After having rallied nearly 30 per cent this year, sugar prices in the global market will likely hold up next year with the weather playing an important factor in the firm price trend, according to industry experts and analysts.
With prices of crude oil threatening to top $100 a barrel and ethanol playing a key role in the convergence of energy prices, they said addressing a webinar “Global Sugar: Brazil loss-Will India fill the gap?” organised by the All India Sugar Traders Association.
Poor demand
“Sugar prices will hold up in 2022 and weather can help the bull market to continue. The market is bullish from speculators point of view, but not yet. This is because demand was poor in the first six months this year,” said Robin Shaw, Managing Director of London-based Marex Spectron that trades in energy and other commodities.
Many nations and companies bought additional sugar last year as prices were low. “They are now eating in 2021 the stocks bought last year. This will result in demand resurgence in 2022. But the freight market is a horrendous negative demand factor,” Shaw said.
Brazil, Australia and Thailand have become tired of sugar production. Brazil has achieved maximum production and over the next two years, there would be nowhere to go for extra sugar as the pipelines were running empty.
Reasons for deficit
The world needs two million tonnes (mt) of additional sugar every year to meet demand arising from growing population. “The world market needs a new major structural exporter and India is the prime candidate for it,” he said.
The Marex Spectron official pointed out four reasons for the current global sugar deficit. One was energy prices have pulled up ethanol parity rates higher, which meant sugar prices also had to rise by 100-200 points above ethanol.
“The second reason is sugar output in Brazil will be low next year, too. From 38.5 mt two years ago, production dropped to 32 mt this year. Due to drought, three frosts and fire that ravaged dry sugarcane fields, yield next year will be lower than optimum. So, it will be lower than normal,” Shaw said.
Extreme weather conditions were the third reason and demand recovery from the downside witnessed during the pandemic was the fourth reason. In case of Thailand, even a bearish cassava market has gone up and good rice production were inhibiting Thailand’s sugar production.
Three parities
Sugar prices would be supported by three parities — ethanol, Indian exports and Chinese imports. “China imported huge sugar stocks two years ago. It has consumed all those stocks and will need to import. Therefore, its import prices have to come up in line with the world market. All these factors will have to work perfectly for supply next year,” he said.
However, prices are destined to decline after a couple of good years. Since the sugar price cycle of good times followed by a few bad years continues, nations resort to protection of producers through import duties. “Sugar is the favourite industry for governments but it creates surpluses that have a two-fold negative impact, pushing world prices lower,” Shaw said.
Growers should be educated on the global market scenario and consider planting sugarcane accordingly. There should be a clear cut solution that when surplus occurs, a mechanism should be evolved to get rid of it.
‘Indian industry lucky’
Referring to the Indian scenario, he said the Indian industry was lucky as its government was taking good care of it. “The Indian sugar sector got a second stroke of luck when global prices increased. But it is time for the industry to think of what kind of mechanism is required in the place of the government to manage the situation,” Shaw said.
The mechanism needs four elements — quotas for producers, freedom to expand, plans to get rid of surplus production and ensure benefits of price are extended to stakeholders producing excess sugar.
India could think of varying the area under sugar cultivation and set up a single export agency. It should also think ahead and plan for a “sensible” system that will share the burden of export, Shaw added.
New cane varieties in UP
Jean Luc Bohbot, Wilmar Sugar Chief Executive Officer (CEO), said sugar production in India was rising mainly in view of growers in Uttar Pradesh cultivating new varieties.
On the other hand, growth in emission of carbon dioxide was increasing by 4 per cent annually. “Pollution is a health concern resulting in $12 billion expenditure annually, with coal making up 50 per cent of power generation. With fleet strength doubling, it would mean doubling of carbon dioxide emission. One way out for India could be to increase use of ethanol in fuel mix,” he said.
Ethanol could make up 27 per cent of fuel consumption in India like Brazil, where green energy makes up 80 per cent of total energy generation. Ramping up of ethanol production would result in savings of billions of dollars in India and this would guarantee prices higher than sugar conversion, he said.
Investment in distilleries
“The only way to increase ethanol production is to stimulate investment for competitive distilleries. India requires $3 billion investment for investments to produce five billion litres of ethanol, which actually can be increased to eight billion litres,” Buhbot said.
Energy prices were higher and chances of crude oil prices topping $100 a barrel were real. This would result in prices of commodities increasing with China importing huge volumes of corn and soyabean. “Indonesia, Vietnam, Pakistan and Egypt may import more food,” the Wilmar sugar official said.
Staging that the best lands were being used to produce the best crop under good agricultural practices, he said new lands that could be added for increasing output would be less productive. With the world exposed to “volatile climate change”, any crop surprise was leading to volatility in the market and resulting in frequent price shocks.
Centre of change
But sugar was at the centre of the change where ethanol will play a key role in convergence of energy prices since production of ethanol is expected to increase as the arbitrage was in its favour.
“Brazil will play a key role and India can follow Brazilian example,” Buhbot said, pointing to the Latin American nation’s plan to tax exports.
Karim Salamon, sugar analysis head, Wilmar Sugar, said Brazil crushes two-thirds of its cane for producing ethanol. Its prices were ruling a little more than sugar at over 20 US cents and Brazilian Real’s weakness was aiding the surge in sugar prices. “Brazil can export more sugar if prices rise in tandem with crude. Sugar is bullish this year but ethanol stocks are tight that makes things difficult (on the supply front),” he said.
The above news was originally posted on www.thehindubusinessline.com
