With the rise in temperature, the domestic sugar market ushered in the traditional peak consumption season, and the spot transaction in the main production areas has generally improved in the past month, and the downstream traders have opened their stocks, can Zheng Sugar usher in the rising trend? In the context of strong internal and external linkage, we believe that although the spot transaction has improved in the short term, in the context of the basic balance of domestic supply and demand, the core of Zheng Sugar's pricing is still raw sugar, and the internal disk is mainly to follow, and it is difficult to get out of the independent market; in the medium and long term, if the domestic inventory is better, we believe that the trend market can be expected. That is, the trend of raw sugar determines the trend of internal disk, and the destocking of domestic inventory determines the height of Zheng sugar.
In-stock pricing basis
Due to the root nature of sugarcane, the domestic sugar market is known as three bears and three bulls, and a six-year cycle. The last cycle, which began in October 2014 and ended in December 2018, lasted 51 months, in line with the law of the large cycle. But since 2019, it has not regained its momentum, but maintained a range-bound pattern, does it mean that the traditional five- to six-year cycle has ended? In recent years, the traces of policy intervention in the domestic sugar market are more obvious, whether it is the recent crackdown on syrup imports or the implementation of the import filing system some time ago, it is to maintain the balance between supply and demand. In the short term, the domestic output plus imports and consumption will remain basically the same, and the endogenous drive of the inner disk is insufficient, which is also the main reason for the failure of the large cycle. It can be clearly seen from the recent trend of Zheng Sugar and raw sugar index that the internal and external trends are basically converging, and Zheng Sugar mainly follows the fluctuations of the outer disk, but the volatility is smaller due to poor fundamentals.
Figure 1: Zheng Sugar and Raw Sugar Index Trend
From the analysis of the domestic supply and demand balance sheet, it can be seen that in recent years, domestic production has basically remained near 10.5 million tons, while consumption has slowly increased with the improvement of living standards, but the balance sheet performance is not short of sugar, and the gap is mainly supplemented by imports. Taking the 20/21 crushing season as an example, the national sugar production is 10.65 million tons, the consumption is 14.9 million tons, and the import quantity within the quota is 1.5 million tons, then the gap = 1490-1065-150 = 2.75 million tons, the gap is supplemented by additional imports, and the import quota will be adjusted according to the gap between production and demand, which has also created a basic balance between domestic supply and demand in the past two years, and the endogenous rise and fall of Zheng sugar is not strong. According to the theory of marginal cost pricing, manufacturers or state-owned enterprises make the price equal to the highest marginal cost. Therefore, domestic cost = max (import cost within quota, additional import cost, domestic production cost). Recently, raw sugar has remained high, and the cost of additional imports in Brazil is higher, so the domestic pricing base falls on the additional cost of allocation. If the raw sugar rises, with the additional import cost upwards, the import is expected to shrink, the domestic ushered in a good opportunity to go to the library, and there is a strong impetus to the internal disk, so we believe that the focus of the study and judgment of the trend of Zheng sugar is still raw sugar.
Figure 2: Domestic supply and demand balance sheet
Raw sugar is expected to remain high
The international sugar market has rebounded sharply since bottoming out in mid-to-late April 2020, and since the first half of 2021, the weather speculation has resumed, and raw sugar has risen sharply, reaching a stage high in May 2021, with an increase of up to 100%. For raw sugar, the short-term market focus remains on Brazilian crushing and India's outstripping exports.
UNICA's latest crushing data shows that a total of 254 factories were squeezed in the 2021/22 crushing season by the end of June, a decrease of 10 from the same period last year. The central and southern regions have cumulatively pressed 211 million tons of sugarcane, a year-on-year decrease of 8.45%, and the cumulative sugar production is 12.256 million tons, a year-on-year decrease of 8.16%; the cumulative output of ethanol is 9.627 billion tons, down 4.24% year-on-year, the average sugar ratio is 45.88%, the same period of the last crushing season was 46.37%, and the average sugarcane sugar production was 132.91 kg per ton, higher than the same period last year of 131.09 kg.
Last year's La Niña climate caused drought in south-central Brazil, which is still continuing, and has had an impact on sugarcane growth, further validated by the slow pace of crushing at the beginning of the year; major institutions have now lowered their expectations for sugar production in the 21/22 crushing season in south-central Brazil, with a general estimate of a decline of about 3 million tons. Although the forecast for Brazil's production cut is more consistent, but the sugar-alcohol ratio is still controversial, some institutions believe that as crude oil continues to rise, ethanol sugar prices or will exceed raw sugar, sugar mill crushing will be inclined to ethanol, sugar-to-alcohol ratio will decline; while some institutions believe that Brazil will sacrifice ethanol production to avoid a sharp decline in sugar production.
Figure 3: Crushing Progress in South-Central Brazil (10,000 tons)
Figure 4: Production in South Central Brazil (10,000 tonnes)
Figure 5: Ethanol discounted sugar price (cents/lb)
India's crushing season is basically over, the sugar production in this crushing season is 30.9 million tons, the output of the next crushing season is expected to be slightly higher than that of the current crushing season, and the main factors affecting raw sugar in the second half of the year are the production expectations and exports in the new season. New season production is expected to grow slightly around 600 000 tonnes to 31.5 million tonnes due to an increase in planted area and good rainfall. In addition, India's export situation is more noteworthy than production. Although the Indian government announced a 31.4% reduction in sugar export subsidies on September 30, India has exported 5.9 million tons before the policy was introduced, and India's unsubsidized exports above 18 cents are profitable, so we estimate that India's annual exports will increase by 14% to 6.5 million tons, and subsequent Indian exports are expected to always suppress the height above raw sugar. At the same time, the development of the epidemic in India is also worthy of attention, if the epidemic is effectively controlled, the corresponding Indian consumption will be increased, and the global oversupply may narrow.
