This has definitely not been a week for celebrations in the sugar world. All the witches were let free and all the black swans prowled around the dark skies of the market.
First, China with the import tax on sugar from certain origins, among which Brazil. Since the Chinese domestic price is twice as much as that on the foreign market, the gain encourages the increase in the sugar flow from Thailand to Myanmar, which later entered China. China wants to avoid that and has set a 95% tax. Brazil is the most jeopardized country.
Then, on Thursday the 25th, Petrobras unexpectedly announced a decrease in gas price for the refineries by 5.4%. In a week when the real strongly devalued against the dollar due to the political turbulence which has hit Brasilia and when oil was slowly recovering on the foreign market, Petrobras’ attitude might have come across as being illogical.
Some calculations commented on by the market show that the company should increase price rather than lower it. However, there was actually room for a decrease in gas price according to the criterion we used which compares the domestic consumer price with the average gas price in 100 countries. By this criterion, according to Archer’s calculations, the fair gas price at the pump in São Paulo should be R$3.1500 per liter. Last week, the average traded price in the city of São Paulo, according to the ANP (National Petroleum Agency) was R$3.3570 per liter. The problem, in the case of Petrobras, was timing.
The Brazilian state-run oil company, concerned about the fall in fuel sales, understood that now was the best time. This change, however, made a great part of the analysts, including this humble scribe, bite their tongues – notably, when the company’s announcement came a couple of hours after we had sent our clients a report stating we believe “we have already seen the sugar low this year (15.12 cents per pound) on April 27 and only under extremely unfavorable circumstances in the political and economic fields in Brazil would NY trade below 15 cents per pound”. The problem, in the case of this scribe, was timing.
Evidently, when different criteria point to different directions, the problem lies in pricing transparency. Who took the rap? Once again it was the sugar-alcohol sector: gas price reduction affects ethanol price and increases the possibility of a mix of more sugar production, pressuring sugar prices at the NY exchange.
Finally, UNICA released the crushing and production of the Center-South in the first fortnight of May and the numbers were smaller than last year’s, but the market didn’t like it. If the weather allows it, the market works with a crushing around 586 million tons of sugarcane and a production of 35.5 million tons of sugar. If the weather allows it!!!! The maximum capacity of crushing, assuming an 85% performance, is around 629 million tons of sugarcane. The Center-South should crush 2.5 million tons of sugarcane per day. If we have a rainy winter like in 2010, the production might be hampered.
Well, the market in NY hasn’t traded below 15 yet, but it has made some casualties: on Friday, July 2017 hit 15.02 cents per pound, “heroically” closing at 15.05 cents per pound.
What now? What are we supposed to do? It’s tempting for the mills to repurchase their hedges (as long as they have their own futures account) because just as there is no market which keeps providing high returns indefinitely on the production cost, as it occurred over October last year up until early this year, there is no market which stays below it indefinitely, under a mid- and long-term scenario which is fundamentally constructive.
The industrial consumers may be before a great opportunity to buy their raw materials or fix prices.
Archer Consulting 28th Intensive Course on Futures, Options and Derivatives – Agricultural Commodities (in Portuguese) will be held on September 19 (Tuesday), 20 (Wednesday) and 21 (Thursday) 2017 from 9:00 am to 5:00 pm, in São Paulo, SP at the Hotel Paulista Wall Street. Don’t leave it to the last minute and enjoy our discounts.
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Have a nice weekend.
Arnaldo Luiz Corrêa
