Singapore: Sugar market bears hoping prices above 30 US cents will melt demand from Asia could be disappointed as dwindling stocks on shrunken domestic crops will force India, Indonesia, Pakistan and others to buy the sweetener regardless.
Several consumers in Asia, which accounts for around 40% of global production and consumption and where sugar is often seen as an essential commodity, have already announced their intention to buy more this year.
It’s not clear if harvests from top producers Thailand and Brazil that start in March, or a decision by the European Union to allow additional exports of 500,000 tonnes of out-of-quota sugar, will be enough to close the immediate supply shortfall.
“We can’t deny that it’s been very difficult to get sugar from the overseas markets because of limited supplies,” said Subagyo, director-general of domestic trade at the Indonesian trade ministry.
“To make things worse, there are also other countries which need to import,” he told Reuters.
Sugar is a politically sensitive commodity in Southeast Asia’s largest consumer. A shortage of basic essentials at the height of the Asian economic crisis in the late 1990s triggered food riots that led to the downfall of then president Suharto.
ICE March raw sugar rallied to another 29-year peak at 30.40 cents this week, while London’s March whites hovered within sight of the record $767 a tonne hit on Jan. 21, with a Reuters poll predicting a peak in the first quarter in the face of a 7.67-million-tonne deficit this year.
There are expectations of more white sugar imports by main consumer India after the government said it would permit duty-free imports until the end of the year.
“The fact remains that India’s mills in the 2009-2010 season are unlikely to be able to produce more than 15 million tonnes, whereas local annual demand is around 23 million tonnes,” Fortis Bank Nederland said in a report.
“This eight million tonnes or more gap has only been partially filled, and, as we have said before, no Indian government is comfortable with stocks at less than 10 million tonnes.”
Trade sources said India’s sugar stocks fell to 2 million tonnes as of 1 November from 2.4 million tonnes when the crop season began in October last year, and much lower than 9 million tonnes at the beginning of November 2008.
“To meet the immediate supply gap, the Indian government must enter global markets via state-owned trading agencies to create buffer stocks,” said Mukesh Kavadia, secretary of the Bombay Sugar Merchants Association.
He added though that current prices would lift plantings, boosting sugar supplies going forward, a factor already reflected in a 25% premium for March 2010 over March 2011 white sugar futures.
India, whose insatiable appetite ignited a rally in global prices last year, could buy between 4 and 5% of global production in the crop year to September 2010 after the worst monsoon in 37 years ravaged its crop, analysts said.
“The question of limiting domestic sales does not arise, as in India sugar falls in the category of essential commodities,” Amol Tilak, a senior analyst at Kotak Commodities in Mumbai, said.
Neighbouring Pakistan faces a shortfall of 1.2 million tonnes and has offered tax incentives for importers, while Indonesia could see a shortage of more than half a million tonnes by the end of April after domestic output dropped 11% in 2009.
China, which imported just over 1 million tonnes of sugar last year, has used up more than 30% of its state reserves, and output is forecast to drop 700,000 tonnes in the main producing region of Guangxi because of drought.
Brazil’s cupboard bare
Buyers expecting prices to fall on March’s fresh crops from Brazil and Thailand, the world’s biggest and second-largest exporter respectively, may end up paying even more if they delay.
“As a potential buyer of sugar, one cannot be too fussy in this environment,” said Luke Mathews, a commodity strategist at Commonwealth Bank of Australia in Sydney.
“The Thai crush has been a little bit disappointing. And there’s a story out of Brazil where excessive rains during their crushing hampered both cane yields and sugar production.”
Main producer Brazil is likely to capitalise on the significant import demand, but there are also worries about fungal disease in the country’s main centre-south growing region.
Thailand was also cautious about selling forward after local output was revised down to 7.25 million tonnes from around 7.6 million due to low yields.
“With Brazil’s cupboard almost bare until March/April at the earliest, and with a number of importing countries running stocks down to a minumum, the stage is set for a very tight and nervous few months,” Rabobank said in a report.