Asia sugar surplus strains prices, eyes on China demand

Manila (Reuters): Bumper sugar harvests in Thailand, India and the Philippines are tilting the global balance into surplus, sparking fierce competition and piling pressure on prices as fears over a slowdown in the world economy knocked futures off highs.

New York raw sugar futures SBc1 have slid more than 11 per cent since hitting a five-month high at 31.68 U.S. cents in late July, weighed down by fears of a global recession, although worries about lower output in Brazil cushioned the fall.

These concerns will dominate policymakers, traders and industry officials, including Peter Baron, executive director of London-based International Sugar Organization, at a sugar conference in Cebu, the Philippines next week.

The industry will also ponder the prospects of a pick-up in demand in top consumer India ahead of year-end religious festivals and New Delhi’s reluctance to allow more exports above what it has agreed, as well as hopes of strong buying from China, which may offer some relief to sellers.

“The main focus of the market really comes down to production prospects in India, Thailand and Brazil, and how are consumptions evolving in China and also in India,” said Luke Mathews, a commodity strategist at Commonwealth Bank of Australia (CBA) in Sydney.

“It really comes down to the fundamental balance sheet equation.”

ABN AMRO/VM Group has said that the global sugar market should swing into surplus in 2011/12 (October/September), estimated at 7.83 million tonnes.

This forecast is now being supported by monsoon rains in India which were 14 per cent above normal in the week to Aug. 10, improving sharply from 22 per cent below average the week before, boosting the outlook for summer crops such as cane and rice.

The higher production in India – which may churn out 26.5 million tonnes in 2011/12, above the country’s estimated annual consumption of 22 million tonnes – has prompted the world’s largest consumer to start exporting excess sugar.

The regional excess is already hitting suppliers, with some trading houses offering Philippines sugar at a discount to New York futures as they try to shift 200,000 tonnes of low-quality raw sugar stocks, dealers said.

The Philippines wants to sell sugar this year because of excess domestic output, but so far just 66,000 tonnes have been booked for shipment to Japan, Indonesia and South Korea.

“It’s not selling at all. We are offering Philippine sugar at a discount of as much as $30 to $35, but there are no takers,” said a dealer in Jakarta.

Thailand, the world’s second-biggest sugar exporter after Brazil, is expected to produce at least 9.2 million tonnes in the current 2011/12 crop, but dealers see output as high as 10 million tonnes, from a record 2010/11 output of 9.6 million tonnes.

But analysts will look for signs of more demand in Asia, which along with a further cut in estimates of Brazil’s main centre-south sugar cane crop due to frost and falling yields, would offer some support. However, easing port congestions could see smoother exports from Brazil.

Sugar merchant Czarnikow expects Asian interest for Brazilian sugar to rise because of the region’s population growth, urbanisation and rising incomes, and this would add to the competition in the region.

China, the world’s second-largest economy, could import between 2.2 million and 2.5 million tonnes of sugar from the international market this year, including from Brazil, and could become the top market for Brazilian exports, possibly in 2011/12, said the Latin American country’s top private sugar consultancy Datagro.

“China buys sugar from Brazil due to its better quality, as most Chinese buyers complained that the quality of Thai sugar is still low compared to raw sugar from Brazil,” said a Bangkok-based trader.

Another trader said: “Chinese buyers even accept higher freight costs to buy from Brazil because the quality is better. Some Chinese buyers said Thai raw sugar gives lower yield when it was processed into white.”

But producers are confident that demand in the region is expected to pick up, though Indonesia has disappointed the market by deciding not to issue additional import permits for raw or white sugar this year due to ample domestic supply.

“I see strong demand from several destinations, including China, Vietnam, Cambodia and Laos,” a Bangkok-based trader said.

Rising demand in the Middle East could also see Asian exporters ramping up competition for a bigger market share and more Thai sugar has made its way to Russia in the first half, traders said.

Asia and the Middle East, which now account for almost 75 per cent of global raw sugar demand, have taken 60 per cent of Brazilian sugar exports this season, said merchant Czarnikow.

Analysts who had predicted lower sugar prices for the 2011/12 season in a July 19 Reuters poll due to the projected global surplus, may have to review their forecasts, to take into account a further hit on demand caused by the debt woes in the United States and Europe.

“Anyone coming out with just a straight-price number at the moment is possibly a little bit meaningless considering what’s actually happening in the world and the vast degree of uncertainty that exists,” said CBA’s Mathews.