Sugar price spike to stay for 2021, with varying impact for companies

Singapore

SUGAR prices have been on the rise as the world recovers from the Covid-19 pandemic. A confluence of dry weather conditions and low production levels have kept global sugar supply tight.

Higher crude oil prices, which can lead to increased demand for cane-based ethanol as a fuel substitute, have also pushed sugar prices up.

On Feb 22, the New York world raw sugar futures (No 11 contract) hit a four-year high.

And experts say prices have room to climb even further, with varying effects on companies in the industry.

Agri-commodities have been on an uptrend across the board. But Charles Clack, a senior commodity analyst at Rabobank, said sugar has seen the quickest consumption "jump back to pre-pandemic levels".

While consumer confidence is improving and returning, he noted that the recoveries of other commodities such as coffee, cocoa and cotton have been more gradual.

Tightness in physical markets is expected to continue due to a low crop from Thailand and a slowing of exports from Brazil.

"At the moment, there is a need for the market to provide higher prices to keep sugar flowing, and coming out of ports," explained Mr Clack. "It doesn't seem like this will alleviate too soon, and an underlying factor is that global stocks are declining."

Rabobank has adjusted its forecasts for the current 2020/21 season to a deficit of 2.8 million metric tons raw value (mtrv) - up from the 0.3 million mtrv deficit projected in December last year - after factoring in production cuts for India, Thailand and the European Union. The 2019/20 season ended with a surplus of 445,000 mtrv.

India is also set to supply less sugar to the world market, said Stephen Geldart, an analyst at sugar trader Czarnikow. This could leave a shortfall in supply. "The risk is that new supply cannot be grown quickly enough; World market sugar returns will also need to be high enough to ensure investment in new production capacity," he added.

On the demand side, Rabobank's Mr Clack is expecting consumption to pick up as countries around the world learn to live with the "new normal" and adjust to the different social restrictions.

The effects of higher prices on companies will depend, at least in part, on levels of diversification. Mr Clack said diversified companies are more likely to be able to manage volatility and maintain revenues.

This appears to be the case at Wilmar International, which has a large sugar operation across the entire value chain - ranging from production and refining to distribution and consumer packs.

Jean-Luc Bohbot, chief executive of Wilmar's sugar business, told The Business Times that while it is difficult to make accurate predictions, there is "more on the upside than on the downside" for the sugar industry on the whole.

The company's diversified range of operations and business segments also provides a buffer against volatile sugar prices.

He explained that if sugar prices were to hit 30 US cents, it would be a positive for Wilmar's milling business but not exactly positive for the refining one. Should sugar prices fall to 10 cents, however, the milling business could be adversely impacted but the refining and consumer pack business segments could enjoy a lift.

Said Mr Bohbot: "The takeaway for 2020 for Wilmar's sugar division, and Wilmar as a group, is that our integrated business model is more resilient and likely to deliver stable results when markets are facing difficult swings, or in unpredictable situations (like the pandemic)."

For FY2020 ended December, Wilmar reported an 18.6 per cent increase in net profit to US$1.53 billion. This came on the back of a 18.5 per cent rise in revenue to US$50.5 billion, driven by growth across all segments.

The plantation and sugar milling business posted a profit of US$104.8 million, turning around from a loss of US$41.3 million in the previous year. But the segment did book a US$20 million impairment of sugar milling assets in India in H1.

MSM Malaysia Holdings, a sugar refining company that is 51 per cent owned by FGV Holdings, was also able to tap higher sugar prices for better margins last year. The group's chief executive Syed Feizal said margins for the company increased by 7 per cent in FY2020 from FY2019.

"With the current market condition, MSM's premium charged to the customers is higher following the market movement," he pointed out. MSM had hedged most of its raw sugar requirement below the average market price for FY2020, he said. The company has also hedged about 85 per cent of its FY2021 requirements.

The company's sales volume in FY2020 rose slightly - to one million tonnes from 0.9 million tonnes in FY2019 - in spite of the pandemic.

The share of wholesale sales volume fell to 28.9 per cent from 47.3 per cent, as a result of reduced operating hours at food and beverage outlets as well as fewer social and public gatherings.

But this was compensated by an upturn to the industries and exports segments. Sales volume to industries rose to 44.7 per cent from 43.9 per cent, and sales volume from exports rose to 26.4 per cent from 8.8 per cent.

As benchmark sugar prices move steadily upwards, MSM is now planning to expand its presence in markets such as China, Vietnam, Singapore and South Korea. The company is also looking to make new inroads in Indonesia and Bangladesh.

Said Mr Feizal: "MSM is focusing on optimisation of Johor operations and upgrading its capacity of value-added products." A fine syrup line was completed in the fourth quarter of last year, whilst a liquid sugar line is scheduled for completion in the early part of this year.

Even as fundamentals for the sugar market remain supportive, there is likely to be volatility.

Patricia Luis-Manso, head of agriculture and metals analytics at S&P Global Platts, said: "There are a lot of uncertainties in the market with potentially opposite impacts on sugar prices - renewed lockdowns in key markets, La Nina influence, and container markets shortage, to name a few. We expect volatility to remain high in the global sugar markets."

This means it won't be smooth sailing for companies.

Ms Luis-Manso added: "From a company's perspective, it is important to understand sugar fundamentals, but also acknowledge that the influences from the energy complex and freight dynamics will be strengthened."