U.S.-based agribusiness trader Cargill and Brazil's Copersucar announced plans to form a business to create the world's biggest sugar trader through a 50-50 joint venture.
The venture will combine Cargill's trading and logistics expertise and a global customer network that stretches from China to Thailand with supply from Copersucar's vast network of 47 mills, which produce 10 percent of the world's sugar exports.
The deal will catapult Cargill and Copersucar ahead of their major trading competitors, Sucres et Denrees (Sucden), Louis Dreyfus and ED&F Man. Cargill will gain access to sugar in Brazil, the world's top producer, without the financial burden of buying and operating assets, while Copersucar will expand its global footprint and secure Cargill's market know-how, analysts said.
"It's basically the marketing arm of Cargill joining the production arm of Copersucar. They are completely different entities so it's a perfect fit really," said a European analyst.
"Cargill gets access to a lot of sugar in Brazil without having to buy sugar mills."
The companies' ethanol businesses and fixed assets, such as terminals and mills, are excluded from the deal.
For privately held Cargill, which had once dominated sugar trading, the deal marks a turnaround. After suffering its worst quarterly losses in a decade in 2011, which prompted top trader Jonathan Drake to leave, Cargill has kept a low profile in the largest soft commodities market.
Ivo Sarjanovic, who replaced Drake, will be chief executive of the new sugar trading venture, Cargill said.
Copersucar, hit by a devastating fire in October that took its Santos Port terminal off line for months, will be able to refocus its capital on producing sugar in Brazil.
"With the new company, Copersucar strengthens its strategy to consolidate its global presence on the sugar market," Copersucar's board chairman, Luis Roberto Pogetti, said in a statement.
News of its expansion in the troubled sugar sector came as Cargill also announced plans to withdraw from coal trading and European power and gas, where margins have been weakening.
Mills and traders like Copersucar have struggled with razor-thin margins as sugar prices languish close to or below breakeven after four years of oversupply.
Some rivals like Louis Dreyfus's Biosev have begun to shed loss-making businesses. Bunge also said it is considering selling its sugar assets in Brazil.
There is a precedent for 50-50 mergers, especially of assets outside the mill-gate. The biggest consolidated sugar and ethanol producer and distributor, Raizen, was created in 2010 when oil major Royal Dutch Shell formed a joint venture with Brazilian producer Cosan.
WINNERS AND LOSERS
The new venture will likely have access to Copersucar's associate mills crush, which accounts for nearly a fifth of Brazil's annual cane crop, the source of half the world's sugar trade.
Smaller mills may worry that consolidation of the market will reduce the number of companies willing to buy their material.
"Selling sugar will be harder with Copersucar and Cargill working together. If you are independent or a small broker, business just got a shade tougher," said analyst Julio Maria Borges of consultants and brokers Job Economia.
The joint venture is expected to be completed in the second half of this year, Cargill said on Thursday.
Soren Hoed Jensen, sugar and ethanol sales executive director of Copersucar, will become the joint venture's chief operating officer, and Stefano Tonti, financial controller of Cargill's global trading and sugar businesses, will become the joint venture's chief financial officer.
Copersucar's Pogetti will become the first rotating chairman of the new joint venture.