Kotak Commodity Services Ltd

*Omicron coronavirus variant could hammer a nascent global economic recovery

A year-end sell-off is accelerating in raw sugar as concerns about demand are heightened by the new COVID variant, Omicron. After a drop of almost 7% over two weeks, the question naturally popping into investors’ minds is whether this is a buying opportunity or is more patience required to lock in at the lower levels? If the latter is the case, then what should those levels be?

Gains in energy markets last week were also supportive with sugar and biofuel ethanol alternative uses for sugar cane, particularly in Brazil. Pulling away from the last week's four-month low of 18.46 cents a pound (454 gram), ICE March raw sugar New York futures higher at 19.25 cents and March white sugar at $488.20 a ton on Monday.

Fears persisted that the Omicron coronavirus variant could hammer a nascent global economic recovery. Dealers said sugar is unlikely to head higher despite positive fundamentals because the market remains obsessed by the Omicron variant and has weeks to wait before the emergence of data on the scale of the threat it poses to global health.

Reports indicate that consumer demand has returned to the market but not in a big way. Ideas are that the supplies are out there, but it will take a stronger price to get them into the market. Raw sugar had one of its biggest rallies in 2020, gaining 15% as it rose virtually non-stop from May through December last year after COVID disruptions to production meant unusually low global supplies.

This year was even bigger for the sweetener, as it gained 25% through September before hitting a speed bump in the final quarter. Now, raw sugar is up about 20% on the year after a recent stretch of red ink particularly, forced by a deteriorating demand outlook. Top producer Brazil exported 2.67 million ton of sugar in November, against 2.9 million ton in the same month last year, data showed.

Sugar output in India touches 4.721 million ton till Nov-end, around 10% more or 4.19 lakh ton higher than last season’s production for the corresponding period. Indian sugar mills association (ISMA) said that it has attributed the higher production to an early start of crushing season in western region of the country this season and higher availability of cane.

ISMA said sugar exports for about 3.5 million ton had already been contracted in the current season of 2021-22. Most of these contracts were signed when the global sugar prices were in the range of 20-21 cents per pound of raw sugar. However, with a fall in the global prices to below 20 cents, Indian sugar mills are not coming forward to sign further export contracts.

(Disclaimer: This analysis is only for educational purpose and is not and must not be construed as investment advice. It is analysis based purely on economic theory and empirical evidence. Readers are requested to kindly consider their own view first, before taking any position.) Date: 7-12-2021

Samarth Mercantile

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