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Capital Markets

Brazil: Prices in the clouds drive ethanol growth organic

Brazil’s market-leading ethanol producer, Cosan, recently made a U-turn on strategy that says a lot about the overheated market for the chemical. The firm rushed out announcements that it would shift from an acquisitive strategy to one that emphasized organic growth, including upgrades of existing facilities and mechanization of the sugar harvest, as well as expansion in less-competitive geographical areas. It blamed prices that it said were "in the clouds" for the rethink. At a hastily convened press conference, managers said that the price of acquisitions in the sector had risen by 147% between April 2005 and January to April of this year, according to the firm’s own calculations.

The price rises and overhaul of strategy confirm a wider sense of growing alarm at the amount of foreign and domestic money being thrown at Brazil’s highly fragmented and mostly family-owned sugar-ethanol industry (the top five players control just 17.4% of the market) and its ability to absorb cash sensibly through acquisitions. Marcus Regueira, chairman of the Brazilian Association of Private Equity and Venture Capital, thinks that acquisition prices should deter investors from buying the most sought after land and facilities and that the giddy increases are making negotiations ever more sticky as asset owners hold out for higher prices, especially in hot spots such as Ribeirão Preto in São Paulo state.

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