Commodities | May 19 2009
By Chris Shaw
Unlike many of its commodity counterparts the sugar market is currently running a massive global deficit thanks to a poor Indian harvest for 2008/09 and underperformance in several other Northern Hemisphere markets, all of which has set the scene for a potential bull market story.
Prices have only just begun to react, with late April seeing a surge that pushes July 2009 contract prices as high as US16c per pound, a rise of almost 30% from the January lows and one that, in the view of Barclays Capital at least, is confirming the market’s bullish fundamentals.
Having run so hard Barclays analysts see scope for prices to consolidate at around the US15c per pound level but this doesn’t change their view the bull run in sugar has further to go, especially as India should remain a sizable importer this year and a smaller importer beyond that time as its harvest slowly recovers to previous levels.
Such a recovery may take some time given the scope of the fall in the 2008/09 harvest, Barclays pointing out from initial expectations of a crop of around 24.8 million tonnes the revised outlook is for something in the order of 15 million tonnes. This means as much as three million tonnes of sugar will need to be imported, a far cry from exports of around five million tonnes in 2007/08.
Given a similar level of imports is likely in 2009/10 Barclays sees scope for the global market to remain in a mild deficit position in the coming year as well, offering one reason to suspect the gains in sugar prices have not yet fully run their course.
Another factor is lower production elsewhere, with harvests in both China and Mexico likely to be lower this year than last and output in Thailand expected to follow a similar trend. The analysts note there is also some pressure building in the US to lift imports, all of which sees Barclays adjust its forecast deficit for 2008/09 to 12.3 million tonnes.
The following year Barclays expects a deficit of 6.1 million tonnes, while it notes the rundown in stocks expected as a result of this year’s shortfall will also offer some bullish momentum given the lack of any available safety buffer if there are any further output shocks in the market.
The offset to the problems in India and elsewhere have been market expectations for a sizable harvest in Brazil, especially given the likelihood this year’s crop is significantly larger than that produced in 2008/09. The analysts’ forecasts are for output in 2009/10 of 37.5 million tonnes compared to 31.5 million tonnes in the previous harvest, though risk remains to the downside in their view given the impact of the financial crisis on investment and new mill development.
The other factor in the Brazilian market is how much sugar goes into ethanol production and here a modest pick-up is expected, with about 43% of the crop going to ethanol against 40% previously. While this will still leave Brazil with around three million tonnes of sugar for export, Barclays points out this will largely counter-balance India’s import requirements.
At the same time other countries will likely lift imports, with Russia a prime example given it imported around four million tonnes last year and this year is expected to require more given poor weather has contributed to a poor domestic sugar beet harvest.
In the view of Barclays there are other reasons ethanol demand could have a positive impact on sugar prices, as it points out higher oil prices are supportive for higher ethanol demand given the ethanol-fuel price ratio remains below 70% in most of Brazil. With OPEC production cuts setting the stage for higher oil prices over the course of 2009 the group therefore sees room for ethanol to receive additional support in the market.
In terms of what this means for prices, Barclays is forecasting front-month prices of US15.5c per pound in the September quarter and US14c per pound for the December quarter. This sets a solid platform in its view for any market developments to further tighten the market and so push prices higher in subsequent periods.
To reflect this the group sees scope for front-month prices to remain at around US15c per pound at least until there is genuine improvement in Indian production. With the likelihood certain factors turn more supportive during the coming year prices could in fact move as high as the US19c per pound levels seen in 2006 in the group’s view.
