Sugar prices gain, as Brazil tax move spurs talk of political favour

25.08.2017

Sugar prices extended their revival, returning above 14 cents a pound at one point, after Brazil unveiled a 20% tax on Brazil's ethanol imports, in the latest of a series of moves by the top producing country of the sweetener deemed potentially positive for values.

Raw sugar futures for October stood 2.1% higher at 13.95 cents pound in midday deals in New York, taking close to 8% the contract's revival from a mid-month low. Earlier the contract touched 14.06 cents a pound.

London-traded white sugar for October was 1.8% higher at $381.30 a tonne, up by approaching 6% from mid-August lows.

The latest gains followed the announcement overnight by Brazil's farm ministry that the country's foreign trade chamber, Camex, had approved a 20% levy on ethanol imported above a tax-free quota of 600m litres a year.

The move was viewed as, in curbing prospects for imports - which have reached 1.8bn litres over the past 12 months, and are growing fast – boosting prospects for domestic output of the biofuel, meaning higher prices of sugar if the sweetener is to secure an adequate supply of cane.

'Sugar prices could react a lot'

"The duty will help the local ethanol industry , which has been competing with imports for some time and is therefore bullish for sugar," said Nick Penney at Sucden Financial, flagging "short covering by speculators and funds" as fuelling price rises.

BTG Pactual said that while the move would have "little-to-no impact" on prices of ethanol, which are capped by competition with gasoline values, "sugar prices could react a lot".

"With sugar prices now inexplicably below their ethanol-equivalent level, we believe Brazil's local producers will accelerate the production shift towards ethanol, filling the expected void left by lower imports and, thus, reducing sugar output."

The bank pegged at 1.5bn litres the potential boost to Brazilian ethanol output following the imposition of the import tariff, implying a cut to sugar output of 2.5m tonnes.

"We expect this to be an important trigger for sugar prices to react," BTG Pactual said, adding that it "could cancel out the expected global sugar surplus for the next year-crop".

In political favour?

The imposition of the tax, which will be reviewed after two years, comes amid ideas that Brazil's government is taking a more proactive stance in promoting the country's cane industry.

The government has already, through revisions to so-called PIC/Cofins taxes, rendered ethanol more competitive with gasoline.

And it is proposing a so-called RenovaBio moves which are expected from next year to introduce a carbon credit market to spur use of renewable fuels.

It will require fossil fuel distributors, such as BR and Ipiranga, to purchase carbon credits issued by ethanol producers, such as Biosev and Sao Martinho

'Constructive sugar market'

"The Brazilian government could be adopting a more pro-ethanol agenda," BTG Pactual said.

 Sucden's Nick Penney said that "last night's news out of Brazil certainly contributes to a constructive sugar market in theory," although adding that "the legality of the recent Pis/Cofins tax changes continues to be debated".

He added that "it seems political considerations have come to the fore as North North East Brazil", the country's other main sugar producing region besides the core Centre South, "is a power base for the current government".

Brazil, which has imported 1.35m litres of ethanol so far this year,  has consumed 25.2bn litres of the biofuel over the past 12 months.


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