Written Commentary
Written by Howard Jenkins, Head of Global Commodities
The week has seen the sugar markets continue to rally as nearby physical tightness, freight issues and higher crude prices put the bulls firmly in control. This time last week the London March contract expired with a total of just under 512k tonnes delivered taken by two trade houses. This week attention has turned to the up-coming New York March expiry. This time last week the front month had dropped back from its foray above 17.00 cents to close at 16.38. A shortened week later (US holiday on Monday) prices have rocketed and are, currently, around 140 points higher and at their highest level since late March 2017 when prices were on the way to 12.50. Trade longs have seen an opportunity to squeeze the remaining shorts in the spot month who do not have an ability to deliver knowing there is precious little fresh pricing to be done. The funds have also returned to sugar after trimming their net long position over the past few weeks. Sentiment has changed with traders sensing a fundamental shift in the market conditions. The market backwardation continues to increase with H-21/N-21 now over 160 points suggesting that supplies will ease as the Brazilian CS crop comes on line. One of the short term issues is that producers are very well priced and probably being squeezed margin wise while end-users are poorly priced and are probably getting increasingly concerned they may have missed the opportunity to price when prices were well below current levels.
Apart from the short to medium concerns of availability of sugar there has been a general up-surge across most markets as the end of the pandemic comes slowly into view with mass-vaccination programmes being roll-out across the world. Whether the euphoria is justified remains to be seen. There are still questions over whether the vaccines will cover all variants of the virus and the fact that vaccinating the whole world is a mammoth task which will take many months if not years. The global economic havoc the pandemic has caused is thought by many not to have been fully appreciated yet and the repercussions will impact for many years. Nevertheless, crude prices are back to well above pre-pandemic levels and a plethora of reasons are being cited by analysts as to why commodity prices will continue to increase. The spectra of inflation, long term weather issues and demand from Asia and in particular China are some.
Specifically turning to sugar the near-term supply and demand is the main driver at the moment. India’s ability to export with a healthy margin regardless of export subsidies should help ease supply concerns so long as they can ship. As discussed last week there is a global shortage of containers with many sitting empty and in the wrong place. Port congestions is another concern not only in India but for the start of the next Brazilian harvest. Massive soybean exports from Santos are likely to be at their highest as the sugar comes to port. It is estimated around 2.5 million tonnes of Indian sugar have been contracted for export with much going to Indonesia. Indian production for the current season has been market down slightly with latest estimates between 30-31 million tonnes. Brazil’s next harvest production is still open to much conjecture especially with the recent surge in crude prices which should filter through to more ethanol demand. Therefore, analysts may start to adjust their sugar/ethanol split in favour of ethanol before too long. The debate continues over the impact the pandemic has had on consumption. Undoubtable, there was a drop last year as lock-down took its toll. Now that restrictions are slowly being lifted consumption is likely to improve. Czarnikow see global consumption recovering back to pre-pandemic levels. They see global consumption at 168.7 million tonnes not too dissimilar to 2019 levels. Of course, it should be remembered that consumption had come under pressure for several years before due to health concerns and drink and food manufacturers cutting sugar content of their products. This will not have changed and, perhaps, may impact further. There is emerging evidence that consumption is falling per head in many countries pandemic or not.
In the short term the markets look very well supported with a week to go before the March expiry in raws. The open interest is probably around 120k lots which is slightly lower than this time last year when 984k tonnes was delivered. Current delivery estimates are wide at between 600k and over a million tonnes. With the start of the Brazilian harvest at least six weeks away there is likely to be several keen receivers. Whether there is the deliverable sugar to satisfy them is the big question and with prices pushing up just shy of 18 cents this morning it would suggest perhaps not. All in all an interesting week to come and, perhaps, for the foreseeable future.
Contact the ADMISI Sugar Desk team:
Howard Jenkins, Kevin Watkins, Steven Trigg
Phone: +44(0) 20 7716 8598
Email: admisi.sugar@admisi.com
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