Business Standard

Mountains of world inventory keeping sugar in bear hug

Kunal Bose
Raw sugar on Intercontinental Exchange( ICE) in New York has seen a fall of 60 per cent from a 30-year high of 36.08 cents a pound since February 2011 as the world market remains overwhelmed by mountains of stocks in major production centres, including India and also big importing countries like China. London-based sugar advisory group C Czarnikow says in the past three seasons alone, as much as 21 million tonnes (mt) in raw sugar terms were added to world inventory. Notwithstanding unfavourable weather to impact production from Brazil to Australia during 2014-15 (October-September), the global surplus, according to International Sugar Organisation (ISO), will still be 473,000 tonnes. Czarnikow, however, thinks world production this season will be ahead of demand by 600,000 tonnes. Taking a contrary position, the US Department of Agriculture (USDA) says this season will be the first since 2009-10 to see a rundown in sugar inventories. USDA estimates inventory depletion of 1.41 mt. How much sugar the cane crop will yield depends on weather during the growing period and therefore, every season is marked by periodic revision of production estimates. What, however, is unlikely to undergo correction is the Czarnikow forecast of world use growing 2.1 per cent in 2014-15 to 182.5 mt.
 
WHAT’S KEEPING SUGAR PRICES LOW?
  • Excess stock in producers like India and importers like China
  • Despite El Niño-related bad weather, production is in excess of demand in Brazil
  • Fall in production in China would be offset by huge stock, leading to a fall in import
  • Lower imports nothwithstanding, Thailand will lift exports

Except for India, likely to make 25.5 mt, helped by bumper cane harvests five years in a row and the European Union delivering a 12 per cent year-on-year growth in beet-based production by 12 per cent to 18.6 mt, production in other places is set to be hit from El Niño-related dry weather to typhoon. On top of drought lowering cane yield in Brazil, cash-strapped factories in the world's largest producer and exporter of sugar are forced to cut back on planting. According Brazilian sugar industry association Unica, between March and September, land planted with cane dropped about 15 per cent. Facing the 'biggest crisis in its history', the industry is likely to see closure of another nine factories in the country's centre-south region, accounting for about 90 per cent of the country's sugar production in 2015. Last year, 11 factories, under the weight of rising debts and falling revenues stopped cane crushing. No wonder, Unica is foreseeing a 6.9 per cent drop in Brazilian production to 31.9 mt this season. Factories, having painted themselves in a corner, are struggling to raise funds. Not a few of them have been put on a negative list by rating agencies.

Things could not be otherwise for the highly export-dependent Brazilian industry, with the world market remaining in surplus for four seasons in a row through 2013-14 and prices in long stretches below production cost. The world market will remain oversupplied this season, too, though to a much lesser extent than before. What further clouds export prospects is the decision by China to tap its 'enormous inventories' built in past seasons to pare its imports in a low crop year. Forecasts of Chinese sugar production in the current season range from a low of less than 13 mt to a high of 13.4 mt against 14 mt last year. Production setback is attributed to typhoon damaging the crop in the country's south-eastern region and diversion of land to 'fruits and cassava', which are yielding better returns than sugar. Improving living standards leading to change in dietary habits will see Chinese demand growing by four per cent this year. Even then, Chinese imports will be down 300,000 tonnes year-on-year to 3.8 mt, the lowest since 2010-11.

Ignoring production setback predictions, Beijing is sticking to over a decade old low-tariff sugar import quota at 1.95 mt. Potential Indian exporters are watching if China, in response to pleadings by local factories, will raise the out of quota tariff from 50 per cent. Victims of imports in the past few years, Indian factories want New Delhi to raise customs duty to 40 per cent from 25 per cent. India kicked off the year with stocks of 7.5 mt. In the event Indian production turns out to be 25.5 mt and domestic use 24.7 mt, its end-season inventory will climb to 8.3 mt. This, however, assumes nil exports. The world's second largest exporter, Thailand, will have a lower output at 10.2 mt. But this is not to deter Thailand to lift exports by at least 200,000 tonnes to 8.5 mt to meet high Asian import demand.


WHAT'S KEEPING SUGAR PRICES LOW?
n Excess stock in producers like India and importers like China
n Despite El Niño-related bad weather, production is in excess of demand in Brazil
n Fall in production in China would be offset by huge stock, leading to a fall in import
n Lower imports nothwithstanding, Thailand will lift exports

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First Published: Jan 12 2015 | 10:33 PM IST

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