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Indian demand fears fuelling sugar price rout are 'not very probable'

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Sao Martinho dismissed as "not very probable" an Indian sugar consumption slowdown, and flagged that prices had fallen below costs even for efficient producers, as it expanded on its forecast of a rebound in sugar prices ahead.

The Brazilian cane crusher - questioned on a forecast earlier this week of a recovery in sugar prices from levels which hit a 15-month low in New York's futures market of 12.78 cents a pound on Tuesday – blamed the market weakness largely on reduced expectations for Indian demand.

"What we see now is that, on the demand side… new from India that India would be consuming less sugar," said Felipe Vicchiato, the Sao Martinho finance director.

'Not very probable'

However, he said that while it was "difficult to evaluate" such expectations for India, the world's top sugar consuming country, "it is not very probable for this to be happening.

"The Indian population continues to be very poor and sugar is still the basis for their food and their meals," Mr Vicchiato told investors.

Indeed, the group saw "no rationale whatsoever to believe" in dent to sugar demand in less developed countries, although he acknowledged the some efforts to cut sugar consumption in more developed nations, where the sweetener has become increasingly targeted by health campaigners.

The comments follow a downgrade last month of 750,000 tonnes, to 25.15m tonnes, in the International Sugar Organization's estimate of Indian sugar consumption in 2016-17 – below the 26.0m tonnes used last season.

Last week, Sucden Financial flagged a "slowdown" in Indian demand for sugar in 2016-17, but termed the dynamic "temporary".

Below production cost

Mr Vicchiato also flagged the sustainability of current sugar prices given that they area below output costs.

"My cost to produce sugar at Sao Martinho is something close to 13.5 cents a pound," and the group was a "very efficient" producer.

Current prices "should have an impact of many sugar producing countries in terms of planting sugar beet or sugarcane", dissuading growers from some sowings, and so fuelling the prospect of a "rebound in prices in the 2018-19 year".

Hedging strategy

Sugar should be priced at "at least" 16 cents a pound to account for the drop in inventories sustained during successive seasons of output deficit in 2015-16 and 2016-17, but were being depressed also by large Brazilian exports and the knock-on effects of weak energy prices.

And "in two or three crop years, we believe that it will go back to 20 cents a pound with a certain degree of comfort", given the dent to output prospects from the current market weakness.

Mr Vicchiato said that the group's price forecasts were reflected in its hedging strategy which, while seeing 50% of expected 2017-18 output already priced, was heavily weighted towards fixing values on short-term deliveries.

"May and July, I would say that they are 90% hedged in what has to be hedged.

"And we are on a little bit lighter in terms of hedging years in March 2018 and October [2017], because we believe that the price could return at the end of the crop year."

"There has been no drastic change in supply and demand for the sugar product. So we understand that the sugar should rebound at the end of the crop year."

By Mike Verdin

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