Figure 6: India's Exports (10,000 tonnes)
On the whole, we believe that crude oil remains high, real appreciation, Brazil drought and frost speculation continues, strong production cuts are always strong support below raw sugar, while the upper pressure mainly comes from India's more than expected exports, and the short-term influencing factors are still Brazil's weather and crushing progress.
The peak domestic consumption season is coming
As the temperature rises, the domestic summer stocking is opened, and the willingness of downstream traders to replenish the warehouse is enhanced. Mu tian technology monitoring, domestic spot transactions continue to maintain the general preference state, to July 23 domestic spot transactions, Guangxi and Guangdong spot transactions are better, some areas of the quotation of the second increase, spot transactions compared with the previous period of significant improvement.
Figure 7: Domestic spot transactions
As of the end of June, the cumulative domestic sugar sales rate in this crushing season was 64.05%, a decrease of 4.08 percentage points over last year, although it is still at a low level in recent years, but it has increased month-on-month. And various statistics show that domestic consumption has improved, retail sales of catering in May have recovered to the level of 2019, and beverage consumption is expected to increase in the near future, and the later period is mainly concerned about the expected realization of peak season consumption.
Figure 8: National cumulative sugar sales rate (%)
Domestic inventories remain on the high side
Although domestic consumption has improved, inventories are still high. Imports have increased significantly since May 2020 with additional tariff reductions. As of the end of June, the cumulative imports of this crushing season reached 4.67 million tons, an increase of 2.71 million tons year-on-year, and the annual imports are expected to exceed 5 million tons, ranking the highest in history. High imports have brought a serious squeeze on domestic sugar sales, which is also an important reason for the deviation of domestic production and marketing this year. The national industrial inventory was 3.8353 million tons, an increase of 515,500 tons year-on-year, although it was narrowed year-on-year, it still ranked the highest position in the past 7 crushing seasons, and the excessively high industrial inventory always suppressed the upward height of the plate.
The short-term domestic supply and demand contradiction is not obvious, and the transmission of import policies is still the basis for Zheng Sugar pricing. According to the current sugar import process, additional imports need to be filed with the relevant departments before they can be allowed to enter the country. Through our combing of the Ministry of Commerce's bulk commodity import information table, the results show that from January to April, there was basically no import license issued in China, and with the rise of raw sugar, the cost of additional imports in Brazil increased significantly, if the raw sugar remained in the high range near 17 cents in the later period, the decline in additional imports is expected to be strong, and domestic sugar will also usher in a valuable opportunity to go to the library. According to the estimated cumulative consumption of 2.69 million tons in the 6-8 months of the 18/19 crushing season without the epidemic period, the country is still expected to have 2.07 million tons of inventory at the end of September of this crushing season, ranking the highest level in history, and the premise of this situation is that domestic imports are the same as the five-year average, and although there is a short-term reduction in imports, it is more likely that the overall imports in June-September will be higher than the five-year average, so the domestic inventory pressure is huge.
Figure 9: Cumulative imports during the crushing season (10,000 tons)
Figure 10: Brazil with additional import profit (yuan/ton)
The trend of the outer disk determines the trend of Zheng sugar, and the domestic inventory dematerialization determines the height
In the short term, although the domestic spot transaction has improved, it is still not enough to support the trend rise of Zheng Sugar in the context of higher domestic inventories. In recent years, the contradiction between domestic supply and demand is not prominent, the fundamental elasticity of Zheng Sugar is not large, and the endogenous upward and downward driving forces are not strong. High imports and high inventories are always the main pressure on the upward movement of the inner disk, and it is difficult to fall sharply below due to cost support, so we believe that the transmission of domestic import policies is still the core of the internal disk pricing, that is, the follow-up trend will depend on the raw sugar, and the domestic inventory destocking situation will determine the height of Zheng Sugar.
For raw sugar, the focus of the market is still on the weather and crushing situation in Brazil, with persistent droughts, frequent frosts, and continuous weather speculation, which has strong support for raw sugar. In the medium term, we believe that the reduction in production in the central and southern regions of Brazil and the decline in the sugar-alcohol ratio are expected to always support raw sugar; the upward pressure is mainly due to the market supply after Brazil squeezes the upper volume, India has no subsidies to export above 18 cents, and the short-term raw sugar is expected to maintain a high level of strong shock. Under the strong trend of the outer disk, with high additional import profits, limited room for the decline of the internal disk, coupled with the arrival of summer, the start of downstream stockpiling, the marginal improvement of domestic fundamentals, but in the context of high domestic inventory, it is difficult to go smoothly, and the market is waiting for the latest production and marketing data to verify the domestic destocking situation. If the domestic destocking situation is good, the trend market can be expected, if the consumption situation is average, Zheng Sugar is expected to still follow the raw sugar.
This article originates from the Minmetals Futures microservice