Friday, July 12, 2013

Crumbling BRICs undermining sugar price prospects

by James Moore

Crumbling in some BRIC economies bodes ill for the outlook for sugar prices, posing "serious problems" to demand, yet underpinning Brazilian production prospects, a leading soft commodities commentator cautioned.

The swing in investor sentiment back towards Western countries from developing markets is a "particularly tough" pill for sugar markets to swallow, given that it is the likes of Asia which have supported consumption growth and therefore prices, leading soft commodities commentator Judith Ganes-Chase said.

"For years, consumption growth in sugar has come from developing nations rather than industrialised nations, where demand has been staid," Ms Ganes-Chase said.

However, "as investment in emerging markets is being reduced, more countries are at risk for a downturn after enjoying robust growth", she said, flagging in particular the importance of Brazil and China – two of the important "BRIC" developing market economics, with Russia and India.

"One only has to look at the headlines to see where sugar can run into some serious problems with Brazil, China, and others expecting demand to be cooled."

The comments follow disappointing trade data from China earlier this week, and ahead of GDP data due on Monday.

China has historically been a large sugar importer, although strong domestic beet and cane harvests have also questioned the extent to which it will tap markets, pushing up 2012-13 output by 13.5% to 13.07m tonnes, according to National Development and Reform Commission data on Friday.

'Could be a game changer'

For Brazil, the top sugar producer and exporter as well as a major consumer, for which economic growth is seen by some analysts falling below 2% in both 2013 and 2014, slower expansion bodes a particular threat to sugar demand given the country's reliance on cane-based ethanol for fuel.

"Previously, it would have been safe to assume that as the market dropped a greater portion of the Brazilian harvest would be utilised for ethanol," a switch which has been reflected in industry data.

"A downturn in the Brazil economy… could be a game changer as it implies that Brazilians will be driving their cars less and reducing their fuel use," and boosting the incentive to turn cane into sugar rather than ethanol.

Dollar vs real appeal

Leaner economic times may present a further inducement to making sugar, in their impact on weakening the real, which stands among its lowest levels against the dollar since 2009.

"Sugar gains an edge because of the increased attractiveness to get dollars for sugar exported versus payment for ethanol in the domestic market."

While the harvesting of the crop in the key Centre South region "is fairly advanced, there is still ample room for the remainder of the harvest to see an increase in the percentage share of sugar over ethanol", Ms Ganes-Chase, at J Ganes Consulting, said.

Surplus upgrades ahead?

The fresh market dynamics had reduced the chance of downgrades to estimates for the world production surplus in 2013-14, which Kingsman has pegged at 3.927m tonnes, and Rabobank at 3.77m tonnes.

"The sugar market should see a fourth consecutive season of production surpluses in 2013-14, but the size of the expected surplus was expected to be trimmed if consumption perked up from lower prices," Ms Ganes-Chase said.

"I don't see this happening now and therefore the actual surplus for the season ahead could be greater than currently priced into the market."

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