Sugar prices may stage a recovery in the spring, but could fall back below 16 cents a pound by the end of next year, dynamics from one of the market's most important drivers, Chinese imports, indicate.
A "sharp jump" in Chinese imports has been a "driving factor" in supporting sugar prices over the last four years, when they have, even at current levels, remained well above historic averages, Australia & New Zealand Bank said.
Indeed, China looks this year on track to import more than 4m tonnes of sugar for the first time in a calendar year since at last the mid-90s, thanks to an opening up of an arbitrage against elevated domestic prices.
Sugar values are being underpinned by high production costs, pegged by US Department of Agriculture staff in Beijing at 5,300-5,400 yuan ($870-886) per tonne, equivalent to about 40 cents per pound, besides by state purchasing to offer support for cane growers.
Imports were at one point in the summer some $200 a tonne cheaper than domestic supplies, even when the out-of-quota tariff rate and VAT on buy-ins were factored in, ANZ said.
Indeed, China's sugar imports hit a record 709,873 tonnes in October, and are likely to have remained strong last month, given the "persistence" of the arbitrage in August and September.
'Natural cap on prices'
However, while growing demand will swallow up much of the imported sugar, much is ending up in inventories too, with China's sugar stockpiles to end 2014 up 4m tonnes in two years to the equivalent of five months' supplies.
This will reduced the need for imports next year, "placing a natural cap on global sugar prices in 2014", ANZ senior ag economist Paul Deane said.
Imports may well halve to 2m tonnes next year, assuming the, unusual, arbitrage on imports closes – an outcome rendered increasingly likely by a rise in the price of Brazilian export supplies, by $70 a tonne quarter on quarter, and an increase in freight rates on the Brazil-China route of 20%.
While it was "likely" that sugar prices "will need to trade above 17 cents a pound" in the first quarter of next year to curtail imports to China, "on the flip side, in the second half of 2014, this [price] level will act as a cap on the market", Mr Deane said.
"If [world] prices persist above 17 cents a pound in the second half of 2014, a lack of discretionary sales to China will occur.
"This leaves prices particularly vulnerable in the second half of 2014," and they may need to fall below 16 cents a pound "to help entice Chinese buyers to absorb Brazil's exportable surplus".
Raw sugar futures actually rose in early deals in New York, adding 0.4% to 16.87 cents a pound as of 06:00 local time (11:00 UK time) for March delivery.
However, this follows a 10-session losing spree which has taken the contract to a nine-week low.
"The current focus on strong Indian and Thai production prospects continues to provide significant headwinds for the global sugar market," Luke Mathews at Commonwealth bank of Australia said.