Mumbai (Commodities Control) – Coupled with a positive closing on Friday, the week ended 5th June bagged 10% gains for sugar #11. It was a week of linear upside for ICE raw sugar futures on the back of fresh fund buys with simultaneous short covering. Firmness in crude oil, strong Brazilian currency and improved demand prospects additionally lent support of price gains.
Raw sugar futures on ICE closed up in a new 2-1/2-month peak on Friday, as improved macro-economic signals and tightness in white sugar supply continued to draw funds in on the buy side.
White sugar prices hit three month highs, with the front month trading more than $20 per tonne higher than the second month, an inverted market structure that signals tight supply, strong demand, or both.
Crude oil prices on Friday surged more than 5% to a 3-month high. While the Real jumped 2.94% against the dollar to a 2-1/2 month high. The stronger real discourages export selling from Brazil's sugar producers and is positive for sugar.
July raw sugar settled up 0.29 cents, or 2.5%, at 12.02 cents per lb, near the intra-day peak of 12.03 cents. August white sugar settled up $8.10, or 2.1%, at $392.90 a tonne.
Dealers cited fund buying amid improved macro and technical signals, but said fundamentals likely don't justify prices much above 12 cents as Brazil remains on course to produce maximum sugar, while India's output is set to recover.
"Improved macroeconomics (Brazilian real, oil) and an array of bullish technical signals have triggered speculative buying in New York #11 futures," said S&P Global Platts Analytics.
In the weekly update from CFTC, managed money funds continued the short covering drive for 6th week in a row. The week on week change came via both reduced shorts and new buys. According to the latest CFTC data for the week ended 2nd June, managed money in NY sugar cut its net shorts to 13,921 contracts vs 19,573 contracts last week.
Managed money added 2443 contracts to the long side taking it to 106,614 contracts for the week ended 2nd June.
Meanwhile, open interest moved up by 14,893 contracts at 11,97,601 contracts.
Bullish Fundamentals
Through Monday to Friday, NY sugar garnered 111 points to its kitty. The week started with concerns regarding Brazilian supply disruptions due to which July raw sugar on ICE settled at 11 cents. Market feared that spread of coronavirus in Brazil may force sugar mills to close and disrupt the supply of sugar to ports.
Support came from ISMA’s report - Indian mills had produced 26.8 million tonnes of sugar between 1st October 2019 and 31st May 2020, down 18% or 5.9 million tonnes from a year earlier.
Multi-month strength in crude oil prices along with Brazilian Real helped the sweetener move past the 11 cents range to end the week with 12 cents mark.
Dealers said a more constructive macroeconomic backdrop had helped trigger fund buying. They added that emerging market currency recovery is linked to a recovery in the world's economies. If that trend continues then consumption, which had been scaled back sharply, should improve.
A slump in the dollar index to a 2-1/2 month low on Thursday boosted the prices of most commodities, including sugar.
Strength in white sugar prices was passed on to raw sugar as well. White sugar prices surged, with the front month trading almost $20 per tonne higher than the second month, an inverted market position that usually indicates strong outright physical demand for the product.
Bearish Fundamentals
USDA's Foreign Agricultural Service (FAS) last week forecast that India's 2020/21 sugar production will climb 17% y/y to 33.7 MMT. FAS also projected that India's 2020/21 sugar ending stocks would climb 8.8% y/y to 17.419 MMT. India's sugar production is expected to recover in 2020/21.
India, a leading sugar producer, is likely to receive above-average monsoon rainfall for a second year running in 2020.
ISMA in its report stated that the closing balance at the end of current season will likely be around 11.5 million tons compared with earlier estimates of about 9.5-10 million tons. For 2019-20 sugar season, the Indian Sugar Mills Association (ISMA) raised its production estimate to 27 MMT from a previous forecast of 26.5 MMT.
Going forward, however, there are some factors that will limit further price gains in sugar. An increase in production in Centre-South Brazil this season and the prospect of a rebound in India could limit the rally in sugar prices.
Also a negative factor for sugar was data from French sugar producer Tereos that said total European sugar demand fell 10% during the coronavirus lockdowns, with beverage consumption down 25% and festive chocolate consumption down 27%. Tereos also said that European ethanol demand fell 10% in March and 55% in April due to the lockdowns.
INTL FCStone projects the global sugar supply balance to shift from deficit to surplus in 2020-21. It also cut its estimate for the size of the deficit in 2019/20.
Experts observe that the Brazil mills are trying to cover the lack of White Sugar in the market, but might switch back to producing ethanol soon if prices continue to improve for the ethanol.
Reports indicate that little is on offer from India in part due to logistical and harvest problems caused by the Coronavirus. India is thought to have a very big crop of Sugarcane this year but getting it into Sugar and into export position has become extremely difficult. Thailand might also have less this year due to reduced planted area and erratic rains during the monsoon season.
Thus experts see more steam left in NY sugar. For the active contract, support and resistance in sugar #11 lies at 11.61 cents and 12.27 cents per lb, respectively.
(Commodities Control Bureau)