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Wave of sugar mill closings seen due to global price pressures

David Brough
Monday, 4 Nov 2013 | 10:49 AM ET

* Production costs exceed market price in many areas

* Stand-off between cane farmers, mills in India

* Global market seen balanced or in deficit in 2014/15

LONDON, Nov 4 (Reuters) - A global merchant's plan to sell its loss-making sugar milling operation is the first sign that low prices could drive mills out of business and move the market from a surplus to a deficit as soon as next season.

Merchant Bunge Ltd's new chief executive has signalled plans to shed its Brazilian sugar milling business, making it the first such player to consider exiting the once-hot sector, which has swallowed billions of dollars of investment.

Mills in major producers Brazil, India and China have struggled with tumbling margins and years of falling prices, and a coming wave of closures appears to be a near-certainty.

In the centre-south growing region of Brazil, the world's top sugar producer and exporter, as many as 50 of the 330 active sugar mills may not restart in the next season, according to Brazilian cane industry group Unica.

Benchmark sugar prices sank to three-year lows in July , succumbing to the huge global surpluses of recent years.

Meanwhile, governments have supported the prices that mills must pay to cane farmers. The combination of high local costs and falling global prices have squeezed mills' margins.

Production costs for a pound of sugar in many areas now exceed the world market price.

Stefan Uhlenbrock, an analyst with F.O. Licht, said there was a real risk that mills in big producing countries such as Brazil could go out of business.

"The surpluses in the world market and the financial difficulties of mills mean that sooner or later producers will turn off the tap," Uhlenbrock said. "This could trigger a severe downturn in sugar production into 2014/15."

Sergey Gudoshnikov, a senior economist of the International Sugar Organization (ISO), also predicted consolidation in the milling sector, which would give survivors the benefits of economies of scale and greater flexibility.

"It is without question that mills' margins are suffering," Gudoshnikov said. "I am more than sure that there will be more consolidation."

A leading Indian miller noted huge pressure on margins of sugar mills in India, the world's top sugar consumer.

"The situation is grim to say the least," said Abinash Verma, director general of the Indian Sugar Mills Association.

"Prices have not only been depressed for a long time, they have been consistently below production cost, and we have been asking the government to step in to help us stabilise prices."

SURPLUSES, PRICE SUPPORTS

The ISO reported global surpluses of 6.1 million tonnes in 2011/12 and 10.2 million in 2012/13 and has estimated a surplus of 4.5 million tonnes in 2013/14, weighing on prices.

The ISO has not yet released a forecast for 2014/15, but Gudoshnikov said he expected the global market to be finely balanced or to show a small surplus.

He added, "The global sugar market in 2014/15 may be balanced or in slight deficit if production costs persist above market prices."

The financial problems of mills have led to delays in cane crushing in major growing states in India.

"A freefall in sugar prices has become so critical that banks have refused to lend working capital to mills, and that's the main reason behind the delay in cane crushing," Verma said.

In China, mills are also suffering from government-supported cane prices.

"Either the government needs to reduce the fixed price of cane for farmers or alternatively the market support, which is resulting in excessive imports," said Tom McNeill, Australia-based director at commodities analyst Green Pool.

Current Chinese domestic prices are equivalent to $880-890 a tonne, almost double the global price, because of government support for cane and beet farmers, who receive $70 per tonne for cane, compared with just $30 per tonne in Thailand.

The result is squeezed margins for Chinese mills.

"This year some of the smaller-scale mills are losing money, but not everyone, and it hasn't reached a level where companies are going bankrupt," said Zhan Xiao, a senior sugar analyst at Xinhu Futures.

"But if the sugar price continues to drop next year, it could be more serious."