Another one of those boring weeks on the sugar market – the only difference is that the volatility is higher, not necessarily when it comes to options, but the futures which are fluctuating more strongly than usual. March/2018 closed at 14.38 cents per pound, a 25-point fall in the week, or 5.50 dollars per ton; all the other maturities closed between 6-20 points down.
After the closing, the surprise came with the release of the commitment of traders: the funds covered 42,000 lots short and the market moved 46 points (from Tuesday to Tuesday). There are two points to be looked at with this information. The first one shows the weakness of the market, which needed 46,000 tons to move one point. The second one is if there was this reduction, there might have been a lot of fixation by the mills (late) taking away the pressure we went on and on about here – remembering that we said that the mills must have had about 80,000 lots still to be fixed. Let’s stay tuned for the next chapters.
Petrobras has raised the gas price further. The oil market has gone from being a supporting actor to being the leading actor in the market analysts’ routine when more watchful eyes focus on the fundamentals of the sugar-alcohol sector. It’s hard to know how much of this leadership has already reached the perception radius of the analyses we read every day about the sector. Our feeling is that the market participants still haven’t learned to deal with this new component.
It’s controversial to say in a peremptory way that oil is under the radar of the funds in sugar; however, those in the sugar-alcohol sector who get ahead of the possible events on the oil/energy market will have a greater competitive edge.
On the energy market, there is a consensus that in 2018 the producers of shale gas will face, regardless of its size, a substantial increase in the drilling cost which will have a considerable impact on the decrease in productivity and on the increase in the production cost. Logistic bottlenecks and lack of labor are also predicted. The analysts argue that after a lot of workers in the oil and gas industries were laid off, with the purpose of cutting costs in times of crises, the replacement of these professionals has turned into a hard task because lots of them migrated to other more stable industries. More money must be put on the table. This pushes the break-even point of shale gas up to higher levels, and that oil will follow the same path is feasible.
To reinforce the argument of higher oil, take the United States growing oil exports, with huge margins, which are helping lower the stocks in the country, which had been up until then a resistance factor to a price increase. Add as possible price sustaining factors (or maybe even an increase ) the geopolitical instability of some important participants – Venezuela, Iraq, Nigeria, Libya, and Iran. Can you see the path we have ahead of us?
A point that deserves serious thought is about the trading companies of commodities. Over the last years, they have been struggling hard to survive. Narrow margins, high competitiveness, smaller volume turnover, greater working capital allocation, greater credit restriction push the decision makers at the trading company to take more risks. With that, the financial institutions which finance a lot of trading companies feel less at ease about the trading business itself, diminishing resource allocation, increasing credit restriction and it turns into a snowball that way. The press has been releasing several cases of musical chairs within the companies, stockholders wanting out of the business, huge shortfalls in speculative operations and huge operational losses or pitiful profits. Over the recent past, trading has not had the same glamour it used to have decades ago.
The immediate effect of the sector – and this is an important counterpoint which can eventually reduce any enthusiasm towards price recovery – is that the trading companies will certainly be less aggressive towards negotiating physical sugar contracts for the 2018/2019 crop. We already see in some negotiations for next year greater discounts than those practiced this year. Likewise, it’s possible – in order to decrease risks and cash flow need to be destined for price adjustments – that there will be a decrease in the timeframe for the mills to fix their contracts in NY before shipment. The reason is simple – the negotiated discount on the spot market along this harvest year has several times presented much lower levels than those contracted by the trading companies. This is a loss in the vein since there is no basis hedge. It’s just natural that the trading companies will not rush things next year.
For those who are coming to Brazil for the Sugar Week in São Paulo, have a safe trip and lots of good businesses.
The book “Derivativos Agrícolas”, my partnership with journalist Carlos Raices, is already available at Amazon Books, iTunes, Google Play, Kobo and Livraria Cultura: https://itunes.apple.com/br/book/derivados-agr%C3ADcolas/id1294585521?mt=11
The registrations for the XXIX Course on Futures, Options and Derivatives on Agricultural Commodities which will be held on March 6, 7, and 8, 2018 in São Paulo, SP at the Hotel Wall Street are already open. For further information: priscilla@archerconsulting.com.br
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Have a nice weekend.
Arnaldo Luiz Corrêa
