Wednesday, 06 June 2012
During this reporting period (21 May to 1 June), sugar prices fell below the US20c/lb mark. Global macroeconomic weakness was the main driver of this, rather than any sugar market fundamentals.
This price decline triggered a round of sell-offs from investment funds, after which prices stabilised somewhat, partly because the market had become oversold as low prices sparked end destination buying and partly because commodities markets as a whole improved.
The July’12 contract opened at US20.47c/lb on Monday 21 May and closed at US19.09c/lb on Friday 1 June.
Macroeconomic weakness spreads to sugar
Analysts have noted that, as in previous weeks, the recent weakness in the sugar market has largely been a reaction to fears about the global macroeconomic situation.
Weakness in Spanish banks, continuing fears of a Greek exit from the Eurozone, and slowing growth in India and China all contributed to a dip in market confidence which sent investors fleeing sugar, and other commodity markets, for “safer” financial or investment options, such as the US dollar.
Currency moves have encouraged exporters
The US dollar strengthened during this reporting period on the back of this aforementioned move away from perceived riskier investment areas back to the dollar, a global reserve currency.
The Indian rupee and Brazilian real also weakened this period. Analysts noted the Brazilian government intervened to stop the real’s descent.
These weakening currencies have been encouraging for raw sugar exporters in India and Brazil. In Brazil, the falling real means production margins are positive for mills that can access financing to lock in prices for 2013 positions. However in India, where there have been strong exports to West Asia and East Africa, the recent fall in world prices has pushed export returns below price levels that are attractive.
As noted last period, it is worth considering that the lower US dollar market price for sugar is somewhat offset by the relatively weaker Australian dollar, which serves to hold up Australian dollar returns for our exports.
End destination demand in Asia and Middle East strengthens
Due to this price weakness in the market, there has been solid demand and buying from end destination users.
Chinese importers have continued to increase their buying and, in April, imported 311,000 tonnes of raw sugar, double their imports at this time last year.
In total, China has imported 810,000 tonnes of sugar over the first four months of 2012, up 240 per cent on last year.