Domestic market may crash if sugar exports are not allowed

Success in trade is all about timing of deals. It is on this consideration that Indian Sugar Mills Association (Isma) president Narendra Murkumbi is pressing the government to allow the industry to start exporting the sweetener now. What lends weight to the demand is the certainty of bumper production during 2011-12 under the pressure of which the domestic market would collapse without big export. More, global traders are striking a bearish stance on expert forecasts that for the first time in four years, the world will have sugar surplus. The surplus scene may stay unchanged through 2013, impinging on prices. In fact, nine of the 13 experts interviewed by Bloomberg expect raw sugar to go on seeking lower levels.

This is despite the Brazilian sugar industry representative body, UNICA, lowering the country’s centre-south region sugar production estimate to 30.8 million tonnes (mt) from the August forecast of 31.6 mt as the freezing June weather and productivity setback in many cane fields, where replantation is overdue, will restrict the cane crop to 488.5 mt, down from earlier expectation, of 510.2 mt. Stung by the 2008 financial crisis, Brazilian groups are making do with ageing cane plants, at the cost of productivity. Brazil, the world’s largest producer and exporter of sugar, produced 33.5 mt during 2010-11.

But any production setback in Brazil will be more than made good by higher cane production in India, Thailand and China and beet-based sugar output turnaround in many places, including Russia. Beet’s competitiveness vis-a-vis cane has improved in the wake of cane growing costs rising in emerging countries like Brazil and India. What, therefore, naturally follows is the share of beet sugar likely to rise to 22 per cent of global sugar production this season from 20 per cent in 2007-08.

Earlier, the scare from Thailand’s worst floods in half a century pummelling many areas led to a major rally in sugar prices in three weeks to October 27. But gains in prices melted away with the country’s biggest shipper Thai Sugar Trading Corporation announcing record cane production and no delays in sugar exports. Thailand is the world’s second-largest exporter. Imports by China, where demand growth for sugar has outpaced any other country by a long margin in the last five years, resulting from growing urban prosperity, are always anticipated with keen interest by the market. The country’s sugar association says domestic sugar production in the current crop year will rise 15 per cent to 12 mt, while the demand will be in excess of 14 mt. While the deficit is to be covered by imports, Chinese buying in the world market this time could be a lot more if it sets about restocking after drawing down around 3.7 mt from inventory in the past two seasons. According to Morgan Stanley, growing cane in not exactly suitable land that keeps productivity low and crushing mills doing with obsolete machinery are the bane of China’s sugar industry.

Meantime, the forecast by London-based C Czarnikow that 2011-12 imports by Russia will be down to 1.2 mt from last year’s 2.75 mt will be a shot in the arm for bears. Russian imports are to be more than halved on the back of a “strong recovery” in the country’s beet crop, to result in sugar production of 4.6 mt. But how much prices of raws and white will finally react will depend on global surplus. This ranges from 4.2 mt as seen by the International Sugar Organisation to 5.32 mt by Macquaire and to a high of 8.4 mt by Kingston. It is in this context Goldman Sachs is expecting a 9.8 per cent fall in raws in the next six months, while Barclays Capital sees “three quarterly declines” in case sugar surplus bloats.

“New Delhi, which is inviting criticism for unchecked food inflation, is likely to err on the side of caution in granting an export quota. A bountiful cane crop leading to sugar production of 26 mt, along with the season’s opening stocks of 5.976 mt, has created ideal conditions to export nothing less than 4 mt. Hopefully, exports will be allowed quickly. As a move like this will ease the industry inventory burden, mills will have the money to settle cane bills in time. More, it is by unloading our surplus sugar in the world market that domestic prices can be maintained at reasonable levels in the face of supply torrent as the season progresses,” says former Isma president Om Dhanuka.

Land under cane being five million hectares here and the weather behaving nicely, bumper sugar output is not in doubt. But crushing operation has been off to a slow start in Maharashtra and Uttar Pradesh on the cane price issue. The government, therefore, may not be in a hurry to sanction exports. And, as Sucden India chief Yatin Wadhwana says, since the 500,000-tonne export instalment formula has worked well, the “government will be tempted to stick to it”.

source: BS