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.