10/04/2016 15h06

Raízen and Wilmar join to create sugar giant

Valor International

A sugar giant has been born: Raízen, the commodity’s biggest producer in Brazil, and Wilmar, the Singapore-based sugar trading and refining giant, have struck a commercial alliance. Named RaW, in allusion to sugar, the joint venture will be launched by the companies today already as the second largest sugar exporter in Brazil.

In its first year of operation, which will correspond to the 2017/18 Brazilian crop (set to begin in April next year), RaW is expected to ship about 4.5 million of very-high polarization sugar (VHP), the volume currently handled by both the 24 mills of Raízen and by Wilmar, said Leonardo Gadotti, the managing VP of logistics, distribution and trading of Raízen. Mr. Gadotti will chair the board of the new venture, which, though headquartered in Singapore, will have an operating office in São Paulo. Wilmar executive Jean Luc will be the CEO.

RaW’s creation is part of a reorganization of the sugar-and-ethanol sector that began with the merger of Copersucar and Cargill to create sugar unit Alvean, in 2014, and which reinforces the consolidation at a moment in which selling is easier than producing sugar. “It’s a global trend in the sugar market, and Brazil, as the largest producer, couldn’t be far from that,” the executive says.

The first-year volume alone already would put RaW very close to Alvean, which obtained 5 million tonnes of sugar from Brazil in 2015/16. But unlike its rival, RaW plans to only obtain VHP sugar, meaning it will only ship free on board, and freight costs will be shared by buyer and seller. The company is not satisfied with the second plan and has already devised a strategic plan to take the market’s leadership.

The move not only joins two already important sugar players but also representatives of opposite ends of the market: while Raízen leads Brazilian sugar production Wilmar is one of the biggest buyers, and has stood out in the last few months as the main (and often sole) buyers of raw sugar delivered by New York Stock Exchange traded futures.

Mr. Gadotti says the merger “made complete sense in terms of synergies and potential to better exploit the market.” Wilmar was also already one of the top clients for Raízen’s exports. As for Raízen, which had sales of R$12.2 billion in 2015/16, RaW’s operations should help determine its production strategies as the company will have a broader vision of market demands, the executive says.

Verticalization strategies are no novelty for Raízen, which already accesses the domestic ethanol market directly through its chain of filling stations. Nor are they a novelty for Wilmar, which since 2010 has been striking partnerships with local companies to ensure sugar origination and refining. The Asian company, which had sales of R$38.8 billion last year, had revenue of $4.4 billion with sugar alone, of which 80% was generated through trading.

Wilmar made its first foray into sugar-and-ethanol in 2010, buying Australian producer Sucrogen and Indonesian refiner Jawamanis Rafinasi. The strategy from 2013 to 2015 shifted to acquiring stakes in Morocco and Myanmar companies. The company only has an indirect stake in Brazilian sugar production, controlling 50% of Indian producer Shree Renuka Sugars, which controls two mills in São Paulo and two in Paraná, in addition to seven in India.

The joint venture’s creation did raise questions. Although the Administrative Council of Economic Defense (Cade) approved it without restrictions, several other companies raised concerns to the antitrust watchdog about the potential closure of sugar’s export markets, documents included in the Cade case.

But the Cade ruled against such risk because there are several other sugar producers that have trading options to negotiate their suppliers. Officials also took into consideration that most sugar exported by Raízen already was moving through Wilmar channels before the joint venture.

Antitrust officials believe that neither Raízen nor Wilmar have over a 30% market share in Brazil, and that Wilmar doesn’t have more than 30% of the sugar export market in the country.

Although some trading firms had raised concerns about potential concentration in the Port of Santo’s export market – where Rumo, which like Raízen is part of group Cosan, has a sugar shipment terminal – two representatives from rival companies said they can count on other terminals like the one being built by VLI Logística with a 2017 inauguration date, and with initial capacity to ship 3.7 million tonnes of sugar a year.