Is sugar an underperforming sector? Experts debate

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Is sugar an underperforming sector? Experts debate

One sector which has got pummeled over the last week is sugar. There is continuous fall in sugar stock prices across the board. This has become an underperforming sector on fears that the sugar cycle globally and locally has turned and that we have seen the best days for this cycle at least.

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Excerpts from Bazaar on CNBC-TV18 Watch the full show » RELATED NEWS India takes measures to tide over sugar shortfall Sugar prices down due to improved production: Oudh Sugars Shree Renuka BSE | NSE 29/05/12 Are Mutual Funds betting on Shree Renuka?

One sector which has got pummeled over the last week is sugar. There is continuous fall in sugar stock prices across the board. This has become an underperforming sector on fears that the sugar cycle globally and locally has turned and that we have seen the best days for this cycle at least.

In an interview with CNBC-TV18, Narendra Murkumbi, Managing Director of Shree Renuka , SP Tulsian of sptulsian.com and Sudakshina Unnikrishnan of Barclays Capital, debate on this subject.

Below is a verbatim transcript of an exclusive interview with Narendra Murkumbi, SP Tulsian and Sudakshina Unnikrishnan on CNBC-TV18. Also watch the accompanying video.

Q: Global sugar prices are down somewhere 30% from peak. What lead to this complete sell off?

Unnikrishnan: It's been a combination of factors. If you go back to reasons for rallying sugar prices, it's come on the back of developments in the world's largest producer and consumer countries like India and Brazil. If we go back to last year, we had weak monsoons in India and very weak production estimates. This coupled with robust domestic consumption meant that India was going to be a substantial importer on to the international market.

Adding to that was lower than expected production coming out of Brazil owing to unseasonable rainfall in the center south, which reduced sucrose levels, production estimates. Going into this year, situation over last few weeks has changed and the slide in prices has come on back of developments focused on India. So they started the week with views from India saying production estimates are revised higher. So you had Indian sugar mills association increasing production estimates by 5% now that number of 16.8 m tonne is quite higher than what we were expecting few months ago.

Few months ago the markets were pricing in between 14.5 -15 m tonne for Indian production. So this increase in terms of India's production estimates coupled with overnight news that we are seeing cancellation in deferrals of import tenders especially from India. It does mean that there is a bearish tone in the market at the moment and that's been responsible for the drag in prices.

Q: With the pace of corrections you have seen so far through would you say sugar prices seem like they are bottoming out globally and where is it that they are currently trading at?

Unnikrishnan: Yes certainly. We saw in 29 year peak in ICE sugar. Raw sugar Futures prices been hit at the start of February and ever since then especially towards mid February onwards we have seen sort of relentless downturn in prices. Prices this morning have actually fallen to 18.8 cents per pound and that's the lowest level in seven months. So it's been a very substantial decrease in prices. Prices fell 6% yesterday.

Prices are down 25% compared to month ago levels. So it has been a very steep decline in terms of prices. In terms of downside risk, we would believe that downside risk is very limited from current price levels. This must be kept in mind within a context that the mood remains very bearish for sugar prices at the moment. There hasn't been really such a dramatic change in terms of global market fundamentals. Certainly, the news coming out that India in terms of high supply prospects and lower import needs is going to weigh on the markets.

Until we see demand coming into the market and some fresh import demand galvanizing prices, prices are vulnerable to any sort of move in terms of sentiment. We would view current prices levels as pretty weak and we would think that significant downside is limited from here.

Q: What is your assessment? The global analyst seems to be telling us that demand supply assessments have change now and it's unlikely that sugar price will head higher in the near-term. Would you agree with an assessment, for the near-term upsides are limited?

Murkumbi: We saw a 30 year peak price of 30 cents on February 1. I do not think prices will go back to that level unless there is a major weather event in India or Brazil later this year. Having said that we have gone back to price range which was prevalent from July to December of 2009 when the situation was also tight, similar to now. So I think we have done enough on the downside for the moment and 20-24 cents is the new range for world sugar prices.

Q: The thing that seems to be pushing this price issue though is what is happening with production. Indian Sugar Mills Association (ISMA) has already raised their production targets but the more interesting observation seems to be that there is now a possibility in FY11 production will exactly match consumption that means 1:1, clean ratio. Do you see that as possible?

Murkumbi: I think it's too early to say as planting has not been as strong as we would expect with better cane prices. One of the reasons is lack of availability of irrigation in the south of the country. This year one must remember the planted area did not increase unlike last year yields were much better so from virtually a similar acreage as last year we have got about 1.5-2 million tonne compared to 2008-2009. So there is an element of variability of yields. I would still think that next year is about 22 million tonne.

Q: What is your assessment? There seems to be a growing feeling that the sugar cycle has topped out, the cycle has turned once again.

Tulsian: There have been two extremes. We have seen one extreme happening on February 1 when there was lot of calculation that India will go for an import of close to 5-6 million tonne and in anticipation of that we have seen raw hitting 30 cents per pound and white hitting 750 dollar per pound. I do not think that that was the realistic price. If that would have been the case that was a real concern for everyone, consumer even the mill owners and even for the government and now we have seen prices correcting by about 30% in last one month having bottomed out at about Rs 30 per kg in Maharashtra and Rs 32 per kg in Uttar Pradesh (UP).

This has more to do with the liquidation of the inventory which is held at the traders or consumers level also because there has been some move initiated by the government like weekly delivery mechanism. In fact, it is not the weekly delivery, but it is delivery and dispatch. There have been some actions happening on part of the government and the advantage of that has been taken by traders also that they have not been participating for first five to six days in the sale or auction process by the mills and then they come on the seventh day to have the quantity at a lower rate. All these things cannot sustain for a very longtime. We have seen that mills have started closing in UP. By the middle of April we will be having all the mills getting closed in Maharashtra as well as in UP.

Post that we can see increase of about couple of rupees in the product prices and that should be a level at which it will settle down. Though I have been hearing the entire mill owners in UP that they are even selling now below their cost price, but I do not think that that is the case because they have been heavily losing on the levy component to the extent of 20% but that is largely getting offset by byproduct and on the sale of the product they are almost breaking even.

So this situation cannot last for a very longtime, there has to be an increase of couple of rupees maybe next 15 days or so. Even we have been hearing that probably next week government is going to restore the delivery mechanism period or the delivery period to 15 days as well as we will announce the levy sugar prices also, which is expected to be at about Rs 18. So taking all into consideration, there should be some respite for their mills or for the sugar stocks from hereon.