“Patriotism is the last refuge of a scoundrel”
Samuel Johson (1709-1784)
English Writer and Literary Critic
The more the real depreciates against the dollar, the more the mills add new sugar pricings for export looking not only to the 2021/2022 crop but also to the 2022/2023 one. In the week that just ended, the Brazilian currency broke a new record and even traded at R$5.8400 right after the disclosure of the reduction in the basic interest rate to 3% per year, the lowest value in history. It closed at R$5.7400 on Friday.
The sugar market in NY, despite the real devaluation, has been able to keep its nose above the 10-cent-per-pound level pretty much because of the recovery of the oil price on the world market. The sugar futures contract expiring on July/20 closed at 10.14 cents per pound, equivalent to R$1,337 per ton and an appreciation of 7.25 dollars per ton in the week.
In the monthly accumulated of May, WTI, RBOB, and Brent lead the way with the appreciation of 37%, 31%, and 22%, respectively.
Last week we reported on the approval of the CIDE for fuels, bringing them up to R$0.30 per litter from the current R$0.10 plus a 15% tax on gas import, which would come to a total increase of about R$0.25 per liter on hydrous. We made a mistake. The approval, taken for granted by one of our most reliable sources, didn’t occur and the government backed down.
On the bright side, the huge volume of raw sugar delivered against the expiration of May’s futures contract in NY last week should find room at the final destination since the white premium (the difference between refined sugar and raw sugar) has boosted the demand for raw sugar. At Santos Port, according to Williams shipping agency, there are 35 vessels in the line-up, which should load the equivalent to two million tons of sugar to be sent to Bangladesh, China, Morocco, Nigeria, and Yemen, waiting in line for berth.
The current scenario is still volatile. If someone says he knows what will happen to the market under this state of affairs and with so many uncontrollable variables, he must be out of his mind. We are far from having a solution. A very experienced political analyst has confided to me that things should get a lot worse in Brazil further down the road. According to him, “in early August the size of the blow we will get hit by will be clear: the number of fatalities and sick people, the number of unemployed and discouraged and the number of companies that have or will close down. In addition, there is the geographical spread of the crisis”.
Because of these issues, it’s important not to lose focus when pricing sugar, not to miss the opportunity to guarantee good profitability, to stay confident that a huge volume of sugar will also be delivered physically against the expirations of July and October. The mills that have adequate risk policy are jumping the gun and making their hedges before even knowing how much additional sugar they will produce or the premium/discount they will be subject to when they trade the commercial contract. You see, the non-index funds are short by more than 48,000 lots and it’s estimated that the mills will have to sell at least 75,000 lots to fix the sugar that is to be additionally produced.
Our worrying view of more sugar to be produced by the mills is backed up by the study that Archer Consulting has released to its clients about the fuel consumption in Brazil for this year under the pandemic scenario. We forecast an unprecedented drop in the Otto Cycle of 9.35% against last year. In 2019, Brazil consumed 60.7 billion liters of total fuel (gas A, anhydrous, and hydrous) which corresponds to 53.95 billion liters of equivalent gas. Our estimate has dropped to 48.9 billion liters for this year.
Besides a revenue loss in current values of more than R$10 billion on ethanol only, the sector will still have to deal with the enormous complexity of the situation which will require a lot of work as far as the renewal of credit line goes, with the infallible breach of contracts by mills that are on ventilators, having difficulty storing and tanking due to the slowdown of the output of products.
The average annual fuel consumption of cars run on gas in 2019 was 1,202 liter per vehicle, almost 2% below that of 2018. For flex-fuel cars, the average consumption was 1,521 liters, roughly 5.3% below the 1,606 liters consumed in the previous year. Motorcycles consumed 423 liters on average in 2019, an 8.5% drop against 2018. Last year, our model shows that 43.79% of the flex-fuel vehicle owners chose to use ethanol when filling up the tank. In 2020, this percentage should drop to 34.58%. We believe that hydrous consumption will plummet to 15.94 billion liters this year, a substantial 29% downturn against 2019.
While the country buries more than 10,000 victims of convid-19, president Bolsonaro announces he will have a barbecue and a “kickabout” with 30 guests on the weekend. We are still paying a high price for the thirteen years of PT (Workers’ Party). In order to get rid of the Brasília gang, we elected someone who has proven to be totally unprepared and who has done little to mitigate this disproportionate crisis. Unfortunately, Bolsonaro is not the only one. The world lacks statesmen and great leaders in tough times like these. Now, big-mouth people abound.
A nice weekend to everyone and HAPPY MOTHERS’ DAY!
Arnaldo Luiz Corrêa
