INDUSTRY OUTLOOK: NEUTRAL
TRIS Rating holds a neutral outlook for the sugar industry due to its character as a commodity product. Generally, commodity products are highly volatile in terms of selling prices and production volume. The supply of sugar depends on uncontrollable factors such as weather conditions or diseases. As a result, the supply of sugar can vary widely from year to year, leading to significant imbalances in supply and demand. Sugar prices swing as a result, as do the revenues and profits of sugar producers.
TRIS Rating expects the current oversupply of sugar will persist in 2018. Sugar consumption worldwide will be less than production in the 2018/2019 season. As a result, the prices of sugar are likely to fall. Profits at most of the sugar millers rated by TRIS Rating will fall as a result. However, we expect profits will gradually recover after the cyclical downturn ends.
KEY FACTORS
Ample inventory
Sugar inventory may reach another record high in the 2018/2019 crop year. Worldwide production has exceeded consumption for the past two years. Production in the 2018/2019 crop year is forecast to decrease slightly to 188.25 million metric ton (MT) from 191.81 million MT in the 2017/2018 crop year. Millers in India and Thailand are producing record quantities owing to favorable weather. In contrast, we forecast the production in Brazil will decrease as more sugarcane will be diverted to ethanol production. Consumption will continue to grow steadily, rising by around 2% per year.
Prolonged slump in prices
An oversupply has pushed down the sugar prices. The average price of raw sugar declined to 15.8 cent per pound in 2017 from 18.1 cent per pound in 2016. The price of refined sugar averaged 19.6 cent per pound in 2017, 13.3% lower than the previous year.
Sugar prices in 2018 were below the 2017 levels due to ample stock. In the first eight months of 2018, the price of raw sugar dropped to 12.2 cent per pound and the price of refined sugar slipped to 16.6 cent per pound.
Production in Thailand
The sugar production in Thailand hit a record high in the 2017/2018 season. The industry rebounded strongly after suffering through a two-year drought.
Sugarcane production surged to 135 million MT in the 2017/2018 season compared with 93 million MT in the 2016/2017 season. Sugar production in Thailand peaked at 14.7 million MT, up from 10 million MT in the previous season. The rise was due to a favorable weather and an increase in the area under cultivation. In the 2018/2019 season, most millers forecast that the quantities of sugarcane and sugar produced will be the same as in the 2017/2018 crop year.
Exports increase
Thailand remained the world’s second-largest sugar exporter. We expect the exports will increase in 2018 because there is a significant amount of sugar available for export. In 2017, sugar exports rose to 6.9 million MT, up by 6.6% year-on-year (y-o-y). In the first five months of 2018, the Office of the Cane and Sugar Board (OCSB) reported exports reached 3.7 million MT, rising by 20.7% y-o-y. The main export markets are Indonesia, Taiwan, Cambodia, and South Korea.
Thai sugar industry restructures
The Thai sugar industry follows rules set out in the Cane and Sugar Act of 1984. Some amendments to the Cane and Sugar Act have been postponed but the changes are not finalized yet. On 15 January 2018, the government invoked Section 44 of the Constitution in order to lift the domestic sugar price controls and the quota system. The changes made are as follows:
o The quota system was revoked. Sugar millers are now required to set a buffer stock equal to one month of domestic consumption.
o The retail prices of sugar are no longer fixed. The prices will float in line with world sugar prices. The reference price will be calculated from the London price of No. 5 white refined sugar plus the price for Thai premium refined sugar. However, retail sugar prices are still on price control list of the Ministry of Commerce.
o The special Bt5/kg tax on domestic sugar sales was cancelled. This special tax was collected from sugar millers, and was used to fund the Cane and Sugar Fund (CSF). The CSF subsidized cane growers when sugarcane prices were low. The CSF will be funded by the difference between the ex-factory prices of sugar and the reference prices.
After a preliminary analysis, TRIS Rating does not see the rule changes having any significant effect on sugar millers.
FINANCIAL HIGHLIGHTS
Better yield improves profits
The profits of most sugar millers rated by TRIS Rating improved in 2017. For example, the operating margin, defined as the operating profit before depreciation and amortization as a percent of revenue, of Mitr Phol Sugar Corporation Ltd. (MPSC) rose to 16.5% in 2017 from 14.2% in 2016. MPSC performed better because of rise in sales and the sugar extraction rate of 115kg per MT of cane, which was above the industry average yield of 109 kg per MT of cane. The operating margin of Buriram Sugar PLC (BRR) rose in 2017. Profits rose because of an increase in sugarcane procurement in the 2016/2017 season. Not all producers enjoyed higher profits in 2017. Profits fell at Khon Kaen Sugar Industry PLC (KSL) in 2017. KSL’s operating margin plunged to 7.2% in 2017 from 13.7% in 2016. The decrease was due to a drop in the supply of sugarcane, and a less revenue in the power segment.
TRIS Rating believes that the operating margins of most sugar millers in 2018 will improve because the record amount of sugarcane produced in the 2017/2018 season. However, profits of sugar producers may stay low as long as sugar prices stay low.
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