Dry bulk freight at 11-year high, capping Brazilian sugar cash premium
The Brazilian sugar cash premium in the inter-trade market has been capped by the dry bulk freight rally that began in early June, two months after the 2021-22 Center-South harvest started in the country April 1.
S&P Global Platts assessed dry bulk freight, for sugar loading from Santos port to the Chinese port, Rizhao, at $64.50/mt, the highest weekly assessment since June 11, 2010, when Platts’ assessment reached $66/mt.
The upward price curve started June 3, and since then the weekly assessment has spiked 27%.
Market participants have been reporting that at current DBF levels, some trades done earlier on the crop at a fixed CFR (cost and freight) price became impractical, encouraging traders to postpone shipment.
Avoiding the high freight cost, more players have been favoring carrying sugar to the forward months, but sugar storage capacity seems to be reaching capacity.
Platts assessed Brazilian VHP raw sugar for August loading at a 39-point discount to the October (V) Sugar No. 11 Futures on July 20, a plunge of 46 points or $10/mt from May 11, when Platts started to assess the August shipment period.
The discounted market is proof that trading houses are accepting discounts on their sugar and leave the long position instead of delivering it to end consumers.
While the prompt loading premium has been capped by the limited storage capacity, for the last quarter of the year the market is suggesting much higher premiums.
Platts assessed Brazilian VHP raw sugar for October loading at a 4 point premium over the October (V) ICE NY 11 October contract July 20, suggesting that October loading was at a 43 point premium, nearly $9.48/mt over August.
“Nowadays the financial cost to carry sugar is at 6-7 points per month. If the warehouse if full, it is necessary to have a much wider spread” to encourage the carry, a sugar trader based in Europe said.
The Brazilian CS sugarcane crop has been moving at a slower pace compared with the prior 2020-21 crop cycle, as the current crop has been suffering the effects of severe dry conditions.
As a reference, sugar production from April 1 to July 1 added 12.2 million tons, down 8.16%, or nearly 1.1 million tons, year on year.
Despite the scenario of reduced sugar production and strong concerns about further crop losses, the wide carry strategy has triggered the collapse in the Brazilian cash premium to prompt shipment.
Port structure and exports
Brazilian raw sugar exports from Santos port from April 1 to July 19 totaled 6.2 million tons, down nearly 12% from the 7.04 million tons exported in the same period of the prior year, data from SA Commodities, a Brazilian consultancy, showed.
The slow export pace, explained by the DBF uptick, is changing the Santos port dynamic, and trading houses are favoring loading small sugar parcels in each terminal to keep the storage capacity from reaching its limit.
A source from a Santos based sugar terminal said of the trading houses, “They are respecting contracts with terminals, but at the limit, as they are trying to negotiate lower freight rates with shipowners.”
According to sources, the Rumo terminal has 270,000 tons of sugar storage capacity in the port area and an additional 600,000 tons in the countryside, and both are fully loaded.
While the possibility to load in more than one sugar terminal can be an option to reduce the stock pressure, the cost to shift a 70,000 mt sugar vessel from one sugar terminal directly to a second is nearly $20,000.
“In this calculation we are considering a direct maneuver, if the vessel needs to wait outside the port area, to later be called to the second berth. This cost can be much higher,” said Luiz Carlos dos Santos, SA Commodities director.