Indian mills export plans are now complicated
After relying on export subsidies since the 2015/2016 season, this year is a bit more complicated as prices have fallen below breakeven and there is no subsidy to fall back on. The Indian Government late last year was adamant that there would be no subsidy as prices were boosted by the drop in Brazilian sugar production for their 21/22 crop due to poor weather. However a fast start to the Thai harvest (relative to last year at least), a strong start to the Indian crop and then good rainfall late December and early January have tipped the market out of the 18.50-20.50 trading range.
Given the export breakeven for Indian mills is somewhere between 19.50-20.50, depending on who you talk to, sub 18.50 just won’t allow mills to export at a profit anymore. In fact, for a brief time last week, the market actually fell as low as 17.60. Just looking at the technical break the market made, it points to a move down to 16.50. Fundamentally, it might be harder to make that justification, but sometimes fundamentals eventually come around to fit the technical outlook. This might come from sugar fundamentals (larger than expected crop for Brazil, Thailand, and India), or it could come from the macro (heavy correction in the global equity markets, or a Chinese invasion of Taiwan) that slows global growth and impacts crude oil price levels.
So the drop in price has left the Indian mills in a quandary. At least they got off to a quick start, as they aggressively sold forward for the first time ever. Their export sales as of last week are already up to 4 MMT. This compares to only 1.0 MMT last year. In previous years, the mills were waiting for the government to announce the subsidy amount and then for the market to cooperate (rally) so they could sell. This year, already confronted by attractive prices and the news that the Government was going to not put out a subsidy, the mills were already posting sales before the official 21/22 season started.
Then the pull back in price occurred and it caught out some of the coop mills, as they had not priced their sales before the market fell. We believe that amount was around 250,000 tons. The drop in price will now leave a question as to what more can be exported and what type of sugar it will be. The range of export ideas before the price break was between 5.9-7.2 MMT. Will the 1.9- 3.2 MMT left actually be sold? The mills have several options now. They can hold off and hope the market rebounds. This, though, will force the mills to place the unsold sugar into stock. That then raises the question, will they actually stock raw sugar (not something they normally do), or will they shift their production to crystal sugar or as they call it in India, Low Quality Whites (LQW)?
The other alternative is the mills can decide to sell export sugar at a loss. They might do this instead of wanting to store sugar, which will incur a cost. They might be able to make up some of the loss if they can sell sugar on the internal market for a good margin, but the, selling at a loss, alternative should be limited as far as quantity goes, though it could lower the price ceiling by a bit. Especially if the trade get wind of the selling.
The last alternative is the mill sector begins to pressure the government to release at least a partial subsidy to relieve the stock overhang. As to what that overhang actually will be, is a good question. ISMA suggests that sugar diversion to ethanol could be as high as 3.4 MMT. Others put that range between 2.7-3.2 MMT. Will Indian crop numbers rise? ISMA has 30.5 (after removing the 3.4 MMT), but the market is thinking the number might rise after the strong start. With the normal expectation of strong exports some suggest that sugar stocks could fall below 7.00 MMT. Others don’t see it as aggressive as that and think we could still be above 8.0 MMT. Of course if exports can’t progress much beyond 4.0 MMT, then those stock numbers could exceed 9.00 MMT. This would be less than the 11.00 + we saw back in 19/20, let alone the 14 + we saw in 18/19, but some mills could begin to put pressure on ISMA or the government. With the government appealing the recent WTO decision, any request for subsidy now would probably fall on deaf ears.
But Indian mills shouldn’t panic yet. If crude oil keeps rising (reaching as high as $84.78 a barrel for FEB WTI this morning before pulling back $1.00 a barrel), then Petrobras will keep raising gasoline prices and this will push ethanol parity above sugar prices. In fact, the hydrous ethanol parity closed at 18.16 on Friday. If one takes into account the exports discount of 15 points, then parity is already equal and in fact positive if one takes in the fact that payment for ethanol is in three days, while export sugar averages 45 days until payment. Anhydrous parity is 19.80, so much better than sugar. This is for spot at least. The last price increase by Petrobras was 5% back on last Monday. Crude prices have already jumped 7.14% since that price increase, therefore effectively wiping that increase out.
If the crude price trend continues, then the mix for sugar in Brazil will fall from the 46% many estimate for the 22/23 season. This compares with the 45.1% for 21/22. Many don’t think the mix could fall below 45% it seems, but that would remove 750 K tons of sugar production. Few seem to remember that for the 19/20 season, Brazil’s sugar mix was 34.1%.
Still, despite the difficulty Indian mills are experiencing now, they have had a good run. The export subsidy last year was a bonus given the price level of sugar for most of the export season. Financing for ethanol projects is abundant. (In theory at least) Internal price levels have been at their highest since 2017, allowing mills to pay down a large proportion of their arrears (but not all). And the monsoon was two years in surplus and this year was average. A good run by any measure.
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Mr. Michael McDougall is Managing Director at Paragon Global Markets, LLC, New York, USA. He has been active in commodity futures for 35 years.