Sugar Slides on Speculation That Brazil Will Cut Gasoline Prices

April 5th, 2016

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Category: Grains, Sugar

sugar 450x299(Bloomberg) – Raw sugar fell to a three-week low on speculation that Brazil’s state-controlled oil company may cut gasoline prices, a move that could weaken ethanol demand and push extra supplies of the sweetener onto international markets.

Petrobras’s management is seeking to cut gasoline prices to reverse a slump in domestic demand and curb rising imports, while the board of directors is resisting a reduction, local newspaper Valor Economico said Monday. Lower prices would make sugar-cane ethanol less attractive to consumers, potentially eroding demand and encouraging mills to make more sweetener. A Petrobras spokesman didn’t respond to an e-mailed request for comment.

In Brazil, gasoline and ethanol compete directly, as the country’s flex-fuel cars can run on either. Petrobras raised domestic gasoline prices by 6 percent last year in a bid to boost cash generation amid slumping oil prices. The move benefited ethanol producers as the biofuel became more competitive, leading to a surge in demand.

Raw sugar for May delivery slid 3.6 percent to settle at 14.64 cents a pound at 1:04 p.m on ICE Futures U.S. in New York, after reaching 14.61 cents, the lowest for the most-active contract since March 10. That follows two consecutive weekly declines amid expected improved supplies out of the South American country, where producers are set to gather a bigger crop.

Ethanol Debt

Lower gasoline prices would hurt Brazil’s ethanol industry because companies have heavy debt loads from when domestic prices were below international ones and have no room to cut ethanol prices, Plinio Nastari, president of consulting firm Datagro, told reporters on a conference call Monday.

“The industry has been using most of its cash to pay interest and has no room to absorb lower ethanol prices,”  he said.

On March 23, futures reached a 17-month high of 16.75 cents on ICE amid projections that a world supply deficit would persist into 2016-17 following damage from drought to crops in India and Thailand, and as surging demand for ethanol spurred the South American mills to make more of it and less sweetener.

A slumping Brazilian real is also adding pressure to sugar prices as it boosts the appeal for suppliers to sell commodity prices in the greenback.

Tumbling Shares

The commodity rose 5 percent in 2015, the first increase after a four-year slump that put many mills around the globe under severe financial stress and prompted many to exit the business, including Brazil’s less efficient mills.

The specter of lower ethanol mill revenue sent shares of some major producers lower in Sao Paulo. Cosan Industria e Comercio SA, a producer of sugar and ethanol in Brazil, was the worst performer on Brazil’s benchmark Ibovespa index, tumbling as much as 9 percent to 28.97 reais. Sao Martinho SA slid 7 percent, heading for the biggest loss since June 2009.

If gasoline is lower, “then expect ethanol parity to fall even further and that would give more motivation” for mills to make more sweetener, Michael McDougall, senior director for Societe Generale in New York, says by e-mail.

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