After five consecutive years of oversupply globally, the supply-demand structure of sugar has changed finally, thanks to the damaging El Nino, according to analyst CCM.
Guangzhou, China, March 31, 2016 (Newswire.com) - After five consecutive years of oversupply globally, the supply-demand structure of sugar has changed finally, thanks to the damaging El Nino, according to analyst CCM.
The price of international sugar futures has kept rising since the beginning of 2016. The prices of raw sugar futures in InterContinental Exchange (ICE) and white sugar futures in London International Financial Futures and Options Exchange (LIFFE) both reached the peak in the first three months in 2016.
Organization of International Sugar (ISO) has increased the lack of sugar demand globally in 2015/16 to 5 million tonnes from 3.5 million tonnes.
According to ISO’s report, due to the falling sugar output from the major producers-Brazil, India and Thailand, it is expected that the global sugar output would fall to 166.8 million tonnes in 2015/16 from 171.2 million tonnes in 2014/15. In addition, the global sugar consumption would increase to 171.9 million tonnes from 168.9 million tonnes in 2014/15.
Before the release of ISO’s report, RaboBank Nederland and F.O.Iicht, an agriculture forecast institution both increased the figures on their forecasts about the global sugar shortage. The former expected that there would be a lack of 6.8-million-ton sugar while the latter believed that it would be 7.2 million tonnes.
Globally, affected by El Nino, except for the south-east of Brazil, major producers like India, Thailand and China witnessed a huge fall in sugar output. CCM expected that there would be a lack of a 4-million-ton sugar globally in 2015/16.
In China, the output of sugar in 2015/16 is estimated to decrease to 9 million tonnes even with 200,000 tonnes to 300,000 tonnes less, which makes sugar shortage in China increase to 2.4 million tonnes.
As for prices, currently, the price of international sugar is about 15 cents/pound and that in China remains USD810/t-USD825/t. CCM expected that it could reach USD917/t in August to October in 2016 because it is the period of low inventory of sugar.
Supply: Output keeps falling
Since 2013, the global sugar market has entered the period of production reduction, which has help ease the oversupply of sugar.
The continuously low price of sugar has caused little enthusiasm for the manufacturers to increase the sugar production and the excessively falling sugar output in two years.
The global sugar output was 180 million tonnes in 2015, 1.6 million tonnes less than that in 2014. Though the global sugar market still remained oversupply, the excess quantity of sugar had increased massively, according to Organization for Economic Co-operation and Development (OECD).
The excess quantity of sugar was 3.43 million tonnes in 2015, much less than the 10.84 million tonnes in 2013.
Unfortunately, the global supply of sugar would keep falling in 2016, due to the El Nino and Brazil fuel policy.
Sugarcane and beet are the main raw materials for producing white sugar. However, manufacturers usually use much more sugarcane than beet to produce sugar, with the 5:1 ratio. Therefore, sugarcane is the key factor to affect the price of sugar.
Sugarcane is suitable to grow in tropical and subtropical areas. The major producers and exported countries are Brazil, India and Thailand.
El Nino causes the massive drop of rainfall in India and Thailand, and then droughts in both of the countries. However, sugarcane needs plentiful rain to grow, with at least 1200 mm rainfall annually. Therefore, without enough water, the growth of sugarcane is restricted, which leads to a sudden fall of sugar output.
In 2009, India experienced the most serious drought in the past 50 years due to El Nino. The output of sugarcane in India reached a historical low, which helped the global price of sugar to reach the peak in the past 30 years.
El Nino brought drought to India while flood to Brazil. Though the growth of sugarcane needs a certain amount of water, too much rainfall also does harm to its growth.
Too much rainfall in Brazil had reduced the sugar content of sugarcane, then the output of white sugar.
In 2009, affected by El Nino, the rainfall of Brazil doubled. With the growth period of sugarcane of 9 months to 17 months, too much rainfall had massively reduced the sugarcane production in 2011.
El Nino came again in 2015. It may probably be the strongest one in history according to World Meteorological Organization (WMO).
For the major producers of sugar, will the history repeat itself?
