Feature: Thai refined sugar premiums slump to 2-month low as international prices recover

The physical cash premiums for container cargoes of Thai refined sugar has been trending lower for the past month and slumped to a two-month low of $66/mt premium over the ICE London No. 5 August futures on June 5, as trade participants factored in lower physical premiums amid a recovery in global sugar prices and muted demand from Asian buyers in light of the coronavirus pandemic.

The physical cash premium for Thai 45i container has dived 28% since hitting the $92/mt peak over ICE London No. 5 August futures on April 5.

A positive macroeconomic outlook, including the rebound in oil benchmarks and a stronger Brazilian real against the US dollar, have provided support to international sugar prices since May.

New York No. 11 front month raw sugar contracts have surpassed 12 cents/lb on June 5 from its low of 9.51 cent/lb on April 28. Similarly, ICE London No. 5 white sugar front month contracts reached its three-month high at $392.90/mt on June 5, recovering from a low of $307.50/mt on April 30.

STRONGER OFFTAKE FROM VIETNAM

Trade sources have also attributed the weak Thai cash premiums to lackluster demand from Asian regional end-users, whose consumption has been battered by the coronavirus pandemic.

While there is a strong uptick in buying activity from Vietnamese end-users, other Asian importers of Thai white and refined sugar had experienced a year-on-year slow down in demand over January-April.

Vietnam was the top importer of Thai refined sugar from January to April this year, as the country had abolished sugar import quota for ASEAN-origin sugar in January. Under the ASEAN Trade in Goods Agreement, or ATIGA, ASEAN-origin sugar will only be imposed a 5% tax compared with non-ASEAN sugar at 85%.

For January-April, Vietnam imported 157,925 mt of white and refined sugar, which was approximately ten times more than imports in 2019 at 15,490 mt, according to data from the Thai Sugar Milling Corporation. Thai raw sugar exports to Vietnam for the same period had also increased almost three times to 118,225 mt this year.

Despite the strong offtake from Vietnam, Thai premiums are weakening as purchases were reported to have slowed in second-quarter 2020.

With Vietnam facing a shortage due to weak sugar production, some traders remained optimistic that Vietnam would still need to import and see recovery by July-August.

"Vietnamese buyers have been buying a lot since the start of this year and have probably covered almost 50% of their requirement already up to April," a trader based in Singapore said.

PIVOT TO CHEAPER ALTERNATIVES

Earlier this year, Thai cash values soared sharply higher due to a shortage of Thai sugar, with Thai sugar millers reportedly buying back sugar from trade houses in an attempt to cover their short positions.

As a result, Thai cash premiums became extremely uncompetitive with buyers seeking cheaper alternatives, including Indian low quality whites.

Indian LQW were priced between $360-$365/mt FOB west coast India, which is trading at a $80-$85/mt discount to Thai high quality whites in containers, S&P Global Platts data showed on June 5.

Contracts to export India's sugar between the start of the season on October 1 and mid-May stood at 4.2 million mt, around 14% more than the whole of the previous season despite the coronavirus pandemic, Platts reported previously.

Another factor weighing on Thai cash premiums is the substantial decline in Chinese cross border flow of Thai refined sugar via Taiwan or Myanmar.

Traders noted that Chinese end-users have substituted sugar demand with liquid sugar since end-2019 as buyers are able to enjoy low duties from import taxes. Industry sources estimated that around 200,000-300,000 mt of white or refined sugar has been so far displaced.

"We are not sure if the [Chinese] government will step in to stop the flow of liquid sugar, but we believe some restriction will happen as it competes with the domestic sugar industry," a Hong Kong trader said.