Economic crisis to slow sugar expansion-Czarnikow

LONDON, Dec 24 (Reuters) - The global economic crisis is set to curtail the expansion of the sugar market with many Brazilian mills struggling to repay debts, merchant Czarnikow said on Wednesday. "The global financial crisis has had a clear short-term impact on the market, but in the longer-run the lack of funding will curtail the pace of expansion," Czarnikow said in a monthly market report.
Czarnikow said the flow of investment funds into and out of the market this year had been directly at odds with sugar fundamentals.
An investor-induced rally at the start of the year was followed by a large scale liquidation during the fourth quarter triggered by dramatic reversal in global economic and investor fortunes, the report said.
Sugar's supply/demand balance has, in contrast, tightened with Czarnikow earlier this month revising up its forecast for the 2008/09 global sugar deficit to 5.8 million tonnes from a previous prediction in August of 3.3 million. [ID:nL3553507].
"Looking towards Brazil, it is clear that the sector has been the victim of initial enthusiasm, and more recently fear," Czarnikow said.
"Many (Brazilian) mills are today in a poor financial state because of insufficient funding given the pace of recent expansion which was debt financed," the report said.
Czarnikow said the strong end to this season's Brazilian crop was being driven by the need for mills to generate revenue with the high cost of servicing debt and the recent volatility in the real damaging profitability.
The report said the unexpected volatility in prices this year had coincided with a carefully planned decline in European Union production and rise of a global refining industry dependent on Brazilian sugar.
"It consequently seems that price volatility in 2008 will have on-going repercussions for sugar market fundamentals," the report said.