March whites expiry: short squeeze

white sugar being moved from a ship to a truck
  • There is not a lot of deliverable refined sugar available for the coming March’21 futures expiry.
  • We think at least one trade house is therefore squeezing shorts ahead of the expiry.
  • This means that the H/K spread has been strengthening, giving the wider sugar market a more positive feeling.

The refined sugar market is undersupplied

  • The shortfall in supply follows poor crops in Thailand and the EU, the world’s two dominant low-cost refined sugar origins.
  • The tightness is concentrated in the near term in part because spot refined sugar demand from Sudan has been very good; we think they could take up to 700k tonnes of refined sugar in H1’21.
  • On top of this, container shipments around the world are still being disrupted by the knock-on effects of COVID lockdowns in 2020: container shortages and delays remain problematic in many ports.
  • Refined sugar origins who have access to containers are therefore being incentivised to ship by strong physical values, further reducing deliverable breakbulk supply for the expiry.
  • This is the case in Thailand, where containerised refined premiums are $50 over the futures; who would give up this kind of return to deliver against the futures expiry?!

Who could deliver?

  • We think the expiry will be dominated by Indian breakbulk supply.
  • Indian ports have been heavily affected by congestion caused by a shortage of available containers.
  • This has reduced the refiners’ ability to ship refined sugar.
  • As we’ve seen in the past, its coastal refiners are happy to use the No.5 to drive their export flow; delivery is a way of ensuring there’s a buyer for their sugar.
  • As No.5 deliveries are for breakbulk shipment, delivering may help reduce the impact of the container shortage.
  • The coastal refineries’ raw sugar offtake has been strong, so they should be able to supply a large volume, perhaps around 200k tonnes.
  • CS Brazil’s February refined sugar stocks are the highest they have been for five years.
  • Therefore, if the H/K spread stays strong, we think some CS Brazilian sugar could be delivered.
  • It’s unlikely NNE Brazil will deliver, however, as its refined stocks are low due to strong offtake this season.
  • This is also the case in Central America; most refined sugar from the region has already been committed.
  • Guatemala delivered most of its refined against the Dec’20 contract (234k tonnes or 4,610 lots).
  • If the receivers want more sugar than India or CS Brazil can commit, we could see volume delivered from toll refiners such as Dubai or Algeria.
  • However, refined prices would have to encourage these refiners to give up containerised shipments that are currently offering large premiums.
  • In this case, the H/K spread and the white premium would need to strengthen further before the contract expires.

Receivers – short squeeze

  • We think that one or more trade house may be looking to squeeze futures shorts.
  • Much of the trade are now bullish and there could be receiver(s) for more than 500k tonnes.
  • This tonnage could be against strong regional sales into the Indian Ocean region.
  • Open interest remains higher than it has been previous years, meaning there’s plenty of contracts still left to roll.
  • After expiry we think that the current stress on the refined market will start to ease.
  • Most of the Sudanese offtake will have been shipped, and we hope the container problems will start to reduce.
  • However, until the next Thai and EU crops get underway at the end of 2021, refined supply options will remain limited.

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