INDUSTRY OUTLOOK: NEUTRAL
TRIS Rating holds a neutral outlook for the sugar industry in Thailand. We believe the oversupply of sugar will remain, but slightly improve in the coming year as supplies from the major producing countries decline due to dry weather. Pressure on sugar prices will continue as a result of the excess supplies. Revenues of sugar exporters in Thailand are likely to decrease because of lower exportable supplies combined with low sugar prices. In 2019, Thai sugar exporters may also suffer as a result of the strong appreciation of the Thai baht. Profits of most of the sugar millers rated by TRIS Rating are likely to fall in 2019. However, we expect profits will gradually recover after the cyclical downturn ends.
KEY FACTORS
Oversupply continues with a smaller surplus
The world sugar market is moving towards supply-demand balance with a small surplus in the 2019/2020 crop year. Worldwide sugar production in the 2019/2020 season is forecast to increase slightly to 180.73 million metric tons (MT) from 178.93 million MT in the 2018/2019 season. However, sugar supplies in the major producing countries are expected to decline. Sugar production in India is expected to decline due to dry weather. Production in Brazil in the 2019/2020 crop year is nearly unchanged from the earlier crop. Brazil’s production is forecast at 29.4 million MT as more sugarcane will be diverted to ethanol. Production in Thailand will drop to 12.0 million MT in the 2019/2020 season due to unfavorable weather conditions. The weather changed rapidly from drought to heavy rain, particularly in the northeastern region, which caused a reduction in plantation areas.
Sugar consumption is expected to grow steadily, rising by around 1% per year. We expect low single-digit growth in sugar usage over the medium term. People are becoming more health conscious and many countries have imposed tax measures to discourage sugar consumption.
Persistently low sugar prices
Excess supplies have pressured sugar prices. The price of raw sugar in 2018 plunged to 12.3 cents per pound, 22.5% lower than the previous year. The average price of refined sugar declined to 15.6 cents per pound in 2018 from 19.6 cents per pound in 2017. Sugar prices in the first nine months of 2019 continued to decline. The raw sugar price fell to 11.2 cents per pound in September 2019 from 12.7 cents per pound in January 2019. The price of refined sugar slipped to 14.6 cents per pound in September 2019 from 15.6 cents per pound in January 2019.
One key reason for the recent weakening in world sugar prices is the implementation of a sugar export subsidy by India. India’s Cabinet approved incentives of US$76.8 billion to subsidize five million MT of sugar exports in the 2018/2019 season. For the 2019/2020 crop year, the Indian Cabinet has continued with this measure and approved a subsidy of US$84.7 billion for six million MT of sugar exports. TRIS Rating expects that sugar prices during 2019-2020 will stay low at around 12-14 cents per pound.
Thailand’s sugar exports decrease
We expect Thai sugar exports to slip in 2019 after hitting a record high in 2018. The lower exportable supply and lower sugar prices will affect the revenue level of sugar exporters in Thailand. The rapid appreciation of the Thai baht in 2019 will be another concern for exporters as it lowers their competitiveness. In the first nine months of 2019, sugar exports dropped to 7.3 million MT, down 9.8% year-on-year (y-o-y). The main export markets are Indonesia, South Korea, Malaysia, China, Cambodia, and Taiwan.
A few key sugar millers dominate Thailand’s sugar industry
At present, there are 55 sugar factories in Thailand producing 14.6 million MT of sugar. Over 58% of the factories are controlled by seven major groups of sugar millers: Mitr Phol Sugar Group, Thai Roong Ruang Group, Khon Kaen Sugar Group, Kaset Thai International Sugar Group, Korach Industry, Cristalla, and Wangkanai Group. These major sugar manufacturers held an approximately 68% share of sugar production in the 2018/2019 season. The remaining factories are run by small or independent manufacturers. Sugar manufacturing plants in Thailand are under government control. Any expansion or relocation of manufacturing bases must be approved by the Ministry of Industry. Therefore, TRIS Rating expects the major players to remain unchanged over the next few years.
Rising domestic competition due to sugar industry restructuring
Before 2018, the domestic sugar industry was highly regulated and had little competition. The Thai sugar industry was reformed in January 2018 after being challenged by Brazil at the World Trade Organization (WTO). The government revoked the quota system and fixed local sugar selling prices, which led to a free market system. Ultimately, sugar prices were floated and fluctuated in line with world sugar prices. Thus, sugar sales in both the domestic and export markets are directed by market mechanisms and the production capabilities of each seller.
After termination of the quota system, domestic market competition increased. The sugar industry remained dominated by the large groups of sugar millers, some gaining more market share, while the small or independent millers struggled to sell sugar in the domestic market. The large sugar producers have more competitive advantages as they have higher capability to respond to the demand of food and beverage processors, the largest domestic customers. These customers generally emphasize the stability of sugar quality and quantities, and on-time delivery.
As the Cane and Sugar Act are now in the amendment process. On 1 October 2019, the Cabinet approved the cost plus method to calculate the retail prices of sugar in domestic market for the 2019/2020 season. The cost plus method will be replaced the retail prices of sugar that combined from the London price of No. 5 white refined sugar and the price for Thai premium refined sugar. The industry expects that the degree of competition may decline under the cost plus method.
FINANCIAL HIGHLIGHTS
Drop in earnings in line with low sugar prices
Aggregate earnings before interest, tax, depreciation and amortization (EBITDA) of sugar processors slipped to Bt19.90 billion in 2018 from Bt24.02 billion in 2017. The average EBITDA margin of sugar processors also declined to 13.34% in 2018, compared with 16.31% a year earlier. The drop was due to the lower sugar prices in 2018. We expect earnings in 2019 will be the same as in 2018 due to the prolonged slump in sugar prices.
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