Industry Risk: Moderately High Risk
TRIS Rating views the sugar industry as a “moderately high risk”. Sugar is a commodity product, and sugar prices are generally volatile due to an imbalance of supply and demand. Sugar production worldwide is dependent on weather conditions, like other agricultural products. After a sugar deficit over the past two years owing to the dry weather, sugar production in the 2017/18 crop year is expected to exceed demand. The rise in production is due to favorable weather in major producing countries.
World Sugar Industry
• Sugar supply increases
In the 2016/17 season, sugar production rose in major producing countries, especially Brazil, Thailand, and China. During this time, sugar production increased by 3.7% to 170.8 million metric tons (MT). The rise was due to favorable weather in Brazil and an increase in the average sugar extraction rate in Thailand. In addition, China’s government implemented a five-year plan (2016-2020) to boost sugar production in order to reduce sugar imports. The plan is targeted to raise sugar production to 15 million MT by 2020. The government will provide subsidies and financial supports to farmers such as a higher sugar cane minimum purchase price to encourage cane growers to plant more cane. However, production costs, particularly labor costs, for sugarcane planted in China remain high.
For the 2017/18 crop year, sugar production worldwide is forecast to increase sharply to 179.6 million MT, owing to an increase in major producing countries. Thanks to favorable weather in Brazil, production is expected to increase by 1.3%. Moreover, Brazil’s sugarcane-ethanol conversion rate is forecast to decline by 1%. Production in India is forecast to rebound by 18% due to higher area and yields. Sugar production in Thailand is expected to recover from the last two years of severe droughts. China’s production is forecast to rise by 10.5%, as a result of government policies to support sugar industry. Sugar production in the European Union (EU) is forecast to reach 18.6 million MT, up by 12.7%, due to an increase in area and yields. The 2017/18 season will be the first year the EU sugar market is liberated from the production quota regime and export limits.
Sugar consumption worldwide in the 2017/18 season is forecast to be flat at 171.6 million MT. Sugar consumption is related to demand from food processors, especially the food and beverages industry. Thus, a surplus of around eight million MT is expected in the 2017/18 crop year.
• Sugar prices are pressured by oversupply
Sugar prices in 2016 recovered owing to the sugar supply deficit and hedge fund speculation. The price of raw sugar rose to 18.1 cent per pound, from 13.1 cent per pound in 2015. The price of refined sugar increased to 22.6 cent per pound in 2016, up by 33.6%. However, sugar prices in 2017 are expected to be pressured by the surplus supply situation. In January 2017, the prices of raw sugar and refined sugar averaged 20.54 cent per pound and 24.44 cent per pound, respectively. In August 2017, the prices of raw sugar and refined sugar dropped to 13.80 cent per pound and 17.15 cent per pound, respectively.
Sugar Industry in Thailand
• Recovering sugar production
Sugar cane production in Thailand has been hit by the dry weather for the two consecutive years covering the 2016/17 season. Sugar cane production dropped to 93 million MT in the 2016/17 crop year, down from 94 million MT in the previous season. Despite the prolonged droughts, the sugar extraction rate increased from an average rate of 104 kilograms (kg) per MT of cane in the 2015/16 season to 108 kg per MT of cane in the 2016/17 season. As a result, the amount of sugar produced in Thailand rose by 2.5% to 10 million MT in the 2016/17 crop year, compared with 9.8 million MT in the previous crop year.
For the 2017/18 crop year, the Office of the Cane and Sugar Board (OCSB) forecasts that sugarcane production will increase, though the sugarcane cultivation area is expected to decrease. The expected rise in sugarcane production is due to improved weather conditions predicted for the next season.
• Domestic sugar industry restructuring
The Thai government pledged to restructure the sugar industry after a petition was filed by Brazil to the World Trade Organization (WTO). Brazil claimed the Thai government supported the domestic sugar industry and exports, which is inconsistent with international trade agreements. The Thai government responded by amending the Sugarcane and Sugar Act. A draft of the amendment is currently being considered by the Cabinet. The new laws and regulations are expected to be implemented in the 2017/18 crop year. The government will discontinue the sugarcane price support program and revoke the quota system . Without Quota A, sugar millers will be ordered to set their buffer stocks for domestic consumption. Moreover, the fixed domestic retail price of sugar will be eliminated. However, retail prices are still under the Ministry of Commerce’s price control list. As a preliminary measure, the Commerce Ministry may regulate the floating price by determining the reference price every month.
• Exports are expected to increase due to exportable supply
Thailand remains the world’s second-largest sugar exporter, tailing Brazil. The major export markets are in Asia, especially Indonesia, Cambodia, Myanmar, Japan, and China. Sugar exports dropped from 8 million MT in 2015 to 6.5 million MT in 2016, decreasing by 18.5%. The drop was due to a lower exportable supply in 2016. Sugar exports in the first four months of 2017 dropped to 2.4 million MT, down by 8.7% year-on-year (y-o-y).
Thailand’s sugar exports to China continued to plunge by 16.5% y-o-y in the first four months of 2017, while sugar exports to Myanmar and Cambodia surged. Most industry operators believe that sugar exported to Myanmar and Cambodia is re-exported to China through border trade.
Thailand’s sugar exports in 2017 might decline as the Chinese government intends to protect their sugar industry by supporting domestic production. Moreover, on 22 May 2017, the Chinese government announced a safeguard measure on sugar imports. The import tariff will be raised from 50% to 95% for out-of quota sugar imports. This safeguard measure will apply to any country with a market share greater than 3% of China’s sugar imports. Thailand’s share was about 8.7% of China’s total sugar imports in 2016.
Ethanol Industry in Thailand
Many sugar millers in Thailand diversified into ethanol production and electricity generation. Millers can use a by-product from the sugar production process to produce power, giving them additional sources of income.
• Ethanol reference price improves
The ethanol reference price in 2016 averaged Bt23.12 per litre, down 12.8%. The drop was a result of a drop in oil prices since the second half of 2014 and a plunge in cassava price in 2016. As a result, the financial performance of millers last year was partially affected by drops in the price of ethanol in 2015. However, the average reference price in the first nine months of 2017 increased to Bt24.78 per litre, 7.2% higher than the same period last year. The rise was in line with a recovery in oil prices since December 2016. During the first half of 2017, the volume of ethanol sold as fuel in Thailand grew by 8.2% y-o-y, compared with a 2.5% y-o-y increase in the first six months of 2016.