Commodities 2023: Weather woes, returning demand to support Thai sugar cash premiums in H1

Production concerns are taking center stage as the global sugar market eyes the first quarter of 2023 with a tight balance sheet for raw sugar to meet recovering demand in Asia, which will likely translate into upward pressure on Thai sugar cash premiums.

Thailand's cane areas have received some of the best rainfall in more than three years in 2022, with the country's cumulative rainfall 21% higher than in 2021.

Against this backdrop, sugar production for the 2022-23 crop season(October-September)is expected to be higher, with market expectations in the range of a 13%-15% increase from the 10.12 million mt produced in 2021-22.

S&P Global Commodity Insights is estimating cane availability in 2022-23 at 105 million mt and sugar production at 11.6 million mt.

Thailand's rainfall high

However, the persistent rainfall in Thailand has also resulted in a slow start to cane crushing and market sources are expecting sugar production in December to be lower than a year earlier.

"There has been a lot of crushing delays in central Thailand, with 10 mills postponing their crushing to Jan. 2. Northern Thailand is doing fine with mills only delaying by one or two days and the northeast region likely to be on track [albeit at a slower rate]," a Thai-based agronomist said.

Expectations of supply tightness amid the rainfall-related delays are supporting cash premiums, with the Thai Hi-Pol raw sugar premium to New York No.11 futures rising in Q4 2022 in comparison to the Thai Quota B premiums awarded.

Refined sugar is also seeing limited selling indications in the market for January shipments due to the low availability of old crop Thai 45i and the slow rate of crushing for the new crop of Thai 45i sugar. Platts, part of S&P Global Commodity Insights, assessed Thai 45i cargoes for January loading at March (H) plus $36/mt in containers Dec. 16.

A Thai miller said: "Early year shipments might be tight with the current weather conditions."

Concern over India's export capacity

The recent bearish forecast for Indian sugar production has also helped to set the stage for Thai cash premiums to rise on expectations that demand for Thai sugar will increase to fill the gap.

In 2022, India has taken steps to limit price hikes in the domestic market through export restrictions on wheat, rice and sugar. For the 2021-22 season, mills were allowed to export 11.2 million mt of the 36 million mt of sugar produced.

The government has extended export quotas into the 2022-23 crop year and released 6 million mt of sugar export quotas in its first tranche, which runs until May 31. However, lower-than-expected yields, mainly in Maharashtra and Karnataka, have raised red flags about India's sugar production estimates. Thus, there are developing concerns that the second tranche of 3 million mt of quotas for the remainder of the season over June-September might be reduced, or not made available.

"We will take a call in January as crushing is in full swing now," the Secretary of India's Department of Food and Public Distribution, Sanjeev Chopra, said Dec. 15 in response to queries on whether the government is considering releasing additional quotas for sugar exports.

Regional demand to pick up

Demand from Indonesia, one of the largest Thai raw sugar buyers in Asia, is also stronger. The country recently allowed an additional 500,000 mt of imports in Q4 in preparation for Ramadan falling early in 2023. With this addition, Indonesia has imported around 6 million mt of sugar in 2022, its highest import volume for several years.

Raw sugar demand going into 2023 is expected to be strong with Indonesia committed to ensuring sufficient stocks in case of supply chain disruptions and to keep domestic prices at healthy levels. The market is also expecting Indonesia to release more import licenses in the coming weeks, with Thai sugar likely to be competitive due to freight advantages.

The freight differential between Brazil and Thailand to Indonesia is currently around $20/mt, based on Platts data, with the Thailand-Indonesia freight rate expected to remain low in 2023 amid an increase in the availability of vessels.

Another major buyer in the region would be China and the recent easing of its pandemic measures has trained focus on how much the country will import. While local sources expect the easing of restrictions will boost domestic sugar consumption, they do not expect the rebound to be immediate.

"I believe that [COVID-19] cases will definitely surge in the next few months, discouraging people from going out and traveling, hence, the consumption demand will not recover immediately," a China-based trader said.

Market sources are also expecting China will have sufficient stocks to last until Q2 2023, when the Brazilian sugarcane harvest will be available. Nonetheless, it is noteworthy that while China is moving into 2023 with prices at negative import parity, any surprise demand in Q1 2023 would boost Thai cash premiums amid overall tightness in Asia's supply.