2013/14 in Surplus: A Fourth Look at the Global Balance

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The physical surplus in Sugar is proving resilient. Despite longer term concerns over weather risks, in the shorter term the market remains well supplied.

  • We now expect to see global stocks rise by just 2.9m mtrv in 2013/14.
  • This is higher than our November estimate of 2.1m mtrv.
  • Though the trends in production and consumption are moving towards equilibrium, global stocks will have built by 19.3m mtrv in the last three seasons.
  • However, prices have been firmer than might have been expected, particularly in early 2014.
  • Though producers are continuing to be challenged by the inability to capture value from the sugar market, price levels seen this year look relatively good in the context of the physical market

Consumption – Strong growth in 2014

  • The strong growth we observed in 2013 has continued into 2014 helped by lower prices and improved affordability.
  • We now estimate 2013 consumption at 175.9m mtrv, a 2.6% increase year-on-year, which marks the strongest annual growth rate in the last five years.
  • We forecast that consumption will rise further to 180.4m mtrv in 2014, also an aggregate growth rate of 2.6% year-on-year.

Production - Cane sugar production to reach a record 149.4m mtrv this season.

  • This is 1.1m mtrv above last year’s production of 148.3m mtrv.
  • We now forecast beet sugar production this year to be 35.0m mtrv, 4.4m mtrv lower than record production of 39.4m mtrv achieved two seasons ago.
  • This is slightly higher than our November forecast of 34.4m mtrv due to the mild winter in Europe, which led to excellent late beet development

Thailand – Record sugar production

  • Weather has been exceptionally dry in the past 2 months and, while this has helped the harvest and sucrose quality there are now concerns that this will be offset by lower agricultural yields.
  • However, this year’s crush has exceeded last year’s 100m tonnes of cane already and will set a new record crop.
  • The strong sucrose yield should make up for any shortfall in cane crushing.
  • Consequently, we believe that 12.5m mtrv of sugar will be produced in 2013/14 – also a new record for the industry.

China – Excellent cane production but remains in deficit

  • Just 746k tonnes of beet sugar was produced, the lowest since 2009/10.
  • We expect 12.3m tonnes of cane sugar to be produced. The crop has recovered well from Cyclone Haiyan and frosts in January.
  • This brings total Chinese sugar production to 13.3m tonnes, roughly in line with last year.
  • Given the high level of stocks and a good crop, domestic prices have been under pressure.
  • The low price environment points to higher consumption growth and we forecast consumption will reach 17.0m mtrv in 2014, up 4% year-on-year.
  • This level of growth is lower than the 5.6% growth observed in 2013 and we will be watching developments closely given the potential for a stronger increase in line with GDP.

Mexico – Another strong year but anti-dumping petition complicates the NAFTA market

  • Persistent rain at the turn of the year saw mills unable to operate, shortening the amount of time available to crush and also reduced sucrose yields in the early part of the season.
  • Consequently we have downgraded our production forecast to 7.0m mtrv from 7.3m mtrv.
  • We currently forecast 2014 Mexican consumption at 4.6m mtrv.
  • A problem is that consumption is not growing while HFCS has been increasing market share.
  • However, the decision by a coalition of US sugar producers and refiners to file an anti-dumping suit against Mexico, which could severely disrupt these assumptions.

India – Better output from Maharashtra and Karnataka as farmers crush immature cane

  • We have now increased our forecast of all-India production to 26.3m mtrv from 24.7m mtrv.
  • This has been mainly due to stronger production in the state of Karnataka and Maharashtra as farmers have harvested immature adsali cane planted just 10 months ago
  • However, we have also lowered our estimate for Tamil Nadu owing to drought problems.
  • In Uttar Pradesh we expect production to be 6.4m tonnes of sugar, 14% lower Y-O-Y.
  • We adjusted Indian consumption to 26.5m mtrv from a previous estimate of 25.8m mtrv.

Brazil – NE production favours ethanol

  • Following 3 consecutive years of drought we forecast NE Brazil cane crushing to fall from 55.7m tonnes last season to 53m tonnes in the current cycle.
  • The mix to sugar from Sep - Feb has averaged 56% compared to 61% for this period in the past 3 seasons, driven by firm domestic and export ethanol values and low sugar market earnings.
  • Attention is now starting to shift to the onset of the 2014/15 CS Brazilian crush and the implications of the dry off-crop on cane quality.

Conclusion

Stephen Geldart, Senior Analyst said, “With consumption rising and production gently falling the pace at which the world is building stocks is on the decline. However, stock levels are still increasing. This is resulting in a need to place marginal tonnage in the physical market, which is holding down values and preventing producers from obtaining the returns that they would like to achieve from the sector.”

For the outlook to improve the balance sheet needs to tighten further.

Underlying consumption growth plays a significant role in this but so too do the decisions made by producers during the downturn in the business cycle.
For most commodity firms the natural reaction to depressed margins is to increase volumes.
However, for producers, while the decision may make sense on an individual basis, it is counter productive in aggregate.
As a consequence we are continuing to see sugar producers seeking to restructure their debts and running the risk of losing control of their businesses or seeing them dissolved.

Toby Cohen, Czarnikow Director said, “Looking ahead we are hopeful that 2014 represents the low point in the cycle but at this stage there is no certainty that the 2014/15 balance sheet will differ from this season with production and consumption broadly in balance.”

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