A collapse in China’s sugar production is igniting business for Thai millers, drawing down stockpiles and setting the stage for a recovery in prices.
Dry weather and a decline in sugarcane planting means China next season will produce its least amount of sweetener in a decade, according to researcher Green Pool Commodity Specialists. That's a big opportunity for Thailand. The world's second-largest exporter shipped four times as much white sugar to China this year through Aug 21, data from the Bangkok-based Office of the Cane and Sugar Board showed.
Trading houses and funds are reversing bearish bets on sugar as Thai refining reduces stockpiles of the sweetener, according to independent soft commodities trader Group Sopex. Global inventories that expanded during a five-year glut are expected to fall this year and the spread between US futures contracts has tightened, a sign of restricted supply.
"The effective flow of Thai white sugar into China is what is changing the market outlook," said John Stansfield, a London-based analyst at Group Sopex, who has followed the market for more than 20 years. "It all boils down to a poor crop in China and the prospect of an even worse one to come."
Sugar mills
Thai millers looking to supply China turned a record amount of raw sugar into the white variety this season through early August, commodities trader ED&F Man Holdings Ltd estimated.
While raw sugar is near seven-year low, Rabobank International forecasts prices will average 12 US cents a pound in the first quarter, a 12% increase from now. The sweetener still fell 26% this year and is heading for a fifth annual loss following the global oversupply.
Near-term spreads are tightening, an indication that supply is restricted. Futures for October delivery in New York were 1.01 cents a pound cheaper than the March contract on Wednesday, compared with 1.59 cents on June 19. The discount reached 0.85 cents last week, the lowest since February.
There are other signs that investors are becoming more positive. In July, speculators were the most bullish on white sugar since at least 2011, data from Ice Futures Europe show. They are still bearish on raw sugar, according to the US government.
Chinese production
China's sugar output will drop to 9.6 million tonnes in the year starting October, the lowest since the 2005-06 season, said Tom McNeill, director of Brisbane, Australia-based Green Pool. The country is the world's largest importer of the sweetener.
To plug the shortage, shipments from Thailand have more than quadrupled this year. Thai exports of white sugar to China totalled 339,821 tonnes from Jan 1 to Aug 21, according to the Office of the Cane and Sugar Board.
Thai millers have been incentivised to make more white sugar, a process known as re-melt, because its premium over raw futures has climbed more than 40% this year. They refined 2.3 million tonnes of raw sugar from the start of the season in October through early August, according to ED&F Man.
"Everyone now makes white sugar as it generates better income," Piromsak Sasunee, the chief executive officer of Bangkok-based Thai Sugar Trading Corp, the nation's largest exporter, said by phone on Aug 24. "That attracts mills to remelt raw sugar to white as much as they can."