Nov 25 / Lívea Coda

Mostly, a demand game!

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"The strength of the short-term bullish trend will depend on demand pace and crop development conditions in the Brazilian Center-South. If the latter deteriorate, trade flows could turn completely bullish."

Mostly, a demand game!

  • The current macro framework is not supportive of the commodity complex.

  • Risks such as the devaluation of emerging market currencies, higher refinery stocks, and a weaker Chinese economy could pressure demand, lowering FOB premiums.

  • Fundamentals seem stable, but availability tightness might not be as severe as expected in Q4/24. Mexico's season has started optimistically, and Brazil continues to push through, with a higher deficit predicted in Q1/25.

  • Q1/25 trade flows could tighten if India's production falls short, widening the supply-demand imbalance and potentially driving higher prices.

  • The strength of the short-term bullish trend will depend on demand pace and crop development conditions in the Brazilian Center-South. If the latter deteriorates, trade flows could turn completely bullish.

As discussed in previous reports, the overall macro framework is not supportive for the commodity complex. Specifically for sugar, following Trump's election, the stronger dollar and weaker Brazilian real, driven by anticipated fiscal policy changes in Brazil, created a favorable environment for Center-South’s exports, which capped sugar gains. Risks such as the devaluation of emerging market currencies, reducing their purchasing power, and a weaker Chinese economy have also added pressure to the demand side, lowering FOB premiums.

Image 1: Raw Sugar Monthly Santos FOB Premium (USc/lb)

Source: Source: Refinitiv, Hedgepoint

Meanwhile, fundamentals seem stable, although the availability tightness might not be as severe as once expected during Q4/24. Mexico has started their season, and Conadesuca has shared a more optimistic view in terms of exports, while significantly reducing imports. Brazil continues to push through, and ultimately, the market is expected to face a deficit in Q1/25. Therefore, March remains the most bullish contract, with a 140 pts H/K25 spread. Recent rains in Center-South could support this trend further, as it is positive for the 25/26 crop development. This price disparity between the March contract and May 2025 can also find strength if India decides not to export.

Image 2: Sugar Balance - Mexico (Mt Oct-Sep)

Source: Conadesuca, Greenpool, Hedgepoint - obs. export data combines exports and IMMEX

Due to Diwali festivities, state elections, and weather conditions, the 24/25 Indian season is experiencing some delays that require monitoring. As of November 15th, only 144 mills were operating, a 45% decrease compared to the 264 mills active at the same time last season. This decline is reflected in cane crushing and sugar processing, which have both dropped by 40% and 41% year-on-year, respectively. A total of 710kt were produced, compared to 1.27Mt last year. However, the season is expected to gain traction during November’s second fortnight. Although we remain optimistic regarding India’s ability to contribute to the world market during 24/25, it is important to explore possible trade flows scenarios to enable the best risk management position.

Currently, our base case assumes 1.5Mt of sugar being exported by the Asian country, along with robust sugar production and participation from the Brazilian Center-South in its 25/26 season (details in link). The Indian volume would only impact the market from Q1/25 onward, as the government is expected to first focus on stock replenishment before announcing any quota allowances. Meanwhile, the additional availability from the Center-South would come into play by Q2/25. However, if India's production falls short of our expectations, how much tighter would the trade flows become?

Image 3: Base Case | Total trade flows (‘000t tq)

Source: GreenPool Hedgepoint

Starting from a nearly 1.5Mt deficit in Q1/25, the imbalance between supply and demand is expected to widen to over 2Mt if India does not export. The recovery towards a surplus will be smoother than in the base case, pushing the potential bearish trend further away. However, considering the current future structure, trade flows, and weaker demand, the latter might be crucial in determining the strength of the short-term bullish trend. Regardless of India's involvement, white sugar trade flows are expected to be more balanced than raw sugar, adding pressure to the white premium and, consequently, refinery margins. If the rumors of higher stocks at the refineries are true, they might be able to postpone new purchases. Additionally, with lower demand from China, whose imports already fell by 41% year-on-year in October, trade flows might be overestimating demand urgency.

Image 4: No India | Total trade flows (‘000t tq)

Source: GreenPool Hedgepoint


If there is low interest and if market seems comfortable enough to push demand to Center-South’s 25/26 season, prices might stay trading at a lower-than-expected, but supported range, between 19.5 c/lb (current Indian export parity) and 22.5c/lb.

However, if demand gains momentum, especially in terms of raws, this range can move up – depending on the urgency.

Another factor that could drive higher prices is the deterioration of crop development conditions in the Brazilian Center-South for the 25/26 season. If rains become scarce again, or if by February there are concerns about cane quality and the ability to achieve a higher sugar mix, demand will have no alternative, and trade flows could turn completely bullish.

Image 5: Sugar market key paritites (c/lb)

Source: Bloomberg, Refinitiv, Hedgepoint


In Summary

The macro framework is not supportive for the commodity complex, especially sugar. Following Trump's election, the stronger dollar and weaker Brazilian real favored exports, capping sugar gains. Risks like the devaluation of emerging market currencies, rumors of higher stocks at refineries and a weaker Chinese economy have pressured demand, lowering FOB premiums.

Simultaneously, fundamentals seem stable, but availability tightness might not be as severe as expected in Q4/24. Mexico's season has started optimistically, and Brazil continues to push through. A higher deficit is only predicted in Q1/25.

Q1/25 trade flows could tighten if India's production falls short of our expectations. The supply-demand imbalance is expected to widen, potentially driving higher prices. This trend can be exceptionally strong if crop conditions in the Brazilian Center-South deteriorate. Otherwise, demand pace will be the key monitoring variable when it comes to price action during the Brazilian offseason.

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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