Cosan, Brazil’s largest producer of sugar and ethanol, argues that heightened demand in the past few months has pushed the prices of everything related to ethanol in Brazil – land, PPE, inventory – past the limits of the acceptable, and that it is thus willing to bide its time until ninety new units, already under construction, shift the supply curve out and prices come down again.
The company’s General Vice-President, Pedro Mizutani, says that the growth of the ethanol sector in Brazil in the coming months should force a drop in prices, bringing down the value of assets in the industry, including land, property, and equipment.
Mr. Mizutani’s projections are based on a simple rule: the relationship between supply and demand. He believes that there is a great risk that ethanol prices will take a plunge once the ninety ethanol plants currently under construction in Brazil become operational, an event that should happen after one or two harvests.
When this happens, supply will have outpaced demand. “The excess of supply will lead to a process of consolidation within the industry”, says Mr. Mizutani. After a season of acquisitions that ended with the purchase of the Bom Retiro plant, in April 2006, Cosan set aside its aggressive-buyer profile to wait for lower prices.
“It is quite clear that the bulk of the growth in the sector today is focused on the development of greenfields (new units), and not in mergers and acquisitions”, says Mr. Mizutani.
What accounts for this, according to the vice-president, is that the interest demonstrated by foreign investors and investment funds with no experience in the industry raised the market value of ethanol-producing plants and refineries over the past months, even when these companies had no contracts closed. For traditional market agents, such as Cosan, prices just got way out of hand. This is especially true in light of Cosan’s business strategy, which calls for the use of cheaper plants in the short run.
Not even the recent drops in international sugar prices had the expected effect on businesses seeking to sell their assets in the sugar and ethanol industry.
“The funds and adventure-seekers who visited the country left a trail of high prices”, says Mr. Mizutani. In his opinion, the sector still harbors expectations that the commodity’s price will retake its upward trajectory, and lowering sales prices now would not be a smart move.
Cosan, however, wants to keep all its options on the table. Mr. Mizutani says that he is constantly assessing new proposals for mergers and acquisitions that are submitted to Cosan, but he considers that the chances for a new acquisition in the coming twelve months are slim.
With its IPO, Cosan raised US$ 887 million, which started to be invested in the acquisition of two new units, Bom Retiro and Acucareira Corona.
At present, the Group has 17 ethanol and sugar-producing units, all of them located in
