Energy sapped from Brazilian renewables

Brazil’s clean energy stocks have failed to avoid the massive slump of the Bovespa, which dropped by 36.5% in the first three weeks of October. The Brazilian stock market is down by 50.7% since the beginning of the year, its worst performance ever.

In parallel, the benchmark New Energy Finance Renewable Energy Index (NEX) collapsed by 65.5% in the third quarter.

Sao Martinho and Acucor Guarani, the largest sugar and ethanol producers listed on Bovespa, saw their share price drop 55.9% and 81.5% respectively over the last three months. In the case of sugar producer Acucor Guarani, its market capitalisation fell from $1,058m to $183m.

“These stocks are following the Bovespa going down and mirror the volatility in the market in general”, says Camila Ramos, a senior analyst with investment analyst firm New Energy Finance.

Most of Brazil’s listed clean energy stocks, which primarily means the ethanol market, are highly leveraged and under-capitalised. As a consequence of this, Ramos says, the lack of available credit finance is “hitting them hard”.

Recent appreciation of the dollar against the local real is serving as an additional hurdle for renewable companies, most of which have derivatives and corporate debt in US dollars. The US currency has gone up by over 22% in October against the local real, and more than 30% since January.

For those stocks already in trouble, the credit crunch has merely exacerbated their problems. A case in point is London-listed biodiesel company Clean Energy Brazil, whose stock price is a mere 10.8% of what it was at the end of June. Prior to the current crisis, the company was struggling with supply difficulties and regulatory issues relating to its use of castor oil as feedstock.


Cosan, the company’s US-listed owner, announced it would buy back up to eight million shares in its Brazilian affiliate


The crisis does present opportunities, however, as renewable stocks are now hugely undervalued.

Cosan SA Industria e Comercio – Brazil’s largest sugar and ethanol producer – provides a notable example. The ethanol giant saw its 48.1% share increase during the first six months of this year wiped out by a 59.2% drop since July.

On October 8, Cosan, the company’s US-listed owner, announced it would buy back up to eight million shares in its Brazilian affiliate. Credit Suisse and Brazilian private equity Gavea joined the buy-out.

As a consequence of tighter market conditions, the renewable energy sector is being forced to make radical adjustments, observes Linda Murasawa, head of sustainability at Banco Real.

“They [renewable companies] are undertaking a reanalysis of their investments and making adjustments to their production”, she says.

Yet Murasawa warns that even with such measures the outlook for Brazil is bleak. “The global economy is impacting the renewable sector … the scarcity of credit globally could lead to the non-prioritisation of investments in Brazil.”

As the sector’s risk increases, investors will inevitably look to move their finance capital into safer, more mature industries, she adds.

Not all analysts are pessimistic, with some predicting a brighter future for those clean energy stocks that can ride out the current storm.

“The demand for renewable energy remains the same despite the financial crisis”, argues Roberto Sales, an industry specialist with Sao Paulo-based law firm Trench, Rossi and Watanabe. “So, while we expect more cautious movement in the near term, the sector will still be the target for future investment”.