The sugar market in NY continues having great difficulty supporting itself close to the 14 -14.50-cent-per-pound levels. The bad news for the sector has been piling up gradually and gain greater magnitude under thicker and darker clouds. On Wednesday, for instance, the oil price dropped by more than 5%.
Oil today is the major factor when it comes to sugar pricing for the next weeks. If fuel price abroad keeps plummeting and the real keeps cutting its downward trajectory short against the dollar, it will not be surprising if Petrobras introduces a new decrease in gas price pretty soon, directly affecting the relation to the hydrous ethanol and encouraging the mills to optimize their sugar production.
We just have to look at the energy market in the yearly accumulated, which works in the red. Gas has fallen by 10% on the foreign market, oil has fallen by 15%, and natural gas has fallen by over 18%. Do you know what has done worse than them? Sugar – with a 27% shrinkage.
July/2017 closed the week traded at 14.27 cents per pound, 53 points better than the previous week, that is, almost 12 dollars per ton. The other months also presented a positive performance, closing with variations between 30 and 48 points.
There is no good news on the market that accounts for the high, but just the impression that the market overrated the fall. Let’s see if that’s right because as far as the funds go, they have increased their long positions and now they accumulate more than 50,000 contracts, based on last Tuesday’s COT. Part of the high seen this week is likely to have been fed by the coverage of positions sold by the funds.
A lot of mills are closely watching the dollar curve for next year and trying to take advantage of eventual peaks that might occur and, then, make an early hedge of the currency, leaving the fixation in cents per pound open. It can be a good strategy, taking into account that the real can appreciate against the American currency when the dust on the domestic political scenario has settled and that the Central Bank should promote another cut in the basic interest rate.
For those who saw year-long prices over R$1,600 per ton a short time ago, now they lick their lips when the market reaches R$1,250 even using NDF (Non-deliverable Forward) – tough one.
The dark side of the foreign sugar price crisis is the decrease in cash flow creation and the resulting delay in the amortization and payment of debts acquired by the sector over the last decade. According to our calculations, the sugar-alcohol sector’s debt based on late May is R$87.71 billion. As the country should crush approximately 650 million tons of sugarcane, the average debt is R$135 per ton of crushed sugarcane. The sector’s debt has gone up 3.12% over the past year.
Fuel consumption in equivalent gas, according to ANP data, has increased 0.14% over the last twelve months against the same period the previous year. The consumption of anhydrous ethanol and gas A (without mix) has increased 5.78% while the consumption of hydrous plummeted 19.49%. The consumption in Brazil has come to 57.47 billion liters over the last twelve months, 1.57% below the 58.39 billion liters consumed over the same previous period. Today, the matrix is made up of 44.4% ethanol and 55.6% gas, the worst percentage for ethanol since May 2015, and 10 percentage points away from the golden times of 2009 (54.5% of ethanol).
The industry needs to move on and come together to invest and implement a sustainable growth plan similar to RenovaBio at the risk of turning into a gasoline-additive producer.
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.
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Have a nice weekend.
Arnaldo Luiz Corrêa
