Brazil Raw-Sugar Discount Spurs White Output as Refiners Profit

Record global sugar inventories are forcing Brazilian exporters to offer discounts on raw-sweetener supplies, helping to bolster profit margins for processors as they increase output of the refined commodity.

Raw sugar from Brazil, the world’s largest producer, has been selling at a discount to New York futures since October, after trading at a premium, according to Green Pool Commodity Specialists. Brazil’s harvest ended in December. The discount is adding incentives to refine more white sugar, which already fetched an average annual premium above $100 a metric ton in the past four years, up at least 30 percent from the mean of the previous two decades.

“Refiners continue to be profitable in most markets, especially now that they can buy raw sugar at a discount in the physical market and sell whites at a premium,” said Leonardo Bichara Rocha, a senior economist at the International Sugar Organization in London. “Domestic white-sugar prices in some markets in Africa and the Middle East are still significantly higher than the world white-sugar market price.”

Increased refinery output is expanding a surplus and eroding prices. Global sugar inventories will rise to 43.4 million tons in the 12 months ending Sept. 30, the biggest since at least 1960, the U.S. Department of Agriculture estimates. The International Sugar Organization forecast refined supplies available for exports will exceed demand from importing nations by 2 million tons. Refined, or white, sugar fell on Jan. 28 to $399.10 a ton on NYSE Liffe in London, the lowest for a most-active contract since April 2009.

Brazil Discount

After a record harvest last year, Brazil is offering discounts during a period when available supplies of raw sugar should be declining. The country is selling the commodity at a discount of 0.45 cent to 0.5 cent a pound ($9.92-$11 a ton), according to Brisbane, Australia-based researcher Green Pool.

While white-sugar futures in London are down 43 percent in the past three years, that’s less than the 51 percent plunge in raw sugar traded on ICE Futures U.S. in New York, adding an incentive to refine more even as global supplies of all varieties tracked by the ISO outpace demand for a fourth straight year.

Overseas sales of refined sweetener by Thailand, the second-biggest exporter, may rise by as much as 18 percent, according to Mitr Phol Sugar Corp., the country’s top cane processor. Millers that usually have the capacity to turn raw sugar into white in a process known as re-melt will probably ship as much as 3.5 million tons of white sugar in 2013-14, said Kannika Vongkusolkit, a marketing strategist at Mitr Phol. That compares with 2.97 million tons a year earlier.

Latin America

Mexican exports will gain 19 percent to a record 2.5 million tons, while overseas sales by countries in Central America rise to 870,000 tons, the third-highest ever, the USDA said. Guatemala may have supplies available to delivery on NYSE Liffe when the March futures contract expires on Feb. 13, said Fabienne Pointier, an analyst at Kingsman SA, the Lausanne, Switzerland-based unit of McGraw Hill Financial Inc. that is holding its annual sugar conference in Dubai starting tomorrow.

“We had an artificially high white premium last year, and that sent the wrong signal to refiners and origin producers such as Thailand and Guatemala,” said Bas van Goor, the head of white-sugar trading at RCMA Commodities Asia. “The whole market is now paying the price. Supplies are more than sufficient, and with the market now paying you to store and carry the sugar, the odds are that we will see a bit of a depressing market in the next five to six months.”

London Contract

The London futures contract, created in 1983, also may no longer be representative of the market for refined sugar, van Goor said. The contract was designed to facilitate deliveries of bagged sugar stacked on break-bulk vessels, rather than inside containers on ships. About 70 percent of the white-sugar trade is in containers, up from 30 percent a decade ago, he said.

“The London contract represents break-bulk vessels, and the number of customers that wants them has shrunk,” said van Goor, a former head of sugar at Cargill Inc. “The market is getting easier and easier to squeeze, and by doing so, you artificially keep the white premium high, sending the wrong signal to producers.”

NYSE Liffe is considering changes to the contract to make delivery in containers acceptable after the bourse was bought by IntercontinentalExchange Group Inc. (ICE), according to two people familiar with the discussions who asked not to be named because the information isn’t public. Just 19 of the world’s countries account for 95 percent of all buyers of white sugar in break-bulk, according to RCMA data. Adaora Anunoby, an NYSE Liffe spokeswoman, declined to comment.

‘Catch Up’

The Liffe contract is “out of date, and it needs to catch up with what the real world is doing,” said Paul Baksh, the head of sugar and ethanol at brokerage ICAP Energy Suisse SA in Geneva. “The real world has to take it in containers or at least have the container option. At the moment, it’s geared to a handful of giant people or corporations.”

The countries that can take break-bulk vessels will have sugar in warehouses for the next five to six months, said RCMA’s van Goor. That’s helping put pressure on prices because most of the importers that had been buying have sufficient inventory, the ISO’s Bichara Rocha said.

While the premium of the London contract over raw futures has declined this year to average $81, compared with $102.50 for 2013, that still may be high enough to encourage refiners. Thailand probably will re-melt raw sugar even if the white premium falls below $70, Kingsman’s Pointier said. Thai white sugar output rose 36 percent to 1.2 million tons from Nov. 15 to Jan. 27, according to the office of the cane and sugar board.

‘Better Returns’

“Production of white and refined sugar in Thailand may increase this year because of attractive prices,” said Piromsak Sasunee, chief executive officer of Bangkok-based Thai Sugar Trading Corp., the country’s biggest exporter. “Although it is quite difficult to sell white sugar, it gives better returns at this time, when the price of raw sugar slumps.”

Installed capacity to process raw sweetener has been rising since 2000, with about 6.5 million tons added in the Middle East and North Africa, 5.3 million tons in the Indian sub-continent, 5.1 million tons in the Far East and 2.7 million tons in sub-Saharan Africa, according to an ISO study. Al Khaleej, based in Dubai, is the world’s biggest refinery.

The white-sugar price in London rallied 8.2 percent since Jan. 22 as the driest January on record threatened to cut production from the next crop in Brazil. The contract for March delivery is still cheaper than futures in later months. That allows refiners to lock in profit because it takes two to three months from the time they buy raw sugar before the refined sweetener is delivered to customers, said Tom McNeill, a director at Green Pool.

“We need to see a much lower premium to convince the white-sugar producer to slow output,” Kingsman’s Pointier said. “Even with a lower white premium, it may be already too late. White-sugar producers may already have received incentives earlier on to produce for the next six months. They’ve sold most of what they will make.”

To contact the reporter on this story: Isis Almeida in London at ialmeida3@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net

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