Yes, the futures sugar market in NY is open, if you have not noticed. However, we are going through one of those phases we have already been through when absolutely nothing happens. The business volume in NY has been very low and most of the futures market trades involve spread. To have an idea, the daily average volume traded at the last five sessions was a little over 100,000 tons, a third below the yearly average. Sugar delivery against May/2014 which expired on April 30 was also a non-event, with Center South leading the way in delivery volume at a little over 600 thousand tons.
The week closed with July/2014 hitting 17.45 cents per pound, a 40-point drop against Friday last week. The other months also closed at a drop between 27 and 58 points during the week, representing a depreciation of 6 to 10 dollars per ton. Demand remains the same. It looks like the market is on a waiting pattern to see how the harvest will be like, if there will be climate-related problems, if Dilma will fall in the opinion polls, etc.
With harvest starting in the Center South and the urgent need for the mills to make money in order to pay their pay sheets and the planting expenses, the easiest way to turn product into money is by selling hydrous ethanol. So, we have seen a steep drop in product this week – over 10%. On the other hand, the volume of sugar exports in April must have been much lower than expected and one of the lowest volumes in recent times. July 2014 now corrects May delivery traded at lower price levels. The market needs good news to get back on its feet.
The National Petroleum Agency has recently put out numbers that show that the fuel consumption in Brazil over the last 12 months (from April 2013 to March 2014) has been 53.36 billion liters, an amazing 8.13% increase on yearly bases. The consumption of gas A (pure, before anhydrous blending) was 31.78 billion liters, only a 0.17% increase against the same period last year. Nevertheless, this rise in consumption, whose increase corresponds to exactly 4 billion liters, was supported by 1.52 billion liters (a 15.69% rise) of hydrous and 2.44 billion liters (30% over) of anhydrous. Overall, today ethanol is responsible for 40.4% of all the fuel consumed in the Otto cycle, the highest percentage since December 2011. It is still lower than the 54.5% reached in December 2009, however.
If the sector has to supply 4 billion more of ethanol every year to meet the internal market appetite, it means we need to grow more sugarcane – at least 45 million tons each year. If the installed capacity of the Center South is 620-640 million tons, how much investment will it take to meet this demand over the next four years? Twenty billion dollars if you are really conservative. Who is going to invest?
In this never-ending chaos, this government seems to be, I cannot help being surprised at the latest nonsense coming from Brasilia day in and day out. It is hard for me to believe that words come out of Mantega’s mouth without going through his brain first. According to the Minister “the sector has to increase its productivity so it can get out of this crisis”. And the greatest pearl of wisdom is when he claims that “he cannot raise gas price just to make the sector feasible since it already has privileged financing at low costs”. In the Workers’ Party (PT) country, the distortion of the truth is the most important activity, which is carried out relentlessly by these people out there.
First, what is this privileged financing the Minister talks about? According to several businesspersons from the sector the truth is unless the mill is in full payment on its fiscal and tax obligations, federal financing is almost like a dream. Second, estimates by reliable institutions such as Itaú BBA, widely disseminated by the press, show that the sector has a debt of R$99 per ton of crushed sugarcane (R$12 of which with BNDES). Multiply it by the 585 million tons of sugarcane estimate for the Center South this 2014/2015 harvest and we will come to almost R$58 million in debt. Third, the Minister does not speak the truth when he says he cannot raise gas price to make the sector feasible. That’s baloney. The sector cannot make itself feasible because gas price is controlled by the federal government, pulling it away from the price practiced on the international market, making Petrobras lose money constantly by importing a product at a higher price than that at the pump. And last but not least, with this week’s price closing, Archer’s estimate is that the mills make on average a little over 3 dollars per ton for crushed sugarcane, which is way too little if we compare the indebtedness to the debt service.
Gas price at the pump, to even it out with WTI oil value, would have to be R$3.1574 per liter. Since the average gas price has been R$2.8800 at the pump, through a simple substitution drill in the model, we come to the top price Petrobras could pay for WTI oil: US$83.45 per barrel. Thus, simply put, we conclude Petrobras loses 16 dollars on every barrel it imports.
I commented some other day that the solution to the sector would be if PT left the government. We need change, people less worried about staying in power forever, people showing decency and respect for the country, people who do not treat the democratic institutions shamefully. I was corrected by a listener who said PT’s leaving is not a solution to the sector, but a solution to the country.
Everybody have a nice weekend.
Arnaldo Luiz Corrêa