-Less supply from Brazil
Brazil, as the biggest sugarcane grower in the world, ranks first in the sugar output, accounting 21.5% of the market share in the world. Due to the climate, sugarcane mainly grows in the north-eastern and south central Brazil. 90% of the sugarcane and 90 % of the sucrose output come from south central Brazil.
Thanks to the support to the sugar industry and alcohol industry in from the Brazil government, the planting area of sugarcane keeps increasing in Brazil.
The planting area of sugarcane reached 10.87 million ha with the sugar output of 35.95 million tonnes in Brazil in 2015.
El Nino brought continuous rainfall for the south central Brazil, which helped sugarcane in their growing period. It is predicted that the output of sugarcane would increase 2% in 2015/16 compared to 2014/15.
However, too much rainfall caused low sugar content in the mature period in the growth sugarcane. Thus, the sugar output from sugarcane is expected to be 133.5kg in 2016, 2.2kg less than that in 2015.
Due to the new fuel policy in Brazil, less sugar would be produced from sugarcane in 2016.
50%-60% of the sugarcanes in Brazil are used to produce ethanol fuel while the rest of them to produce sugar.
Since Feb. 2015, the Brazil government keeps stimulating the ethanol consumption. For example, the government increased the ratio of alcohol in the fuel from 25% to 27%. Also, it imposed taxation on gasoline and diesel again and increased the prices of gasoline, which raised the ratio of producing ethanol from sugarcane.
It is expected that the ratios of sugar and alcohol produced from sugarcane were 40.6% and 59.4% in 2015/16. The ratios of sugar would be down 3% compared to 2014/15.
Generally, with the influences from El Nino and the fuel policy, the sugar output in Brazil would be 34.87 million tonnes, down 3% compared to that in 2015.
-Less supply from India
India is the second biggest producer and the fourth biggest export country in the sugar industry in the world. Recently, the planting area and output of sugarcane remains steady. The planting area of sugarcane in India was 5.06 million ha in 2015 and it is expected that the area would remain the same in 2016, according to Indian Sugar Mills Association.
Since 2015, El Nino has caused continuously hot and dry weather in the main producing areas of sugarcane in India. Without enough rainfall, the output of sugar was affected.
The sugarcane yield in India was only 67t/ha in 2015, down 5.6% compared to that in 2014, according to Indian Sugar Mills Association.
Also, 33 sugar factories in Maharashtra, the major producing district of sugarcane, had suspended their production of sugar milling recently, while in the same time, only 11factories suspended the production. That’s to say, the production of sugarcane has reduced a lot in India in 2016.
With the falling of sugarcane yield, the sugar output is expected to be 28.55 million tonnes, down 5.6%, 1.69 million tonnes, compared to that in 2015.
All in all, without much changes of sugar output in other countries, it is expected that the global sugar output would be 177 million tonnes, down 1.88% year on year.
-Less supply from China
With massive fall of sugar output in China’s four major producing areas, the supply of sugar in China doesn’t look good either.
Guangxi, as the biggest sugar producing area in China, had been in deficit in its sugar industry for three consecutive years. The planting area of sugarcane decreased from 1.098 million ha to 800,000 ha.
With over 60% of the sugar output coming from Guangxi, the reduction on the planting areas had caused fewer supply of the sugar.
Demand: Increase comes from Asia
China and India would be the major Asian countries to drive the global sugar consumption.
Since 1960, the proportions of China and India in sugar consumption have kept increasing, respectively, from 2.18% and 5.69% in 1960 to 10.23% and 15.84% in 2015. In the meanwhile, the average consumption of sugar in Asia still remains lower than the average consumption level globally. Driven by the economic and the growing population, the sugar consumption in Asia could still increase.
The global sugar consumption is expected to reach over 200 million tonnes in 2020 and 210 million tonnes in 2023, according to OECD.
60% of the sugar consumption comes from Asia countries till 2020, according to ISO. The sugar consumption from India and China would account for 30% of the total consumption.
The growth of sugar consumption would be 1%-2% in China and India while that in Europe and the US would be less than 1% or even negative.
