Executive Summary
El Nino related weather effects during the 2015/16 crop year cut sugar production worldwide. As a result, sugar production was less than consumption for the first time in five years. Major sugar producing countries were hit by El Nino effects. In addition, sugar producers in China faced difficulties such as high production costs and the cancellation of sugarcane floor prices in major sugar producing provinces. Sugar production worldwide fell to 164.9 million metric ton (MT) in the 2015/16 season, while sugar consumption grew marginally to 171.8 million MT.
For the next season, sugar production is forecast to increase by just 2.7% year-on-year (y-o-y). Production in Brazil is expected to rise, due to favorable weather and a drop in the amount of sugarcane converted to ethanol. In contrast, sugar production in Thailand and India are anticipated to fall because of prolonged droughts. The dry conditions have discouraged farmers from planting new cane. Sugar consumption in the 2016/17 season is forecast to increase to 173.6 million MT. Demand from food processors are growing, especially in India and China. Sugar supply shortages are expected for the second consecutive year.
Sugar prices worldwide have rebounded since the last quarter of 2015 due to an anticipated shortage of sugar. The prices of raw sugar and refined sugar improved worldwide. In the first half of 2016, the prices of raw sugar and refined sugar rebounded to 15.68 cent per pound and 20.33 cent per pound, respectively. Sugar stocks are expected to be drawn down as demand exceeds supply. Part of the recent rise in sugar prices is due to speculation by hedge funds. Nevertheless, the downward pressure on the prices of sugar eased as the Brazilian real (BRL) appreciated against US dollar (USD).
Sugar production in Thailand was hurt by a severe drought, which led to less sugarcane and a lower sugar extraction rate. Sugarcane production in Thailand was only 94.0 million MT in the 2015/16 season, while the sugar extraction rate fell by 2.8% y-o-y. As a result, the amount of sugar produced in Thailand dropped to 9.8 million MT. In the 2016/17 crop year, the cultivation area is forecast to increase. However, sugar production is expected to fall further due to dry conditions in the beginning of the growing period.
Thailand remains the world’s second-largest sugar exporter. Sugar exports increased from 7.3 million MT in 2014 to 8.0 million MT in 2015, rising by 8.8%. The major export’s markets are in Asia. Sugar exports in 2016 are expected to increase by 2.3% owing to growing demand from Indonesia and China.
The ethanol industry in Thailand underperformed in 2015 because of the drops in oil prices since the second half of 2014. The ethanol reference price in 2015 averaged Bt26.50 per litre, down by 2.6% y-o-y. This trend continued in the first seven months of 2016. In addition, cassava prices have tumbled since the fourth quarter of 2015. The drop kept the ethanol reference price in check. The price of cassava in the first half of 2016 plunged by 18.7% y-o-y.
The plunge in sugar prices in 2015 squeezed the profits of most sugar producers rated by TRIS Rating, excepting Buriram Sugar Industry Plc (BRR). BRR’s profit rose because it expanded cane procurement, despite the drop in export prices. The operating margin of Khon Kaen Sugar Industry Plc. (KSL) eroded in 2015 because of the fall in sugar prices, the drop in the reference price of ethanol, and a feed-in tariff. Mitrphol Sugar Corporation Ltd. (MPSC) posted an improved operating margin because its operations in China boosted its overall performance. The level of leverage at the sugar producers rated by TRIS Rating stayed at moderate to high levels in 2015. However, the cash flow protection and liquidity measures of rated sugar millers remain adequate and manageable. Sugar prices have recovered since the last quarter of 2015. Nonetheless, the benefit of rising sugar prices will be offset by higher production costs and less sugar production in 2016. Profits at sugar producers will recover gradually in 2017 as the impact of the current drought eases.