August 2011 - Brazil needs at least $340 bn investment to meet global sugar demand

Costs of Sugar Production Forecast to Rise by 85%

 Czarnikow Group, the international trading and analysis house, today publishes two landmark reports on the future of the sugar and ethanol industry. The company, which this week celebrates its 150th anniversary, forecasts that at least $340 billion and possibly as much as $490 billion investment in Brazil will be needed to meet soaring global demand for sugar and ethanol.  The papers, titled Brazil’s Need for Growth: the Call for Investment Capital and Brazil Cost and World Market Prices, will highlight the investment Brazil will require to meet rising demand for sugar and ethanol over the next two decades, and look at the key drivers fuelling inflation in production costs over this period.

BRAZIL’S NEED FOR GROWTH: THE CALL FOR INVESTMENT CAPITAL

  • Brazil will need to crush at least 1.4 billion tonnes of cane by 2030, to meet the rising global demand for sugar and domestic demand for ethanol.
  • Czarnikow forecasts that meeting the additional demand will require investment in Brazil of at least $340 billion, and up to $490 billion, to develop infrastructure, mechanisation and land in line with required industry expansion.
  • Demand for Brazilian sugar is being driven by global population growth and rising incomes; the market for ethanol is largely being driven by increasing fuel use. Sales of flex fuel cars are predicted to account for over 85% of Brazil’s total fleet by 2030, from 45% today.
  • The additional Brazilian land requirement to meet the growth in sugar and ethanol demand is 9.17m hectares. This means that land under cane cultivation in Brazil will have to more than double in by 2030.
  • However, the land requirements can be met, as the Brazilian government estimates that there is at least that much land available for expansion in the key CS states, even accounting for expansion in other crops.

 

BRAZIL COST AND WORLD MARKET PRICES

  • The operational cost of sugar production excluding debt in Centre-South Brazil is forecast to rise to over 35c/lb ($772/tonne) over the next 20 years – a rise of more than 85%.
  • Agricultural costs will remain the biggest cost component, accounting for 60% of the total operational production cost. Cane costs are expected to double over the next 20 years from around $37.5/tonne of cane in 2011/12 to over $75/ tonne of cane in 2030.
  • Despite ongoing investment in transport infrastructure, logistical costs face significant headwinds from wage inflation and demand growth. We forecast that these will rise from around $53/tonne of sugar to $94/tonne of sugar over the next 20 years.
  • Industrial cost will rise as wages increase. By 2030, they are forecast to rise to over $18/tonne of cane from $10/tonne of cane today, representing 14% of total costs.
  • Operational inefficiencies will fall over time as better practices are adopted. In turn, this will incur additional general and administrative costs as additional managerial roles are created, and in order to provide the required support infrastructure. We expect these costs to emerge as a significant part of total cost inflation, rising from just under $2.8/tonne to $6.9/tonne by 2030.

 

Toby Cohen, Czarnikow director, said: “These two papers outline two of the key factors that will shape the future for the world sugar market over the next 20 years. Our analysis shows that Brazil will remain central to the world sugar market in the next two decades. To meet rising demand for both sugar and ethanol, at least $340bn of investment will be needed in land and mill development coupled with investment in supporting infrastructure. Over this period, costs of production in the main sugar producing areas of Brazil are predicted to rise significantly, by 85%. The rise in costs will primarily be driven by wage inflation, but growth in costs associated with mechanisation, infrastructure development and expansion will all play a part. These two issues will challenge the industry and the global sugar market in the decades ahead.”

 

Notes to Editors

For further information please contact:

Czarnikow 020 7972 6600
Toby Cohen
Peter de Klerk 

Cubitt Consulting 0207 367 5100
Caroline Merrell
Fergus Brady

About Czarnikow:

Czarnikow Group is one of the most respected names in agricultural commodity markets and has been providing high quality market services since 1861. Czarnikow operates in three core areas; sugar, biofuels and corporate finance. Its success is built upon knowledge of the market, confidentiality, reliability and independence.

Czarnikow deals with around 10% of the 50 million tonnes of sugar that is traded annually, which means that it has a first hand presence in all major sugar markets of the world. Czarnikow works throughout the entire supply chain providing services to growers, millers, refiners, beet producers, traders, merchants and industrial users.

Czarnikow operates from a head office in London and a network of 10 regional offices to service clients and customers globally.