Squeezed global sugar market looks to holy grails and black swans

The global sugar industry is grappling with slowing growth in consumption coupled with oversupply, which have pushed prices down to unsustainable levels.

In such a challenging environment, it’s understandable that the sector is searching for a holy grail to fix its demand-side problems, while also watching carefully for black swan events that could upend the current fundamental picture. This was the mindset in evidence at the Ninth Platts/Kingsman Geneva Sugar Conference held on April 2-3.

For Alexandre Luneau, executive vice-president of Tereos, the world’s second-largest corporate sugar produce, the holy grail is a food product that is natural, healthy and tasty – but that includes sugar as an essential part if its formulation. The concern with promoting sugar’s role as a vital ingredient comes in the wake of anti-obesity campaigns in many countries targeting sugar consumption.

For some consumers, acceptance on grounds of taste has to be weighed against the health factor. After the introduction of the sugar tax in the UK, both PepsiCo and Coca Cola kept the sugar level unchanged in their classic colas, according to Martin Todd, managing director of market intelligence and analysis provider LMC.

Many at the conference said reformulating soft drinks was relatively easy – just cut sugar, add water – but for confectioners it is much more complicated. They not only have to take into account taste, they also have to deal with bulk and consistency. As Mars Wrigley’s Senior Strategic Sourcing Manager Yury Sharanov said, if you reformulate incorrectly you can end up with a Snickers bar the size of a credit card.

That will be cold comfort in the face of slowing demand, mainly due to lower sugar consumption in developed markets. Combined with overproduction, it has led to benchmark futures prices below the cost of production in even the most efficient producers. This was unsustainable for exporters, Luneau said. To illustrate the tough times the sector is facing, on the same day of his presentation, S&P Global Ratings changed the outlook on its BBB- rating of the world’s largest corporate sugar producer, Germany’s Suedzucker, to negative from stable.  However, Luneau did see some relief ahead, forecasting that the 2019-20 (October-September) and 2020-21 seasons would be in deficit.

One of the factors in this was lower sugar production from Center-South Brazil due in part to a large part of the sucrose going to make fuel ethanol. Luneau said he thought Brazil was the best place for the sugar investment because of its Renovabio biofuels program and a pro-sugar industry environment not found in other regions.

However, the key to fuel ethanol consumption lies in the gasoline price. For drivers of Brazil’s large fleet of flex-fuel cars the ethanol price needs to be 70% the gasoline price to be economical, because it is less efficient. One of the game changers in ethanol consumption in recent years has been state-controlled oil company Petrobras aligning its ex-refinery gasoline price with the world price, making ethanol more attractive to drivers. Any move toward subsidizing gasoline or a major drop in the world price could be a potential black swan event.

Another fuel-related development, IMO 2020, could also be a black swan for the sugar sector - judging by the low number of raised hands in the conference hall when asked who had heard of it. This is the implementation by the International Maritime Organization of a 0.5% sulfur emissions limit from marine transportation fuel starting January 1, 2020, down from 3.5% now.

Claudio Galimberti, head of oil demand and refining analytics at Platts, said the need to produce lower sulfur fuel for the marine sector would result in refineries making less gasoline. As a result, gasoline prices would rise, which in the case of Brazil could mean more sucrose going to ethanol and lower sugar production. However, for Brazil, the world’s largest sugar exporter, the effect of IMO 2020 on freight rates might be a game-changer. Similarly, changes in freight rates due to the new regulation have the potential to alter trade flows in general, as well as the economics of refining raw sugar.

A more tangible opportunity may lie in Africa’s growing demand for sugar. With the continent’s population expected to grow to 4.4 billion or 39% of the global population in 2100, from 1.3 billion or 17% in 2018, sugar consumption looks set to soar, according to Alexander Stewart, director of consultancy Abercore. Assuming annual per capita sugar consumption remains constant at a relatively low 17 kg – less than half the approximately 35kg consumed in the US and EU – the continent would need an extra 19 million mt of sugar by 2050 and 53 million mt by 2100, Stewart said. That compares with current world production of around 180 million mt a year. Africa imports around 50% of its sugar needs.

However, Stewart warned of a whole host of risks, albeit manageable ones: currency risk, credit risk, long routes to market, security risk consisting of theft, losses and smuggling, as well as political and macro-economic risks. He gave an illustration of the logistical problems combined with the theft risk in the method of taking sugar from a slow-moving truck climbing a hill, using a hole bored in one of the bags, and attaching a bucket to the truck to collect the stolen sugar.

El Nino normally brings wet weather to the south of Brazil, which can delay cane harvesting and dilute its sucrose content. Equally important, it could reduce the monsoon rains in the world’s largest sugar producer, India.

It was perhaps fitting then that the final image of the conference was a family of black swans gliding along a body of water.