Cost to keep rising
The cost of raw sugar comes from sugar crop, sugar manufacturing and sugar selling. The cost of sugar crop means the planting and purchasing cost of its raw material-sugarcane. The cost of sugar manufacturing means the transportation cost and processing cost. The cost of sugar selling includes the management, financial expanse and taxation.
The cost of sugar crop takes up 70% of the cost in producing raw sugar. Thus, the price of the raw material, sugarcane, affects the cost of the raw sugar mostly.
The cost of planting sugarcane keeps increasing in the three major exported countries, Brazil, India and Thailand. Take Brazil as an example, the cost of planting sugarcane increased slowly in 2004-2010. After 2010, it went up quickly.
The cost of planting sugarcane in the major producing countries would keep increasing, because:
Firstly, it is of very little possibility to reduce the cost by increasing the yield of sugarcane.
In 1970-2010, the three major producing countries had great increased the yield of sugarcane by the popularization of eminent sugarcane varieties and mechanization.
Currently, the sugarcane yields in Brazil and India have reached 75t/ha and 52.5t/ha respectively. In the past three years, the yield hadn’t been increased and it is expected that it would remain the same as now.
Secondly, with the increasing production cost and labor cost, the cost of planting sugarcane would keep rising.
Brazil Federal Public Ministry requested to take away all the 2,4-D herbicide products in the market in Sep. 2015. If this application gets approved, the cost of planting sugarcane in Brazil is expected to increase 500%, according to Robinson Osipe and Jethro Osipe, agronomists in Brazil.
In China, the decline of the sugarcane planting area also leads to the increase of the cost for sugar manufacturing.
As for sugar produced in China, the cost of sugarcane is 70% higher than that in Brazil, India and Thailand, due to the low yield and poor mechanization. With the high cost of manufacturing sugar in China, the cost would be USD810/t and UDS799/t in Guangxi and Yunnan respectively.
Price of sugar? For sure to rise!
It is expected that the average price of international raw sugar would reach 18 cents/pound, and it is of great possibility to be over 20 cents/pound (the current price is 14.8 cents/pound). In China, the average price of white sugar would be USD877/t, and it is likely to be over USD917/t-USD994/t.
Firstly, it is the first time for the international sugar market to experience the shortage of sugar demand in five years. In 2009, there was a lack of 9.97-million-ton sugar with the highest price of 26.24 cents/pounds. In 2010, the lack of sugar decreased 1.35 million tonnes with the sugar price of 21.37 cents/pound. Thus, it is estimated that the global shortage of sugar would be 1.42 million tonnes and the sugar price would increase to 18 cents/pound, up 36% year on year.
Secondly, the Federal Reserve delayed rate hikes, which is beneficial to the sugar price. Historically, the trend of the sugar price has a negative correlation with the US dollar index. Without an exact schedule for the Federal Reserve to have rate hikes, and Europe, Japan and China keep reducing the interests; the global monetary environment would help increase the sugar price.
In China, it is expected that the cost of sugar manufacturing in Guangxi and Yunnan would be USD810/t and USD799/t respectively in 2015/16. Based on the relation between the sugar price and the cost in 2010/11 (the price of white sugar in Nanning was 32% higher than the sugar manufacturing cost in Guangxi; 80% than that in Yunnan), it is expected that the sugar price would be 20% higher the cost. That’s to say, the average white sugar price in Nanning would be USD877/t, with the peak on USD917/t-USD944/t.
For more information about sugar, you could visit CCM’s Online Platform.
About CCM:
CCM is the leading market intelligence provider for China’s agriculture, chemicals, food & ingredients and life science markets. Founded in 2001, CCM offers a range of data and content solutions, from price and trade data to industry newsletters and customized market research reports. Our clients include Monsanto, DuPont, Shell, Bayer, and Syngenta. CCM is a brand of Kcomber Inc.
For more information about CCM, please visit www.cnchemicals.com or get in touch with us directly by emailing econtact@cnchemicals.com or calling +86-20-37616606.
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