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Sugar: A global perspective - Views on News from Equitymaster
 
 
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  • Jun 7, 2006

    Sugar: A global perspective

    The sugar market is highly regulated throughout the world. It is produced in over 100 countries with about two- thirds of the output consumed in the country of production. Brazil, India, the EU, Australia and Mexico are the largest producers of sugar. Trade barriers, including production quotas, guaranteed prices and import tariffs, impart a significant degree of distortion to international prices. We analyse the global scenario in brief and its implication on sugar prices.

    Consumption pattern: World sugar consumption, which was at 118.1 MT in 1996 rose to 145.1 MT in 2005. During the last three years (i.e. 2002 to 2005), demand has grown by 9.6 MT (2.3% CAGR). India and China together account for 45% of the world's total consumption (though bulk of the Chinese consumption is still saccharine). Overall, the world sugar production is expected to grow at an annual rate of 1.1% as against 0.47% earlier. Growth could accelerate depending upon the rate of shift from saccharine to sugar in China. But overall, the world sugar consumption is expected to be around 160.7 MT in 2010.

    Year Production ( MT) Consumption (MT) Imports End stock Ratio
    2001-02 137.99 135.46 45 61 45%
    2002-03 149.58 139.54 48 69 49%
    2003-04 144.39 142.93 48 67 47%
    2004-05 146.37 145.09 50 65 45%

    Source: F.O. Litch.

    Demand supply situation: Brazil and India are the largest producing counties in the world. Global production has increased from 125.8 MT in 1996 to 146.4 MT in 2005. The following structural changes had a significant impact on sugar prices in the global markets.

    • Success of flexi-fuel vehicles (FFVs) in Brazil - Brazil is the largest producer of sugar in world at around 23 MT. Currently, the blending of ethanol with gasoline in Brazil is in the ratio of 20:80 (Source: International Sugar Organisation). Brazil started manufacturing flexi-cars (running 100% on ethanol). With demand for such vehicles growing faster, demand for ethanol is also likely to increase). If more cane is diverted towards ethanol production, we believe that the demand-supply equation in the global markets for sugar will remain in favour of sugar producers, thus resulting in higher prices.

    • Rising crude prices - Due to rising/firm crude prices, the search for alternate source of fuel has increased manifold. While many areas are still under the development stage (including fuel-cell and jatropha-based fuels), commercially, ethanol has proved to be a successful alternative (taking Brazil as the example). If crude prices continue to increase, we believe that ethanol demand will increase at a much faster rate.

    • EU subsidy reduction - Under the WTO ruling announced in mid-2005, EU is under obligation to cut subsidies on sugar. This would result in EU becoming less competitive, which will open up new opportunities for Indian players apart from higher prices.

    Regulations: Each country has its own rules apart from the WTO norms to protect their domestic industries. Sugar has been under the WTO scanner, many developed countries provide high subsidies to maintain competitiveness in the global markets. Europe leads the pack as far as sugar subsidies are concerned. However, the WTO regulations have forced EU to change its policy, which will come into effect this year.

    EU subsidy: The European Union is a key player in the sugar market. Its produces around 20 MT of sugar and is one of the largest exporter in the world. The European Union currently pays about US$ 1.8 bn per year in support to the sugar sector (as the cost of the production and consequently, the cost of the sugar sold is higher. Besides, import duty is at higher levels to give protection to domestic manufacturers). To put things in perspective, sugar prices in the EU is almost 3 times of the world sugar prices. Subsidies, as is known, breeds inefficiency and post the latest ruling by the WTO with respect to subsidies on sugar by the EU, we expect sugar supply to come under pressure going forward. (chart sugar prices)

    Outlook
    Sugar trading is subject to various controls. Import restrictions, political compulsions, domestic support in the form of production quotas and limitations on market access have artificially kept sugar prices at low levels. However, since the announcement of the EU reforms in June 2005, prices of both raw and white sugar have increased by over 20%. Sugar prices touched the high of US$ 484 in April 2006. Given this backdrop, based on our interaction with sugar companies, prices are expected to remain firm over the next two years. This is not only on account of demand growing in India and China but also due to cane production being diverted towards ethanol at the cost of sugar.

     

     

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