Apr 24 / Lívea Coda

Lower Chinese demand and CS crop revision

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"China has been facing economic challenges including deflation and high financial leverage, exacerbated by the recent trade war escalation with the US, leading to a slowdown in sugar market demand. Brazilian crop prospects remain positive, though revised downward due to recent below-average precipitation. Re-running our model for TCH, it indicates yield reduction in the Center-South region, leading to a revised cane crushing forecast from 630 Mt to 621.2 Mt."

Lower Chinese demand and CS crop revision

  • China faces economic challenges, including deflation and high financial leverage. The trade war with the US may worsen these issues.

  • China did not take advantage of recent import arbitrage, indicating weaker demand. Both fundamentals and macroeconomic developments can be perceived as responsible for the lack of purchasing interest.

  • Brazilian crop prospects are positive, but February and March’s lower-than-average precipitation shouldn’t be overlooked.

  • The Vegetation Health Index (VHI) for cane areas from National Oceanic and Atmospheric Administration (NOAA) allows for optimism.

  • Yield reduction in the Center-South region led to a revised cane crushing forecast from 630 Mt to 621.2 Mt and reduced sugar production from 43.3 Mt to 42.6 Mt.

China has been struggling with economic challenges, particularly in its real estate sector, for over a year. These challenges include deflation and high financial leverage, as the government has relied on fiscal stimulus to spur activity growth. The recent escalation of the trade war with the US could potentially exacerbate these issues and underscore a concerning trend for the sugar market: a slowdown in demand.

Image 1: China’s Estimated Import Arbitrage 

Source: Bloomberg, Refinitiv, Msweet, Yntw, Hedgepoint



While fundamentals cannot be ignored, and the country’s record-high production contributes to a more bearish outlook regarding import needs, China did not take advantage of the recent import arbitrage opportunities in non-producing regions. Historically, even when arbitrage in producing regions remained closed, the opening of non-producing regions led to increased purchases. Although this does not necessarily indicate a growth in imports beyond expectations, it would be reasonable to expect that China would take advantage of recent lower raw prices to purchase what was already anticipated. The fact that it didn't indicates that demand is indeed weaker, or at least dormant, as it waits for the new Brazilian crop. Consequently, sugar prices had no reason to recover, remaining around 18 cents per pound while the market digests all macroeconomic changes.

Image 2: Brazilian Monthly Exports to China (‘000t)

Source: Williams, Hedgepoint

In addition to the weaker demand, particularly from the sugar market's key importer, Brazilian crop prospects remain positive, although we have revised our availability marginally downward.

The below-average precipitation in February and March cannot be overlooked, as it impacted soil moisture, bringing it to the lowest level in 30 years. However, when examining the Vegetation Health Index for Center-South cane areas, calculated based on information shared by NOAA, it is evident that, although the index suffered during these months, the late rainfall in March and a close-to-average April have helped recover plant health. According to the data, the VHI has not crossed the basic stress level of 40, indicating that there is still no confirmation of higher stress concerns – at least for now.

Image 3: Weekly Vegetation Health Index for Center South Cane Areas 

Source: NOAA, Hedgepoint



Re-running our model for TCH with updated values for precipitation, VHI, temperature, and soil moisture indicates that the Center-South region is likely to face a yield reduction. However, mills have reported a marginal increase in area, contrary to our initial estimates which considered a decrease due to last year's fires and drought. Consequently, by combining a 1.1% TCH reduction with a 1% growth in area, our cane crushing forecast has been adjusted from 630 Mt to 621.2 Mt.

Image 4: Agricultural Yield and Area Evolution 

Source: Unica, Conab, Hedgepoint

No changes were made to our sugar mix expectations or ATR, which remain at 51% and 141.2 kg/t, respectively. Consequently, sugar production has been reduced from 43.3 Mt to 42.6 Mt, a decrease of nearly 700 kt. As a result, the trade-flows surplus has been marginally reduced. Ultimately, Brazil continues to act as a major bearish force in the market, adding to the recent raw sugar price weakness and failure to surpass the 18c/lb level.

Despite the positive prospects, we should be aware that the initial reports on the 25/26 crop evolution from UNICA might indicate a lower TCH, potentially generating supportive momentum. However, it is expected that the first tranche of the crop will present poorer results, as this is the cane that suffered the most during its development due to last year's drought.

Image 5: Crop estimates summary  

Source: Unica, Hedgepoint

In Summary

China has been facing economic challenges including deflation and high financial leverage, exacerbated by the recent trade war escalation with the US, leading to a slowdown in sugar market demand. China did not capitalize on recent import arbitrage opportunities, indicating weaker demand as it waits for the new Brazilian crop. Consequently, sugar prices have remained around 18 cents per pound, failing to recover after the “Liberation Day” implications.

Brazilian crop prospects remain positive, though revised downward due to recent below-average precipitation. Re-running our model for TCH, it indicates yield reduction in the Center-South region, leading to a revised cane crushing forecast from 630 Mt to 621.2 Mt and reduced sugar production from 43.3 Mt to 42.6 Mt. This marginal drop does not change the overall bearish sentiment, trade flows remain surplus.

Weekly Report — Sugar

Written by Lívea Coda
livea.coda@hedgepointglobal.com
Reviewed by Laleska Moda
laleska.moda@hedgepointglobal.com
www.hedgepointglobal.com

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