Brazil ethanol sector crawls on credit crunch

01 July 2009 02:57  [Source: ICIS news]

PIRACICABA, BRAZIL (ICIS news)--Brazil’s ethanol sector will continue to struggle for possibly another two years due to a credit crunch that began in August 2008 and nearly crippled the industry, a government official said on Tuesday.

“This is complicated moment for the ethanol industry and the main obstacle continues to be lack of credit,” said Luciano Almeida with the Sao Paulo Department of Development.

Even putting an industry event together right now is “an act of courage,” he said at the opening of the 7th SIMTEC conference in Piracicaba, Sao Paulo.

According to Almeida, the Brazilian ethanol industry became highly leveraged following a rapid expansion that took place in the last three years.

But when credit markets suddenly froze, a number of mills were left hanging by a thread, he said.

The credit crunch was also blamed for a sharp drop in Brazilian ethanol prices, which further compounded the problem, according to sources.

This came as cash-strapped mills began selling ethanol at reduced prices in the first quarter in a desperate bid to service debt and meet operational cash needs.

Adverse market conditions forced Brazil’s second-largest sugarcane group Santelisa Vale to seek a partner earlier this year to escape going into bankruptcy, sources said.

Santelisa was said to have raked in debts of more than Brazilian reais (R) 3.0bn ($1.53bn or €1.09bn) after an aggressive expansion project.

The financial crisis left the industry with at least one black eye after high-flying ethanol maker Infinity Bio-Energy filed for bankruptcy protection in late May.

Infinity, which is listed on the London Stock Exchange, attributed its liquidity troubles to the international financial crisis and the difficulties faced by the sugar and ethanol sector in Brazil.

Market sources expect the Brazilian ethanol sector to go through a phase of intense consolidation as a result of the latest crisis.

“Consolidation, not bankruptcy, seems poised to be the name of the game now,” an industry consultant said on the sidelines of SIMTEC.

($1 = R1.96/ $1 = €0.71)

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By: William Lemos
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