The Corona Virus has struck its first blows to the world sugar market! With the spread of the epidemic, global financial and commodity markets are suffering and sugar has been no exception: prices have pulled back significantly from a buoyant 15.78/US cents/lb (ICE #11 front contract) on 12 February to end the month at 14.14 US cents/lb (a 11% retraction, a good part of which is arguably due to Coronavirus).
So a key question going forward is will the Corona virus sap all the bullish sentiment out of the world sugar market?
A Brief Recap: Bullish Sentiment Grows With World Market Swing From Surplus to Deficit...
The world sugar balance returns to deficit in 2019/20 - bringing an end to a 2-year surplus phase since 2017/18 that saw the accumulation of massive stocks and in consequence, world market prices at low and, at times, unremunerative levels for even the most cost competitive exporters.
In fact, world sugar price hit a ten-year low in August 2018 on the back of a surplus in global production over consumption in 2017-18, initially projected at 10 mln tonnes of sugar (mainly from boosted production in India, Thailand, the European Union and several other countries). Prices rebounded modestly from that August 2018 low but the world sugar price roller coaster hit a “flat spot” in 2019: trading in a fairly narrow range of 12.3-13.4 US cents/lb (ISA Price) on a monthly basis. Most in the sugar market would view 2019 as a largely forgettable event – a “necessary evil” of continued lower prices as the global balance sheet attempted to correct itself from two years of bumper surpluses.
Analysts believed if we were to see a sustained recovery in prices in 2020, the market would need to move strongly into a physical deficit. Well world sugar price did rally - the month of December saw a modest increase in values to around 13.50 US cents/lb on the raw futures, thanks in part to a liquidation in speculative short positions. But at the same time, prospects of a substantial global deficit in the 2019/20 October-September year became firmer (as much as 11 mln tonnes according to some pundits). This was mainly on the back of expectations for production declines in Thailand, other Asian countries, Australia and Mexico. But bullish sentiment turned even hotter when the true severity of Thailand’s production crash became apparent - reaching even 8.5 mln tonnes sugar production would now be considered a good result. This is a massive slump - compared to 14.6-14.7 mln tonnes in the previous two seasons and even against earlier expectations for around 10 mln tonnes this campaign. Thailand’s crop failure is due to adverse weather conditions, high pest incidence and a lower cane area.
….and Then the Corona Virus Struck
So with bullish news and sentiment, driven by the outlook for tighter global supply-demand fundamentals in 2019/20, raw sugar prices rose to the top of the 14-cent range in January. World prices rallied further during February, with the ISA daily price maxing-out at 15.18 US cents/lb on 19 February. But then the Corona virus struck bullish market sentiment and sugar prices (ISA) fell back to 14.11 US cents/lb by the end of February.
China: the Epicentre to the Corona Virus Impact
Initial sugar market concern was focussed on China, the epicentre of the coronavirus outbreak and also typically the world’s single largest importer of sugar. How much would demand slump due to epidemic prevention and control measures? Would Internal prices weaken markedly? By how much would import demand fade away, at least in the short term, especially as sales in the instant food industry, baking, confectionery, beverages, and catering have all dropped sharply.
But against these bearish impacts, bullish considerations have also become apparent. The Covid-19
coronavirus outbreak is also hitting harvesting, planting, crushing and processing in the major Chinese cane-producing provinces such as Yunnan – directly impacting this year’s harvest but also next season’s plantings. Guangxi mills have closed down at a much faster pace than normal. So on balance perhaps for China it’s a zero sum: lower production offset by lower consumption. Next season though the extent to which new planted cane has been impaired by the virus will be key.
Bullish Sentiment Might Wane if Global Consumption Prospects Falter
In terms of sapping bullish sentiment, perhaps the biggest factor in the market today is the impact of the coronavirus on China’s consumption; and should the virus spread more widely around the world, how much might initial prospects for global consumption growth in 19/20 of 1.3 % (around +2.3 mln tonnes) have to be pared back.
A slow-down of sugar consumption growth is a key changing component of the global sugar market and is already impacting trade flows. The impact of the anti-sugar campaign and the wave of additional taxes on sugar-containing foodstuff (to fight obesity and diabetes) is manifesting as reducing or even negative growth of sugar consumption in both total and per capita terms in a number of pivotal markets. Slowing global population growth is also contributing to easing rates of sugar offtake. So, in an already “weakened” demand picture, a significant and sustained Coronavirus impact could certainly pare back growth of global sugar consumption, whittling away the size of the projected world market deficit in 2019/20.
But Brazil Might Hold the Real Answer
Crude Oil prices have weakened over recent weeks as part of the macro/commodity impact of
the corona virus outbreak. In short, the virus is keeping oil prices low by threatening to stifle oil demand in one of the world’s largest oil markets (China). WTI - Cushing, Oklahoma was trading at as much as USD63/bbl early January but by end February had slumped to near USD51/bbl. If crude oil prices stay this low into the coming CS Brazil harvest, it means that sugar prices will have to weaken substantially from even current levels to prevent Brazilian mills from making sugar in excess of the world’s needs – needs that will be potentially even smaller should the coronavirus take a knife to world consumption levels. So the biggest unknown fundamental factor in the market today is the allocation to sugar within the forthcoming Centre-South season. Remember, for the previous two campaigns Centre/South mills have maximised production of more profitable ethanol for the domestic market and minimised sugar for export to a lack lustre world sugar market. Indeed, in 2019 Brazil played its role admirably, maximising its ethanol production to record levels and removing 10 mln tonnes of sugar from the market. A swing back to more historical allocation levels from 34% of cane juice to sugar, back up to 46-49%) could see Brazil produce an additional 6 mln tonnes of sugar in their 20/21 April-March season, especially as cane production is also slated to rise significantly.
Having made a point of this scenario, it is also true that when the corona virus outbreak ends (does anyone really know when that will be?), then energy prices will in all likelihood bounce back and remove the threat of
Brazil’s millers producing more sugar than the market actually needs.
Higher Ocean Freight Rates Post Caronavirus?
One final issue is ocean freight, and this issue is simply flagged here. When the virus outbreak is over, can available shipping tonnage catch up with a likely shipment backlog (caused by disruption to normal ocean freight activity)? Freight rates for commodity cargoes could soar.
It’s anyone’s Guess
Whilst this has been a superficial look at the issue, more designed to give “food for thought” than crystal clear answers, it’s evident that the coronavirus outbreak is already biting in terms of impacts on financial and commodity markets and on potential economic growth around the globe. At this point it seems to be anyone’s guess how extensive and sustained the epidemic will finally be (in part determined how well governments and populations act to control its spread). So for sugar also, no one really knows for how long or how significantly the corona virus outbreak can stymie bullish sentiment otherwise driven by significant weather shocks on the supply side. But there is some potential for this to be a significant disruptive non-sugar factor that can kill off bullish sentiment and send prices south again, at least until the fog of uncertainty dissipates and there are more answers than questions when it comes to the corona virus.
