São Paulo: The dynamics of the energy market have once again gained relevance for the global sugar market. According to an analysis by Hedgepoint Global Markets, the evolution of oil prices and possible decisions by Petrobras on passing on fuel import costs could alter the effective floor for the sweetener by influencing the competitiveness of ethanol in Brazil.
As around 15% of the country’s gasoline consumption is supplied by imports, rising oil prices increase import costs and could put pressure on domestic fuel prices. If Petrobras passes on all or part of these costs to the domestic market, ethanol tends to become more competitive in relation to gasoline, encouraging mills to direct most of their sugarcane to the production of biofuels.
In this scenario, the implicit floor for sugar could rise. In a sensitivity exercise carried out by Hedgepoint, three scenarios illustrate how the dynamic between gasoline and ethanol could influence the minimum price for sugar.
In the first scenario, based on current hydrous ethanol prices at the mills, calculated on the basis of gasoline imports and with no cost pass-through by Petrobras, hydrous ethanol prices in sugar equivalent stand at around 17.4 cents per pound, acting as a benchmark for the mills’ production decisions. When hydrous ethanol prices are higher than sugar prices, a lower sugar mix is expected, with more sugarcane going into biofuels.
In a second scenario, in which ethanol needs to become more competitive than gasoline in most Brazilian states to stimulate domestic demand for biofuels and consume the sugar/ethanol surplus, resolving both the sweetener’s surplus trade flow and a possible overgrowth in biofuel stocks, the implicit level for sugar would fall to around 13.5 cents per pound ex-mill in São Paulo, a level that can be seen as a floor for sugar prices throughout the harvest.
In a third scenario, if Petrobras fully passes on the higher costs of fuel imports, maintaining the pump parity that guarantees the consumption of surpluses, the floor could rise to around 16.2 cents per pound.
It’s worth noting that if Petrobras passed on the price and there was no adjustment to the pump parity for surplus consumption, the price of hydrous ethanol would be higher than the 17.4 cents per pound in the first case.
“Sugar prices spiked at the beginning of last week due to fund purchases and hedging of short positions linked to risks in the Middle East, higher oil prices and logistical disruptions, but quickly reversed the trend as the move was largely technical and the fundamentals continue to point to a global oversupply,” says Lívea Coda, Market Intelligence Coordinator at Hedgepoint.
“Even so, if the strength in the energy complex persists, the sugar price floor could become more bullish. Firmer prices for oil derivatives could drive up domestic fuel prices in Brazil, strengthening ethanol’s competitiveness and directly influencing mills’ production decisions,” she adds.
In recent weeks, the sugar market has experienced strong volatility amid geopolitical tensions and macroeconomic uncertainties. Sugar prices even rose at the beginning of the week, driven by fund purchases and hedging of short positions, amid increased geopolitical risk in the Middle East and logistical disruptions in international trade.
However, the movement quickly lost momentum as the market reassessed the scenario and the fundamentals once again indicated a global oversupply, reinforcing the consensus that price shocks driven by macroeconomic factors tend to be temporary in a market with a structural surplus.
Thus, while sustained strength in the energy sector may offer some support to the price floor through fuel dynamics in Brazil, this support tends to remain sensitive to the headlines and duration of the conflict in the Middle East.
