May 27 / Lívea Coda

Sugar and Ethanol Weekly Report - 2024 05 27

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"Sugar attempted recovery early last week, with July settlements reaching 18.68 cents per pound on Monday. The remainder of the week saw unfavorable conditions for bullish traders, with the dollar index strengthening and the market acknowledging unchanged sugar fundamentals, particularly in the short term."

A lower support level

  • Sugar attempted recovery early last week, with July settlements reaching 18.68 cents per pound on Monday. The remainder of the week saw unfavorable conditions for bullish traders, with the dollar index strengthening and the market acknowledging unchanged sugar fundamentals, particularly in the short term.

  • Strong Brazilian crop and robust exports contributed to a bearish outlook, with April's Center-South region exports surpassing previous records, reaching nearly 1.6 Mt.

  • Chinese Customs disclosed April's import figures, showing a decrease of 20 kt compared to the same period last year, reaffirming China’s selective purchasing approach. Rumors of additional purchases and recalibration of import arbitrage suggest lower support.

  • Additionally, the looming threat of La Niña poses a significant long-term risk, potentially impacting sugar production in 2025, especially in July and October contracts.

Sugar made another attempt to recover at the start of last week after breaching the 18c/lb support level on May 16th. The July settlement reached 18.68c/lb on Monday, also reflecting a relatively dull day in other markets. The dollar index remained stable, while the energy complex experienced corrections.

However, the rest of the week did not favor bullish traders. The dollar index regained strength, and the market recognized that sugar fundamentals didn’t change, at least not in the short term.

Image 1: Dollar Index versus Sugar

Source: Refinitiv, Hedgepoint

The Brazilian crop started at a fast pace, and exports remained strong, further contributing to the bearish outlook. In April, the Center-South region surpassed its record volume from the 2017/18 season, exporting nearly 1.6 Mt, according to Williams.

One can easily expect that May's export volumes will be even bigger. With approximately 4.7 Mt already nominated for shipment, port congestion has escalated throughout the month, reaching peak levels for this time of year, although it shouldn’t prevent sugar from reaching global trade flows. The maintenance of dry weather coupled with mills’ activities are likely to support export results.

Image 2: Total Exports - Brazil CS ('000t)

Source: Unica, MAPA, SECEX, Williams, Hedgepoint

Also regarding current fundamentals, Chinese Customs has disclosed April's import figures, aligning with initial expectations. The nation imported 50kt during the month, reflecting a decrease of 20kt compared to the same period last year. This reaffirms China’s buying calculated approach, with the 3.1 Mt already imported this season providing a cushion for selective purchasing based on price viability.

Recent price fluctuations, dropping below 18 c/lb, have spurred rumors that China acquired an additional 350kt, scheduled for arrival between June and July, in accordance with seasonal patterns. Considering that support was identified around the 18 c/lb mark, it suggests that the Chinese import arbitrage is recalibrating from a 605 RMB/t premium to slowly align with the sole ZCE parity, calculated at 17 c/lb.

Over the preceding fortnight, the majority of trading activity orbited 18.56 c/lb, with the uppermost trading range falling below this mark. Consequently, the current scenario of sugar prices residing below this threshold, at 18.3 c/lb, isn't unexpected, with notable difficulty encountered in surpassing it. Both fundamental factors and market interest contribute to this challenge.

Image 3: Raw sugar volume at price between May 12 and May 23 (c/lb and No. of lots)

Source: Refinitiv, Hedgepoint

The looming presence of La Niña poses a significant long-term risk. Its potential activation during the Center-South's winter and the Northern Hemisphere's summer carries a 50% likelihood, and if it manifests as a mild event, it could potentially boost sugar production this season. However, the probability of its occurrence heightens as we approach the end of 2024, implying that the main cane development window for the Center-South in 2025, particularly in October-January, could be impacted by below-average precipitation. This prospect leans toward a bullish outlook for 2025 contracts, especially in July and October.

Image 4: NOAA CPC ENSO Probabilities (May 2024)

Source: NOAA

In Summary

Sugar prices briefly rose but soon corrected due to no changes in current fundamentals. A strong Brazilian harvest and its higher exports, coupled with weaker Chinese imports and support, acted directly preventing any strong uptrend. While La Niña might increase production this year, it could also lead to lower supply in 2025, acting as a bullish factor worth monitoring.

Weekly Report — Sugar

Written by Lívea Coda
Reviewed by Natália Gandolphi


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