Outlook for world sugar prices. Vietnam Sugar Association, 15 February 2010 Presentation by Martin Todd

Transcription

1 Outlook for world sugar prices Implications for Vietnam Vietnam Sugar Association 15 th February 21 Vietnam Sugar Association, 15 February 21 Presentation by Martin Todd 1

2 The dynamics of sugar & ethanol prices have changed fundamentally Until recently, the world sugar market behaved like a normal commodity market: consumers had to pay for producers to supply the growth in global import demand This means that world sugar prices had to follow the costs of producing sugar in Brazil (5% of world trade) Ethanol and sugar prices move in tandem (most of the time), because of the ability of millers to switch between the two products 2

3 The old world : sugar prices followed Brazil s production costs 6 5 Brazil s sugar production costs (FOB) vs. world raw sugar price Brazil s costs have been heavily influenced by the R$/US$ exchange rate US$ per tonne /1 22/3 24/5 26/7 28/9 21/11 Ex Factory Costs Fobbing Costs World Raw Sugar Price 3

4 And ethanol and sugar prices move together 8 Sugar & ethanol prices, ex-mill Brazil 1, Sugar (US S$ per tonne) Ethanol (US$p per m3) Sugar Ethanol 4

5 But, flex-fuel vehicles (FFVs) have changed everything! FFV s can use ethanol or gasoline FFVs now represent 6% of the Brazilian ethanol market To keep this market, millers must price ethanol competitively against gasoline So, ethanol prices must now track gasoline and sugar will follow ethanol 5

6 FFVs will create a potential market for almost 6 billion litres by 22 7 Ethanol demand projections to lion litres bil Hydrous in Ethanol Only Cars Hydrous in FFVs Anhydrous in Gasoline Cars 6

7 The theory Oil gasoline ethanol +/- sugar Refining margin crack spread FFVs mean that ethanol price < 65% gasoline price D d f ld Depends of world sugar supply/demand balance 7

8 The practice: oil gasoline Brazilian government sets the gasoline price! But, gasoline prices follows oil prices in the long run 36 World oil & Brazilian producer gasoline prices (R$) 27 Oil (R$/bbl) Jan-2 Jan-3 Jan-4 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Produc cer/consumer Gasol line (R$ cents/litre) World Oil Brazilian Retail Gasoline Brazilian Producer Gasoline 8

9 The practice: gasoline ethanol Consumer price of ethanol trades in a band below gasoline Producer prices follow the consumer price 2,5 Brazilian gasoline vs. ethanol prices (R$) 2 2, Ethanol is now trading close to its maximum = energy parity (7% of gasoline) R$/m3 1,5 1, 5 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Consumer Gasoline Consumer Ethanol Ex-mill ethanol price 9

10 The practice: ethanol sugar Driven by the world sugar supply/demand balance But, this requires a lot of flexibility in Brazil US$ per to onne, sugar equiv valent Jan- 6 Sugar/ethanol price differential, ex-mill Brazil (US$) Jul- 6 Jan- 7 Jul- 7 Jan- 8 Sugar has moved to a premium due to Brazil s inability to supply enough sugar Jul- 8 Jan- 9 Sugar traded at a discount when India was exporting (26/7 & 27/8) Jul- 9 Jan- 1 Jul- 1 Jan- 11 1

11 Conclusion: theory practice Oil gasoline ethanol +/- sugar Why? a) Because Brazilian government intervention in the gasoline market means that the link from oil to ethanol & sugar breaks down (at least in the short run) b) But also because short term capacity constraints in Brazil means that ethanol and sugar prices can become decoupled 11

12 What next? Ethanol today offers Brazilian millers a guaranteed price around 18-2 cents/lb raw sugar-equivalent If the sugar price falls below 18-2 cents/lb, millers will produce more ethanol and less sugar The swing away from sugar will reduce supply to the world market And, this will support world sugar prices 12

13 Ethanol will provide a floor when sugar prices fall back How quickly they fall back will depend on the scale of the supply response 35 Sugar/ethanol price differential, ex-mill Brazil (US$) 3 c/lb Q1 1 Q2 1 Q3 1 Q4 1 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Strong Real Weak Real Base Case 13

14 Sugar prices in Vietnam follow the world price fairly predictably The premium is normally around US$1 but has been higher recently 1, 9 8 Vietnamese & world white sugar prices US$ per tonne Apr-7 Oct-7 Apr-8 Oct-8 Apr-9 Oct-9 Apr-1 Oct-1 Wholesale White (RS) No.5 Vietnam Premium 14

15 Outlook for Vietnamese prices Assuming current gasoline prices in Brazil (which are equivalent to US$8-9/bbl) 8 Projected white sugar price: Vietnam vs. world 7 6 per tonne US$ No. 5 Vietnam (excluding VAT) 15

16 Conclusion FFVs have altered the dynamics of sugar prices The have created a link between sugar and Brazilian gasoline not world gasoline (oil) But, this only works if ethanol and sugar prices can be arbitraged by Brazilian millers (which is not the case today because of limited switching capacity!) Today, the floor price for ethanol is around 18-2 cents/lb sugar equivalent This should support prices in Vietnam at around US$6-7 per tonne (Dong 11,-13, per kg) 16

17 Thank You 17