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QSL Monthly Market Update - March 2020

Friday, 20 March 2020


By QSL Trading Manager Matthew Page

Current as of 20 March 2020

And so the volatility in our markets continues. A period of positivity in sugar based on an improving fundamental outlook that lasted right up until the final week before the March expiry has completely reversed. Only one word can describe the overwhelming macro environment in its current state; panic.

The spread of COVID-19 (coronavirus) outside of China has now become a global pandemic that governments worldwide are struggling to contain. Borders are closing, markets are collapsing and daily life is now beginning to be heavily affected, with school and office closures becoming go-to policies. The resulting risk aversion has seen some eye-watering losses in financial markets:

Despite the improving fundamental picture we have seen so far this calendar year, sugar has by no means been exempt from the rout. A significant weakening of the Brazilian Real (BRL) to over 5.00 per US dollar coupled with a complete collapse in crude oil, which is now trading under US$26 per barrel, has seen Brazilian mills further favour sugar production over ethanol in the upcoming crush. So much so that most analysts expect the mix to be near max sugar which will result in something around 37/38 million tonnes. 

That said, from a global supply and demand perspective this merely replaces what has been lost from the Thai crop failure and also what won’t be exported from India now that we are below the export parity levels required to bring those sugars out. This narrative is clearly reflected in cash premiums for physical sugars, which remain resilient at the elevated levels seen in February despite the collapse in the ICE 11 flat price.

So if these moves in BRL and Crude Oil aren’t significantly changing the supply and demand outlook, why are prices lower? Back to our dear friends the speculators. While our run up to 15 cents USc/lb last month was adequately supported by the investors building a reasonable net long of 165k lots, the opposite can certainly be said of the now 4-cent drop, with funds running for the hills and liquidating their positions in sugar faster than Woolies can sell loo rolls! The one-direction order flow we are seeing means technical indicators and momentum all point towards selling the current market and this will likely continue for the short term.

Further, the ongoing discord among OPEC (the Organization of the Petroleum Exporting Countries), particularly between Russia and Saudi Arabia, has only exacerbated the situation hence oil has been hit even harder. While supply continues to creep up with OPEC members flooding the market with increased production, the downturn in demand (and not just in oil) that will result from ever-increasing doses of ‘social distancing’ will likely throw us in to a protracted period of global recession. Quite how long the virus risk hangs around for and the economic damage it will inflict is anyone’s guess at this stage unfortunately.

Similarly, the Australian dollar (AUD) has also not been immune to the virus and while it had already been depreciating since the start of the calendar year, the speed of the devaluation has increased markedly, particularly in the past week, with it a full 5 cents lower against the US dollar.
Travel restrictions, decreased consumer spending and the unavoidable downgrade in exports to China will all weigh heavily and likely push the local economy into its first recession in 29 years.

We are already now well below 60 cents and the sub-50 cent lows experienced back in 2001 are certainly well within reach. A final RBA rate cut to 0.25% and Quantitative Easing has now been announced so how much further this pushes us remains to be seen. However, monetary policy alone will not suffice and the market will look to the government for a significant fiscal response to support the economy.

Despite the significant drop in AUD, its smaller weighting in making up our AUD/metric tonne sugar prices has not been enough to offset the significant downturn in sugar and we are now over $100 lower per tonne than we were a short 3 weeks ago. QSL used its discretion as best as we could to capture the rally.

For our most current market overview, please click here.