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Ethanol helping Brazilian sugar makers

SAO PAULO -- Raizen, Royal Dutch Shell Plc's sugar venture with Cosan Industria & Comercio, is among producers set to profit from funneling more of a record cane crop into ethanol as a government measure bolsters demand.

Mills in the Center South, the world's largest sugar producing region, are likely to turn as much as 54 percent of their cane into ethanol in the season starting April 1, the most in three years, said Antonio de Padua Rodrigues, a director at industry association Unica. Brazil plans to boost the amount of the biofuel added to gasoline to 25 percent in June from 20 percent now, the first increase since 2010, Energy Minister Edison Lobao said in a recent interview.

Producers from Raizen, the world's largest cane processor, to billionaire George Soros-backed Adecoagro will benefit from a bumper Brazilian crop and sugar prices poised to rebound after a two-year drop. Raw-sugar futures will rise to 22 cents a pound by year-end, up from yesterday's close of 18.5 cents, according to the median of nine estimates compiled by Bloomberg.

"There's no doubt that an increase in the blend is positive," HSBC analyst Pedro Herrera, who rates Cosan a buy, said Jan. 22 in a telephone interview from New York. "It means ethanol will be more profitable and also gives support to sugar prices."

Adjusted earnings at Sao Paulo-based Cosan, which also has logistics and gas-distribution units, will more than double in 2013 to 1.72 billion reais ($840 million), according to the median estimate of seven analysts compiled by Bloomberg. Profit at No. 2 producer Sao Martinho and Tereos Internacional will climb by at least 30 percent, the data show. Adecoagro, the Luxembourg-based company that runs two ethanol mills in Brazil as well as soybean farms in Argentina, is also forecast to rise.

Cosan, whose shares surged 58 percent in the past year, trades at 26 times earnings estimates for 2013, compared with 23 for Sao Martinho, and 13 for Tereos. Sao Martinho gained 55 percent in the past year and Tereos rose 11 percent.

Mills in the Center South, which make about 90 percent of Brazil's sugar and ethanol, will produce 25 billion liters (6.6 billion gallons) of ethanol from the coming crop, up from 22 billion a year earlier, Maurilio Biagi, the world's second- largest cane grower, said last week in an interview from Ribeirao Preto, Brazil.

Cosan, Sao Martinho and Tereos declined to comment. Adecoagro didn't reply to calls and an email seeking comment.

The increased use of ethanol in the gasoline blend in Brazil, the largest producer and consumer of the biofuel after the United States, will boost annual domestic demand by 1.5 billion liters, Felipe Silveira, an equity analyst at Coinvalores, said in a telephone interview from Sao Paulo.

Demand will rise further should state-run oil producer Petroleo Brasileiro be allowed to raise the price of gasoline it sells to distributors by about 10 percent, said Giovana Araujo, an analyst at Itau Unibanco Holding.

"Give us the right incentives and millers will produce more ethanol," said Narciso Bertholdi, a director at Grupo USJ, a partner of Cargill in two sugar and ethanol ventures. He estimates Center-South producers may turn as much as 55 percent of the crop into ethanol, up from 50.4 percent.

Brazil previously lowered the amount of biofuel blended into gasoline to 20 percent in October 2011, adding to a global sugar glut that dragged prices down 43 percent in the past two years. About 45 percent of the world's sugar exports come from Brazil.

Profitability will increase as ethanol makers bring idled mills on line, after weather damage and debt led to the shutdown of 39 units since 2009, Araujo said. Mills in the Center South will run at 95 percent of capacity on average in 2013, up from 88 percent in 2012, industry group Unica said Dec. 20.

Expected gains will depend on weather remaining favorable for cane crops, Araujo said.

"We are counting on normal weather conditions but who knows if these conditions will materialize?" she said.

Center-South mills will crush up to 590 million metric tons of cane, up from 531.3 million in the current season, Unica's Padua said in an interview yesterday.

"The production of sugar will be more or less the same as the last harvest," producer Biagi said. "The difference in cane output will have to be transformed into ethanol."