Thai sugar faces bleak future amid oversupply

Thai sugar faces bleak future amid oversupply

Nisara Srihanam
Dow Jones
Bangkok

Thailand's sugar industry is bracing for a tough year ahead in
2004, as shrinking demand from Russia could worsen a domestic
glut at a time when production is expected to hit another record
as forecast by industry experts.

Even a likely increase in demand from China and Indonesia
won't be enough to make up for the loss of demand from Russia,
traders and analysts say.

"The prospects for Thai sugar exports seem bleak next year,"
said Boonyakiet Netcharussaeng, executive chairman of E-Saan
Sugar Industry Co., a leading sugar producer and exporter.
"Thailand appears to be the last choice (as a supplier) for
Russia."

Currently high freight rates will make it expensive for Russia
to import Thai sugar and will force it to depend more on other
traditional suppliers such as Brazil in 2004, he said.

The large Russian purchase of around 750,000 metric tons of
Thai sugar in 2003 literally bailed Thailand out of a potentially
disastrous glut in the market when the country produced a record
7.29 million tons of sugar in the 2002-03 crop year that ended
September 2003.

According to the latest forecasts, Thailand, one of the
world's top three sugar exporters, looks set to see another
record production at 7.48 million tons in the 2003-04 crop year.

"The (global) sugar market will tend towards oversupply over
the next two years, and prices will soften. Higher production, in
an already oversupplied market, will slowly fill stocks," said
Matthew Parry, senior commodities analyst at the Economist
Intelligence Unit, in a report on the outlook for soft
commodities.

"In case Russia (doesn't) buy, Thai sugar prices will be under
pressure...at around 7 cents a pound (including premiums)," said
Piromsak Sasunee, deputy director general of the Thai Sugar
Millers Corp., a lobby group for sugar mills in Thailand.

Strong Russian demand had kept Thai raw sugar prices at an
average 7.46 cents/lb, free on board, during the January-
September 2003 period, up from around 6.69 cents/lb in the same
period of 2002, data from Thailand's Department of Foreign Trade
showed.

Prices have since fallen to around 7.03 cents/lb, FOB, in the
latest sale last week of some 24,000 tons of the benchmark Quota
B raw sugar for Mar 1-May 15 shipment by the Thai Cane and Sugar
Corp.

The market is expecting a rise in demand for Thai sugar from
China and Indonesia in 2004, but that won't be enough to make up
for the likely loss of demand from Russia or keep pace with the
growth in output.

According to the China Sugar Association, China may see a drop
in its own output in the 2003-04 crop year to around 9.87 million
tons, down 7.2 percent from a record production of 10.64 million
tons in 2002-03.

On the other hand, "domestic consumption is growing to exceed
this year's 9.5 million tons. Our stocks aren't that big, so we
would come to the market to import raw sugar, including that of
Thai origin," said an official at the China National Cereals Oils
& Foodstuffs Import & Export Corp.

Forecasts on Chinese sugar imports in 2004 generally range
from 1 million tons to 1.5 million tons, with some very
optimistic forecasts even pegging the figure at 2 million tons.

However, with China's long-term agreement to import around
400,000 tons of sugar a year from Cuba and some from Australia,
only the remaining market will be available to other exporters,
including Thailand, traders noted.

Indonesia, Asia's largest white sugar importer, could also
increase buying from this year's estimated 1.5 million tons, said
Colosewoko, executive secretary of the Indonesian Sugar Council.
Colosewoko uses only one name.

While higher freight rates may keep Brazilian sugar mostly out
of the Indonesian market in 2004, the country still has more
options than just Thailand, including India, which currently sits
on a healthy stock of around 10 million tons.

Besides India, the Philippines, a net importer of sugar for
nearly a decade, plans to return to the export market in 2004.
The Philippine Sugar Regulatory Administration recently announced
it would export 80,000 tons of sugar next year from an estimated
output of around 2.2 million tons, to countries such as Japan and
Taiwan, both of which are currently buyers of Thai sugar.

"The world sugar market isn't favorable. The major problem is
surplus (production), while demand isn't growing...(I don't see)
any bullish factor for the time being," Jean Luc Bohbot, managing
director of French trading house Sucden, said during a recent
visit to Bangkok.

Faced with the prospect of a further increase in supply in the
market in 2004, the government introduced a plan in July 2003 to
deny government support for sugar cane produced above its target
of 65 million tons a year.

Yet, Thailand is forecast to produce a record 74.85 million
tons of sugar cane in the 2003-04 crop year.

"I doubt if the government can limit cane output, as mills
want higher production to utilize their crushing capacity," said
a Bangkok-based trader at an international trading house.

Previously, the 46 sugar mills in Thailand operated at around
50 percent-60 percent of their combined capacity, but they can
almost use their full crushing capacity this crop year, thanks to
ample sugar cane supply, she said.

Along with the output reduction plan, the government is also
working to promote a sugar cane-based ethanol industry, hoping to
allocate 23 million tons to 26 million tons of cane from the
2004-05 crop year onward for ethanol production.

Industry Minister Pinij Jarusombat said he hopes the ethanol
project will reduce the glut in the sugar market while boosting
the price of cane as mills earmark part of the cane supply for
ethanol production. Sugar cane hasn't been used commercially to
produce ethanol in Thailand so far.

For their 2002-03 crop, Thai farmers got a price of 330 to 440
baht (US$8.3 to $11.1) per ton of cane, much below their
estimated production cost of 580 baht per ton.

"I haven't seen any sign of light at the end of the tunnel,"
said Vibul Panitvong, executive chairman of Ban Pong Sugar Co.
and a director at the Thai Sugar Millers Corp., which represents
the country's sugar mills.