Export liberalization and the end of the quota system from October 1 is the biggest change in the EU sugar market in 11 years.
Joining S&P Global Platts/Kingsman sugar analyst Erin Burns to discuss its implications as well as the potential impact of and on European power prices, container freight rates and the European fuel ethanol market are Platts Analytics energy analyst Anise Ganbold, Platts senior container freight editor Andrew Scorer, and ethanol editor Chrysa Glystra.
Erin Burns: Hello, and welcome to this edition of Platts Commodity Pulse. I’m Erin Burns and I’m going to be discussing the implications of the biggest change in the EU sugar regime in 11 years with some of my Platts colleagues. From October 1, the current EU sugar regime officially ends for production quotas and exports.
Most producing countries have taken advantage of lift in production quotas and increased their planted area this season; this coupled with generally favorable weather is resulting in a rise in production. Given relatively stagnant consumption, we forecast that the exportable surplus will grow. For the last 10 seasons they have been capped around 1.3-1.5 million metric tons. The major exporting countries are likely to be those in the beet belt of Northwestern Europe, with forecasts for this season ranging from 2.5 to 5 million mt.
Pricing will of course be key to the success of exports. One of the key costs for sugar production is power; Energy requirements differ between factories, according to Europe’s largest sugar producer Suedzucker for 10,000mt of beet/day the boiler will use 1.75 gigawatt-hours and drying the slices 750 megawatt-hours. Joining me to discuss the outlook for power prices over the October to September sugar season is Anise Ganbold, a gas and power analyst with Platts Analytics. Hi Anise.
Anise Ganbold: Thanks. As there's no, one European power price, I've taken a look at the power prices across the main beet belt. So, as you mentioned: France Germany Belgium and the Netherlands. So, what we've been seeing there is a bullish run on the front winter, especially, and that bullish run was driven by a perceived risk of nuclear delays in France, as well as rising gas, carbon and coal prices.
In terms of the nuclear delays, we'll see more clarity on what the situation is, but until there's actually a reduction in availability of nuclear output then, we see a downside to prices. In terms of the next calendar year, the calendar contracts are trading about one year above where 2017 has been trading so far, and the key factors to watch would be coal prices: so coal can be a huge factor in driving the German forward curves, and secondly, as I mentioned the French nuclear delays.
So, if there's any reduction to nuclear output, the losses would likely be met by higher gas-fire generation across Northwest Europe, so gas fundamentals will have a bigger impact on power prices. In terms of the gas markets, one key to watch is LNG and how much of the global LNG supply will find its way to Europe and that said, I want to point out that beet producers cannot only take electricity as an expense, but they could also produce electricity; so either through beet pulp or through biogas. So, rather than being an expense it can also be a source of revenue
EB: Thanks, Anise. Obviously it's not only production costs that we look at; we look at how to get the sugar from its origin to its destination. We've seen global prices falling over the last, at least twelve months, and we've seen European prices taking a huge downfall over the last few months as well.
As we know, production is going to increase and the EU are going to start trying to compete on the export market. So, we're seeing global prices and EU prices starting to converge. So, now we're going to take a look at freight with our senior freight analyst Andy Scorer.
Andrew Scorer: Thanks, Erin. So, sugar normally -- bag sugar -- normally gets transported on a 20 ft dry container. There is plenty around in the world, but they're trying to compete against other commodities, so it's not going to be a very small proportion going to be transported, you know, relative to the other ones.
You know, if you look at sort of the European bags of sugar, most are around 25 kg compared to the more desirable 50 kg. If you translate that into what can be fitted into the containers, then the EU, on the 25, could be around 23 tonnes compared with the 50, where you could actually squeeze into 27 tonnes.
So, you're sort of four tonnes disadvantaged; but the EU-to-Med route, which is quite a stable market, compared to the longer-hauls which can fluctuate a lot more. Indications at the moment for October going into Q4 this year are around $300 for one TEU. That's just indications at the moment. It could go down or it could be more depending on the tightness of the container shift.
EB: Great, so I mean there are a few logistical challenges that we see in the future. We do expect that a lot of the EU producers know what they are and they're gearing up to change this. I guess, looking forward, with prices low, we do expect some EU producers just to go after market share, regardless of what the cost may be.
The EU hasn't been a real exporter in 11 seasons, so market share will be the thing that they want to go after. But also, you know, if they don't want to go after the market share -- if they don't export -- then there is another outlet and, Anise, you touched on it earlier with the biofuels, and we'll talk to our biofuels analyst, Chrysa.
Chrysa Glystra: So, for sure we're going to see some sugar beet go into ethanol production, at least for the first few months, so during the harvest period. And that partly explains why the outlook for ethanol is so bearish at the moment. Then the sugar/ethanol parity is going to come more into play in the following months and more in the New Year.
And, at that point indeed, the producers are going to be faced with quite a difficult decision, in the sense that, just looking at the ethanol forward curve at the moment, it doesn't look terribly attractive. But, then again, with the white sugar premium collapsing as well, that isn't as appealing an option as it could have been.
So, actually, we're hearing more and more people in the market saying that it would actually make sense for a producer to store some of the sugar, and carry it forward into the next season when they might earn a better margin. That being said, people in Europe often look to developments in Brazil as a forerunner to what we could see in Europe. And, indeed, we have seen ethanol pay more than sugar since the start of August in Brazil and there have been some minor shifts in the mix.
So, it's definitely something to keep an eye on. Just bearing in mind that there are constraints to how much sugar can actually be -- or how much beet can actually be -- switched between sugar and ethanol, so these will be logistical constraints, commercial constraints; a lot of the sugar will be hedged in advance as well. Realistically, there probably won't be huge shifts between the two.
EB: Great, thanks Chrysa. That wraps it up for this Commodity Pulse. For more information on sugar, power, freight, and ethanol, please visit Platts.com Thanks for watching and tune in again.