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Sugar: The Whites Conundrum | Seeking Alpha

ING Economic and Financial Analysis

By Warren Patterson, Commodities Strategist

Whereas sugar is buying and selling again close to the lows of April, the whites market has been comparatively extra constructive than the raws. That is even though the worldwide sugar surplus this season is essentially pushed by the whites market. So why the disconnect? India is likely one of the key causes.

No. 5 whites construction at odds with fundamentals… or is it?

The white sugar market was meant to be bearish. We’re almost by way of the primary season of the lifting in EU sugar manufacturing quotas, which has seen the EU develop into a big whites exporter as soon as once more. India has seen a unprecedented restoration in output. In reality, manufacturing elevated by an estimated 11.7mt yr on yr to a document 32mt within the 17/18 season. This leaves a home surplus of round 7mt, which is predominantly low-quality whites. Regardless of this extra provide, we now have seen the no. 5 whites curve strengthen. This week, the August/October unfold expired at $14.80/t premium, while the October/December unfold is buying and selling at a premium of $1.80/t (though has been as excessive as $three.70/t this week), up from an $eight/t low cost in mid-Might. Wanting on the whites relative to the raws, the October whites premium has traded as excessive as $85/t, up from round $60/t seen in Might. This worth motion seems to be in battle with pretty bearish fundamentals. Nevertheless, there’s extra at play right here.

October whites premium hits US$85/t

(Supply: Bloomberg, ING Analysis)

October/December whites unfold trades to a premium (US$/t)

(Supply: Bloomberg)

When will India’s surplus hit the world market?

In India, the federal government has tried to shift its estimated surplus of 7mt onto the world market by eradicating export duties, mandating exports, and offering a subsidy to mills. These measures haven’t had the specified influence, with restricted exports. To be able to attempt help home costs, the federal government determined to create a 3mt buffer inventory, however by doing this, sizeable exports from India now look even much less possible. So while India has a big whites surplus, it isn’t out there to the world market at present costs.

This, nevertheless, shouldn’t be sustainable, notably given the truth that India is about to see a good bigger crop within the upcoming 2018/19 season. The Indian Sugar Mills Affiliation (ISMA) at present estimates that subsequent season, sugar output might hit a report 35mt, assuming a traditional monsoon over the summer time, which would go away a home surplus of 9mt over the course of the season. In consequence, it’s not a lot a query of “if” India exports to the world market, however extra a query of “when”. The strain of a giant 2018/19 crop, we consider, will weigh on home costs, opening up the export parity. Nevertheless, authorities intervention will play a task right here.

Indian home market premium over world market widens (US$/t)

(Supply: Bloomberg)

The EU market

It definitely has been a consumers’ market when wanting on the EU. Month-to-month common costs reported by the European Fee fell to €362/t on the finish of April, which is 26% decrease than the place they began the 2017/18 season. Spot costs are reportedly even decrease. This isn’t an excessive amount of of a shock, with a big improve in space and stronger-than-average yields seeing manufacturing attain 21.1mt, up 25% YoY. Nevertheless, regardless of this weak spot, EU sugar exports onto the world market have slowed down because the season has progressed. This has been on the again of EU producers’ reluctance to promote at low flat worth ranges onto the world market. Provisional knowledge from the European Fee exhibits that the tempo of exports from the EU has slowed. In 4Q17, exports averaged virtually 340kt a month. This then fell to virtually 290kt in 1Q18, and is on target to drop to a mean of round 240kt in 2Q18. This development in exports is at odds with what we noticed over the earlier two seasons, the place exports often peak over 2Q and 3Q.

Looking forward to 2018/19, while EU manufacturing is predicted to fall to 20.1mt, it should nonetheless be a sizeable crop. Subsequently, forward of the harvest, we might see EU producers eager to shift previous crop sugars, which might put some renewed strain on the whites premium and spreads. The current August expiry does recommend this, with the most important quantity of EU sugar delivered into the tape because the lifting of EU manufacturing quotas, though the robust August/October unfold at expiry would have additionally performed a key position on this.

What sign is the whites premium sending to refiners? And the place will it go subsequent?

The whites premium has lately been sending a transparent sign to standalone refiners: improve throughput charges. These refiners aren’t too involved concerning the flat worth; it’s the whites premium which is essential to them. The October whites premium peaked just lately at $85/t, though since then it has fallen again in the direction of $77/t, whereas if we contemplate the carry out there and take a look at the diagonal whites premium (No.5 Mar-19/No.11- Oct-18), refiners are capable of obtain round $80/t. We don’t anticipate the power within the whites premium to final. The EU is about to see one other sizeable crop subsequent season, and we anticipate India to turn into a big exporter of low-quality whites over 2018/19, with an growing home surplus set to weigh on the native market.

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