World sugar prices may rise in H2

World sugar prices have been range-bound in the last three months or so in the wake of an estimated 8 million tonnes surplus of production over consumption for 2011-12.

While output is estimated at a record 173 mt, up 6 per cent from 163 mt in the previous year, consumption is forecast to rise by a modest 1.7 per cent or about 2.5 mt to 165.5 mt.

With the market clearly is surplus, it is least surprising that sugar futures prices have generally been under downward pressure, barring some transient movements otherwise.

While the upside has remained capped because of harvest pressure in the northern hemisphere, primarily India the world's second largest producer, the downside has been cushioned by purchases by importing countries.

India has announced export of a mt. Thailand is also scouting for export markets.

On current reckoning, the situation is unlikely to change at least until early April.

Physical premiums are already under pressure and if anything, world sugar prices can potentially come under further downward pressure in the weeks ahead.

But after a couple of months roll by, the market focus is sure to shift to Brazilian cane output and harvest. Given the dry conditions South America is currently facing, there indeed is a question mark over the size of Brazilian cane crop.

The crucial question is how much of cane will be diverted for ethanol and how much will be crushed for sugar. It is logical to assume that if ethanol is more remunerative than sugar export, Brazil's sugar production may rise only modestly, especially if sugar prices continue to remain weak in the first half of this year.

The world market is indeed dependent on Brazilian sugar. Demand for the sweetener is expected to pick up sometime in May for the Ramadan festival while importing countries are likely to replenish their reserves — China, for instance.

What if India faces production risks for the next season? That would immediately mean an embargo on any export shipment. Worse, if India is forced to turn an importer, then the world's reliance on Brazilian sugar will increase.

A call on Brazilian sugar supplies to meet world demand is probably the last thing the market wants at present; but it cannot be ruled out. Indian cane acreage numbers will be known by end-March–early-April.

But the risk of planted area not rising beyond 5 million hectares cannot be ignored. Southwest monsoon is another uncertain factor. Will the cyclical downturn catch up in 2012-13?

Low internal sugar prices and large cane arrears can affect acreage and thereby prospects for next year.

So, while supply uncertainties, more particularly in two of the world's largest producers, will continue to hang like Damocles' sword over the world market, demand conditions may stay fairly robust because of current consumer-friendly prices and indeed improve, if overall economic growth starts to gather pace in the second half of the year, as is widely expected.

In the event, global sugar market fundamentals will undergo a change and supplies will get tighter. Inevitably, prices will break out of the narrow range and rise by at least 10-15 per cent to trade above 25 cents a pound in the second half of 2012. It is important that Indian policymakers have a clear view of the emerging scenario and proactively prepare to face challenging times.

source: thehindubusinessline