The symbiotic relationship between crude oil and sugar prices should still be at work. In fact, any rally in oil will prove to be an incentive for Brazil where cars are designed to use up to 100 per cent ethanol to commit a much larger portion of cane crop for production of the fuel during the new season to start next month (for India and most other cane-based sugar producers, the season starts in October.)
Such a possibility is leading many to believe that in the medium term, ICE raw sugar futures will rise to 27 cents a pound from the present low of around 25 cents a pound. Brazil apart, some other cane producers, though not India, the second-largest harvester, could also put their bet on ethanol production. For the time being, New Delhi has restricted ethanol blending in oil to five per cent.
An analyst with F O Licht says high oil prices could lift sugar in the near term. But, any rise in sugar prices from the current level will not be sustainable as the world will have surplus of the commodity this season and also in the next year. While commodity research house Licht is not ruling out raws caving below 20 cents a pound by year-end under the weight of global surplus, HSBC Holdings says in a recent report that the soft commodity will move in a range of 25 to 20 cents a pound. The last time sugar traded at less than 20 cents a pound was in September 2010.
To further add to the discomfort of sugar exporting countries – New Delhi, so far, has given sanctions for export of two million tonnes (mt) as the country is heading for a bumper production of 26 mt – Federal Reserve Board chairman Ben Bernanke hinting that the Fed was no closer to the third round of quantitative easing (QE3) led many investors to take money out of soft commodities, including sugar.
That the world will be awash with surpluses in two consecutive seasons was foreseen by the trade quite early prompting liquidation of forward positions. In the process, ICE futures lost 27 per cent in 2011. This proved to be the biggest sugar futures fall for a year in a decade. Earlier, three annual shortages in a row sent sugar futures to a 30-year high of 36.08 cents a pound on February 2, 2011. Much light was thrown as to where sugar is heading at two conferences last month – first by Kingsman in Dubai and then by Licht in Bangkok.
While there is a consensus about surplus, quite expectedly research agencies are posting surplus figures different from one another. Surpluses bring happy tidings for bulk users like Coca-Cola. A company official says as sugar surplus is to overwhelm demand, price falls are inevitable and any rally will be short lived.
Let's see how different surplus estimates stack up. The International Sugar Organisation (ISO) has raised global surplus estimate for the current season from the earlier 4.5 mt to 5.2 mt based on likely record production of 173 mt and consumption of 167.83 mt, a rise of 2.32 per cent, against 0.34 per cent in 2010-11 when sugar prices ruled high.
Interestingly, much of the production rise is on account of beet sugar. Output of the sweetener derived from cane is to have a modest increase of 1.9 mt despite the setback in Brazilian crop. The Brazilian loss and therefore, of exports are more than compensated by gains in Thailand, India, Australia and Pakistan.
At the same time, world exports will rise by 2.28 mt to 53.28 mt. As China is to miss sugar production target of 12 mt by up to 700,000 tonnes, it is likely to end up importing 3.5 mt. In a season marked by high production and low prices, countries, including China and bulk users like Coca-Cola and Pepsi will go for inventory building. ISO has pegged 2011-12 stocks to use ratio at close to 37 per cent.
Stocks of such order should have a bearish effecton sugar prices. The median conclusion of traders and analysts that Bloomberg spoke to on the sidelines of Dubai conference is raws could be down to 19.75 cents.
Kingsman thinks global sugar surplus will be down to 5.5 mt in 2012-13 from 9.7 mt. Market intelligence agency Olam International is seeing this season's surplus at nine mt and as for the next season supply will be ahead of demand by anything between six and eight mt. Licht is still not ready with its surplus estimate for 2012-13. Which, however, is likely to be smaller than available this season.
The size of the Brazilian crop and how much of that will be used for making ethanol will be the major determinants of global surplus for the next sugar year.
In the meantime, price falls will hit the Indian industry badly which must export at least three mt to mitigate burden of mounting stocks. Lower realisations from exports will compromise the capacity of factories here to clear cane bills.
Nothing could be more disturbing for the sugar economy than mills not able to settle dues on cane account in time.
