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Bunge, BP team up for Brazil sugar and ethanol venture

fresh sugarcane in garden
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Sao Paulo | Reuters – U.S. commodities trader Bunge Ltd and British energy company BP Plc said on Monday they will merge their Brazilian sugar and ethanol operations to create the world’s third-largest sugarcane processor.

The joint venture is the largest deal in Brazil’s bioenergy sector since Royal Dutch Shell joined forces with Cosan to form industry leader Raízen in 2011.

Together, Bunge and BP will manage 11 cane processing plants in Brazil, with capacity to crush 32 million tonnes of cane per year, putting them behind just Raízen and Biosev, controlled by commodities trader Louis Dreyfus.

The deal gives BP a key role in Brazil’s booming ethanol market ahead of a new federal policy next year aimed at boosting use of biofuels, which are used interchangeably with gasoline in Brazilian passenger cars.

“Brazil is the Saudi Arabia of biofuel,” BP’s head of Alternative Energy, Dev Sanyal, told Reuters. He added that the new venture was cash-flow positive.

Bunge said it will receive cash proceeds of $775 million as part of the agreement, which it expects to use to cut debt.

Bunge shares opened up more than 3 per cent in New York before reducing gains to 1.8 per cent. BP rose 0.7 per cent in London.

The U.S.-based company has tried to sell its sugar operation in Brazil in the past with no success. It then tried listing shares of the unit in Sao Paulo last year, but canceled the plan, citing adverse market conditions.

Bunge sold its sugar trading business to Wilmar International Ltd in August. Its bioenergy unit posted losses in five of the past six quarters and the company forecast results for the unit would be roughly break-even in 2019.

“This partnership with BP represents a major portfolio optimization milestone for Bunge which allows us to reduce our current exposure to sugar milling,” Bunge CEO Gregory Heckman said in a statement.

Market conditions have improved for ethanol in Brazil, with strong demand and better prices, but the global sugar market remains challenging.

“I think the companies together will be able to have large synergies, there will be great optimization of resources and cost reductions,” said Arnaldo Corrêa, a sugar and ethanol consultant in Brazil.

“It is great news for the sector, because the deal creates a much stronger player. All those worries about the future of Bunge’s assets disappeared,” he added.

The joint venture, named BP Bunge Bioenergia, will operate on a standalone basis, headquartered in Sao Paulo. Besides sugar and ethanol, the company has capacity to produce electricity fueled by waste biomass from sugarcane.

“The new company will certainly focus on fuel and electricity, which will have a growing importance as Brazil’s economy recovers,” said Plinio Nastari, chief analyst at Brazilian consultancy Datagro.

The deal is expected to close in the fourth quarter of 2019.

Reporting by Marcelo Teixeira in Sao Paulo; Shradha Singh in Bengaluru; Karl Plume in Chicago; Susanna Twidale and Shadia Nasralla in London

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