The macro scenario continued deteriorating due to the flow of news coming from China and the commodities kept the bloodbath we have seen this year. The yearly accumulated losses point to coffee and sugar as being the commodities that have melted the most, 29.2% and 28.9% respectively. Right on their heels, WTI and Brent oil have also fallen by 28% on average. And there doesn’t seem to be an end to the scares.
Patrícia Hemsworth, an energy market expert stationed in NY, believes that the oil market will keep on falling since there hasn’t been any change in OPEC policies despite the decrease in oil production on the part of the Saudis last July. She believes the market will test the 32.08-dollar-low per barrel seen in 2008.
The futures sugar market in NY closed the week at 10.44 cents per pound on October/2015 representing an over 5-dollar-per-ton fall against the previous week. All trading months opened up new lows.
The October/2015-March/2016 spread, which closed the week at 116 points, or the equivalent to a 28.76% load a year in dollars has been encouraging some capitalized companies to form stock just to strip it later on, and giving the market the task of loading it. A possible narrowing of the basis hasn’t gone into the calculation, which would make the operation more profitable. No one knows what volume was made for this purpose, but companies have to look at these opportunities that come up carefully.
Since there are no good news in order to cheer up the operators, a usual fortnight crushing number is usually expected as the most important thing that could happen on the market just to “legitimize” that more short sales are made by the funds, which are now sold at no less than 86,000 lots. There’s nothing wrong with that.
Sugar fundamentals, were we to analyze them bias-free, haven’t changed much over the past two months. What has changed a lot is the Brazilian political scenario, which reflects the unburied body PT’s Dilma Rousseff’s government has turned into.
The correlation between the sugar in NY and the Brazilian currency, out of the last 20 sessions on average, presents a -0.8500 adherence, that is, 85% of the absolute variation of NY is accounted for by the dollar variation against the real in reverse order – for each 1% the dollar goes up, the sugar in NY falls 0.85%. Brazil calls the shots and sets the sugar price in NY as an equation that reflects the dismal performance of the economy and Dilma’s fiscal maneuvers. Late last year, the real had a 15% impact only on the NY quotations on the 20-day moving average found in early December, that is, the rest of the fall was fundamental. Today, the fall is mostly accounted for by the real, the rest is sugar commodity fundamental. There is no doubt the macro scenario has worsened and affected the currencies, among them the real, but this year’s sugar pricing has a lot to do with the Brazilian political component.
The long crisis which the sugar-alcohol sector has been going through and whose peak has been reached today is by far much worse than that we saw in 1999. In April of that year, the foreign prices plummeted due to the sugar production in Brazil for the 98/99 harvest, and mainly due to the real devaluation which occurred early in the year and caused the ousting of the Finance Minister. Unlike today’s crisis, in 1999 the sugar cost of production was around 6.00 cents per pound, but the mills’ debts didn’t go beyond 25% of the yearly revenue and if, on one hand, it was backed especially in real, on the other hand, they were not debts with an extended profile, which caused stress on the needed juggling of constant rollovers.
With the world surplus liquidity seen in the middle of the first decade of this century, we witnessed the allocation of huge foreign resources to invest in renewable energy validated by the increasing fear oil – it was said – would permanently, due to China’s voracious appetite growing by two digits yearly, trade above 100 dollars a barrel.
Now the situation is totally reverse: the Chinese economy is getting weaker (and if they have a 37.5° fever, the world will have hyperpyrexia), oil is pointing to 30 dollars a barrel with no improvement ahead, Brazil is about to lose its level of investment rewarding a government which excels in mediocrity and paralysis, while the sugar-alcohol sector has a debt (unredeemable, according to some) which must be around R$90 billion and there is no project which shows we will be able to meet the demands over the next five years.
Have a nice weekend.
Arnaldo Luiz Corrêa
