The sugar market in NY had yet again another down week. March 2015 closed Friday at 15.14 cents per pound, accumulating a 42-point fall in the week, or about 9 dollars per ton. Every month traded up until 2017 closed at a 28-50 point low in the week, showing that the market mood is not only being influenced by short and long term, but also by a global environment which involves low economic growth, oil price melting and increasing concern over the rough paths the sugar market will have to take in the coming years.
The export physical market has weakened again this week with prices for immediate shipment trading at a 90-point discount, a little worse than last week’s 75 points. The spread for March 2015/May 2015 has widened a little more showing a 35-point discount with an included 14.6% carry, that is, the shorter maturity is given increasing discounts because no target markets can be found.
The major change factor for the sector which is eroding the supporting pillars and undermining the budget of the mills is the sharp drop of the oil price. Since last June, when oil hit the 110-dollar high a barrel, we have seen a steep drop reaching the recent 69.64 lows for Brent, or a huge 38% devaluation. Nevertheless, anhydrous and hydrous prices have been steadfast on the internal market because we are at the end of the crushing period and their profitability is still positive and greater than that of sugar.
The question is what will the next harvest be like if oil price keeps falling? We shouldn’t forget that present oil and gas price on foreign markets has greatly diminished the price distortion there was between foreign market and pump gas price. According to our calculations, today’s fair price would be R$3.0100 a liter, which is close to the market today. This way, it seems there is no room for increasing gas price or even for reintroducing CIDE. It gets even harder when our inflation rate is above the target set up by the government.
I don’t remember having seen in the sector a time when we found ourselves at such a crossroad with an avalanche of problems and negative endogenous and exogenous factors which makes the decision-making process really hard. The decrease in financial resources (credit) stemming from the suspicion that meeting obligations will be difficult is one of these factors.
2015 will be an extremely difficult year. It will be like flying a plane through a CB storm. It will take the pilots nerves of steel and increased and constant attention to the cockpit instruments, monitoring the hedge, looking for space between the dark clouds to be able to fly through the storm safely. That’s a hard task. It will be a year where risk management will have to come first – keep an eye on the screen and fixations for 2015/2016. The average value based on Friday’s closing and using the dollar traded via NDF reaches a little over R$1.010 per FOB ton, but bringing it up to present value by the Central Bank interest rates it is at R$935 per ton.
A great effort must be made so we won’t lose focus. Maybe there is some light at the end of the tunnel. We have talked about the absolute need for the sector to grow at least by 150 million tons over the next 5 years in order to meet the internal fuel demand only. This will hardly occur and should reflect positively on ethanol and sugar prices. Since fuel consumption has vigorously grown by 7% a year over the last 5 years, this fuel will have to come from somewhere, be it from corn ethanol or imported gas. The key factor is still up to the oil market. Many analysts understand that oil at as such a low level as it is now starts to cause a lack of investment for new drilling and production (the pre-salt is an example – it needs a market over US$70).
We are at a turning point, at a poker table, at an all-or-nothing situation which increases the insecurity dose and can lead us to extreme standpoints. Fasten your seatbelts in order to ride out this turbulence. We still have a long way to go before getting to our final destination.
Arnaldo Luiz Corrêa
