The July futures contract failed to reach May price levels due to high delivery volumes and broader macroeconomic risk sentiment with dollar strength, declines in equity markets and declines in commodity prices.
Despite reports that India and Thailand face challenges in their sugar sectors, the impact on the market has been limited due to higher-than-expected supply and weakening demand, particularly from top importer China, which has reduced imports. amid increased domestic production.
As prices fell below key import arbitrage levels, demand declined, affecting prospects for a recovery in sugar prices. It is anticipated that import arbitrage levels will change, potentially signaling new support and a new price range for sugar depending on global market needs and costs.
Last week began with active negotiations ahead of the May contract delivery. “On Monday (29/04), market excitement grew due to rumors about the Pakistani government's decision on the export quota, which increased complexity, as a possible denial led prices to a slight momentum high, in conflict with the trend observed in the previous week”, says Lívea Coda, Sugar and Ethanol analyst at Hedgepoint Global Markets.
According to the analyst, however, on Tuesday (31/04), there was a sharp price correction after the Pakistan Sugar Mills Association refuted reports about the refusal of the government's export quota for 23/24. Along with these rumors, the market was already expecting a robust delivery, with at least 1 Mt being delivered.
“Consequently, raw sugar did not receive the support expected by some traders. In the end, a total of 1,67 Mt were delivered, an increase of 73% compared to the eight-year average, with Brazil being the largest supplier”, he notes.
The July contract failed to reach the price levels seen in May expiry, likely due to high volume delivered and a deterioration in macroeconomic risk sentiment. The dollar strengthened between Tuesday (30/04) and Wednesday (01/05), stock markets fell and almost all commodities had significant drops in their prices.
According to Lívea, “although recent reports suggest that the 23/24 Indian harvest may fall short of the Isma (Indian Sugar Mills Association) estimate of 34 Mt, especially with the reduction in crushing activities, and despite Although Thailand went through a severe heat wave, sugar prices were unable to recover.”
“Why didn’t this news affect the market as much as expected? One of the main reasons is that supply remains greater than expected. Although India's sugar production may fall short of ISMA's estimate of 34 Mt, the actual production achieved so far represents a significant improvement compared to the market expectation of less than 29 Mt at the end of August 2023”, he points out.
Regarding the 24/25 season, rising ending stocks and forecast of above-average monsoon rains could further increase sugar availability in India and enable exports, adding to the bearish sentiment.
"Meanwhile, Thailand's final crush for the season exceeded expectations, reaching 8,8 Mt. Looking ahead to the upcoming season, despite reports of exceptionally high temperatures, Thailand's cane is expected to withstand these conditions with supply enough water,” he says.
The Thai Meteorological Department forecasts reduced rainfall in May, but forecasts robust rainfall in June and July, contributing positively to the expected recovery of the 24/25 harvest. On the other side of the equation, demand appears to be weaker.
One of the largest importers, China, was the main reason why raw sugar found support in 1Q-24. The reduction of their prices below the country's non-producing regions' import arbitrage level of 20,5c/lb triggered buying.
“However, having imported more than 3 Mt since the start of its harvest in October 2023, it is natural that its appetite for imports will decrease as its domestic production increases. For example, in March, the country's customs reported that only 10 kt entered the country, which was not surprising, given the seasonality”, he highlights.
Recently, prices fell below the arbitrage of non-producing states, and no relevant purchasing movement was observed. This suggests a reduction in demand, one of the main reasons why sugar prices have found it difficult to recover.
“In this context, it is anticipated that the level of import arbitrage will converge from non-producing states (20 c/lb) to producing states (18 c/lb). It is important to note that the 18c/lb level is lower than Indian export parity, which suggests that sugar may be entering a new support level and price range. If the global market really needs Indian sugar going forward, then the market will need to cover its costs and premium by keeping sugar prices above 19c/lb”, he analyzes.
In summary, the July contract failed to reach May price levels due to high delivery volume and broader macro risk sentiment with dollar strength, declines in equity markets and declines in commodity prices.
Despite reports that India and Thailand face challenges in their sugar sectors, the impact on the market has been limited due to higher-than-expected supply and weakening demand, particularly from top importer China, which has reduced imports by through increased domestic production.
As prices fell below key import arbitrage levels, demand declined, affecting prospects for a recovery in sugar prices. It is anticipated that import arbitrage levels will change, potentially signaling new support and a new price range for sugar depending on global market needs and costs.
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