Chronic sugar surplus could drive processing consolidation
The growing global sugar surplus as production outstrips consumption, means that there will have to be some consolidation of processing capacity, warns a report from the London-based sugar desk of analyst Marex Spectron Research.
"The reason for this serious pessimism is of course the continuing increases in estimates of so many important crops: India at 31 million tonnes +; Thailand at 14m tonnes +; and the EU ending up at 21.5m tonnes +. So the surplus has gone from being serious to being terminal," Marex notes.
Last week, Rabobank warned sugar prices were trading at a level below the so-called "ethanol parity" - where mills in Brazil can make as much margin from manufacturing bioethanol for the fuels market from cane as that can the sweetener for human consumption. This stage usually indicates that sugar supply and demand is reaching balance, but not this time...
Once below the ethanol parity point, lower prices will do nothing to increase consumption, warns Marex. "We have been saying for weeks, that now that we are below the ethanol parity, there is literally nothing which will be achieved by lower prices. So the flat price can literally go anywhere... 12, 11, 10, 9, 8c... without doing anything to diminish supply (or increase demand)."
30 month sugar low
The ICE May raw sugar contract was unchanged at 12.34 cents per pound in early Monday trading, the value as it closed the previous week, although that week had seen a trading range of 12.22 - 12.55c a lb. March 28th saw a 30 month low of 12.18c a lb.
Marex predicted that consumption growth will decline, exemplified by the introduction of a sugar tax n the UK this week in response to societal concerns over rising obesity levels.
At the same time, output is rising as productivity and yield improvements enable more crop to be produced. British Sugar has just revealed a UK average sugar beet yield of 83.4 tonnes per hectare for the 2017/18 season that has just finished, up from the previous record of 79.8tonnes/ha. It notes that the average yield has risen by 25% over the last decade, and many growers now achieve yields over 100 tonnes/ha.
Add political factors to the fundamental supply demand balance, and "this chronic surplus will continue indefinitely," predicts the analyst. For example, there is "creeping protectionism returning in India and Pakistan in the form of subsidized exports". EU sugar prices are below the official reference price of €404/tonne below which storage aid can be triggered to take quantities off the market, although there seems little political or commercial enthusiasm for this.
Weather factors can always move markets, and already European beet plantings for the new crop are being delayed by the cold, wet weather across the region that is delaying spring plantings in general.
But Marex concludes that concerted national action will be necessary to solve the structural problems within the next year and a half. "It could involve quite simple changes like Brazil investing in extra ethanol-making equipment, Europe and Russia learning to vary production with price, and the Indian government learning that they do not need to tell farmers what to grow."
Whatever, it believes that without such actions, falling prices mean that sugar refining - whether beet or cane - will become so unprofitable that current capacity will have to be consolidated to meet the lower demand level.
In the meantime, Marex adds: "The role of the market is to cause sufficient pain to ensure that such changes take place."