMAA) - The company has little dollar debt and this year made good sugar price fixes in reais. The CMAA has low leverage (net debt / EBITDA below 1.5x) and should not suffer from short-term impacts due to the rise in the dollar and the low price of ethanol.

Zilor - Despite a high leverage in the 2018/2019 crop, Zilor closed the first quarter of the current crop with 3.1x net debt / EBITDA (5.1x in Jun / 19).

In addition, its indebtedness schedule benefits, in addition to the potential for cash generation, by the flow of receipt of court orders, which reduces the risk of refinancing.

Our vision 

In short, due to all the factors mentioned above, we have a positive outlook for the sector in the short-medium term with regard to prices.

The sector's attention factor in this short-medium term is the production of sugarcane, the sector's raw material. The first months of this year, mainly in the state of São Paulo, had a below average rainfall index and there was virtually no rain from March to May, with rains only in June.

The high point of the rains occurs in the summer, mainly between January and March. So, we will have this issue to monitor in the coming months and the point of mitigation to this fact is in the price dynamics, exposed above.

The view on the main plants that we monitor in the sector varies, mainly in relation to refinancing risks, but in general the prospects for the sector should be positive for the cash generation potential in this crop.

The high point of the rains occurs in the summer, mainly between January and March. So, we will have this issue to monitor in the coming months and the point of mitigation to this fact is in the price dynamics, exposed above.

The view on the main plants that we monitor in the sector varies, mainly in relation to refinancing risks, but in general the prospects for the sector should be positive for the cash generation potential in this crop.