Judith Wilson


JUNE 2017

The No 11 July came off the board at the end of June, and showed no sign of recovery before the contract close.  The contract broke through ethanol parity with a low of 12.55 US c/lb on the 28 June 2017, before closing at 13.68 two days later.  The October 2017 contract, now the front month, has followed a similar trajectory, dipping to a low of 12.76 US c/lb on 28 June 2017, before recovering to current levels above 14.00 US c/lb.  During June, significantly bearish influences were evident in the market.  

A global shortage of deliverable white sugar has resulted in the white premium remaining above $100 per ton for June and the first part of July 2017. Thailand continues to supply demand, with Indian and Central American volumes reported as being mostly sold out.  Strong  demand from East Africa and particularly Kenya, impacted by drought, have been cited as boosting demand.

Brazilian corporation Petrobras changed gasoline prices every few days recently.  The price was cut by 2.9% and 5.9% in June, with the global fuel power citing falling market share as a result of low-priced fuel imports as the reason for the frequent changes.  Petrobras has also indicated that frequent changes should now be expected as part of their strategy to win back the market, and this has played out already with gasoline pricing changing nearly every day in the second week of July 2017.  The negative effect on ethanol of falling gasoline prices is evident, with hydrous ethanol currently having an estimated raw sugar equivalent value of 13.64 US c/lb, according to one of the leading commodities trade houses.  Kingsman has produced a useful graphic below, to illustrate the eroding margin between sugar and Brazilian hydrous ex-mill pricing over several months.

Chinese production for the 2016/2017 season ended in early June 2017, 590 000 tons higher than the previous year to reach 9.29 million tons.  The Chinese structural deficit is set at 6 million tons, to be supplied by imports (both legal and smuggled) and government stock releases. Following the Chinese government’s announced increase in the import tariff for out of quota raw sugar from 50% to 95%, effective from 21 May for 12 months, lower than expected raws have flowed to the region due to ongoing discussions with government on the duty hike.  In addition to the increase in the duty, the Chinese government also announced that certain developing countries would be exempt from the import duty increase, including South Africa. We are not clear yet around all the rules to do with this short term preference, there is an issue of quotas per country that has not been fully clarified, however some premium for raws in this market seems possible. 

The Mexican sugar season has ended poorly at 5.94 million tons, with low renovation rates and lack of investment cited as key drivers for lower production.  Sugar yields were down to 7.67 tons per hectare, versus 7.87 tons per hectare the prior season.  With domestic sugar pricing high, less than expected volumes have flowed to the US in recent months.  With US stocks to use ratios heading below 10 (with a target of over 13), it is possible that the US government will initiate action to increase imports.  This could include an increase in the tariff rate quotas in the coming US season (2017/2018 starting 1 October 2017).  The upcoming signature of the modified Suspension Agreement between the US and Mexico is seen as being supportive of raws pricing into the US market going forward.

The European Commission, in their short term report publish on 11 July 2017, forecasts white sugar production in the European Union to reach 20.1 mn tonnes in 2017/2018, this is 20% higher than the current season. The Commission also expects exports to double to 2.8 mn tonnes in 2017/2018, with a import requirement almost halving to 1.5 million tons for 2017/2018. EU local market prices are reported to be deflated as a result of increased beet production. This is further evidenced by lower volumes of raws imports into the region from SADC countries.  With increasing pressure on Brexit negotiations to facilitate free trade for EU surplus producers to the deficit UK, opportunities for preferential raws into these markets are currently looking bleak.

Speculators continued to increase their net short positions, starting June net short 30 445 lots and ending the month 116 336 lots (close to the record 132 479 lots short in March 2015, when front month prices averaged between 12.00 and 13.00 US c/lb).  The increase in the net short position was as a result of fresh short positions rather than the liquidation of long positions, which changed little in the month.

Since 2006/2007, world sugar producers have produced 21.5 million tons more sugar than required for global consumption.  The surplus of approximately 5 million expected in the current season, with little other than a major weather event to prevent it, is likely to place a cap on pricing upside.  Strenghtening of ethanol pricing may be the major factor lifting the No 11 price from recent low levels, together with some speculator activity.  

Judith Wilson is the
Commercial Director at SASA