Almost all resources are lost. Sugar is the hope of the markets?

Since the outbreak of the epidemic coronavirus they lose almost all resources. Apart from sugar. Where does this sweet strength come from? Demand exceeds supply, the background is fighting the global warming and global slowdown. What can investors really expect?

- The fear of the coronavirus is much more evident in the commodity markets than in the case of the stock market. The quarantine and restrictions in transport translate into a temporary reduction in China's demand for fuels by more than 15 percent. The Middle Kingdom is not only responsible for most of the growth in world oil demand, but is also a major consumer of industrial metals. In this light, it is not surprising that the paralysis of the largest emerging economy will translate into an increase in the availability of both categories of raw materials, and in the case of oil, it carries the risk of deepening its oversupply. As a result, the price of crude oil fell by over 15 percent this year, and copper by over 5 percent. All optimism about the signing of a trade agreement with the US was wiped out of the valuation - says the head of the Analyzes Department TMS Brokers Bartosz Sawicki.

TMS Brokers analysts predicted these trends at the end of 2019 in their report "7 investment forecasts for 2020". They wrote in it, among others, that gold has a very good chance of a rise in the long run (especially since it went up by 18,5% in 2019) and that investors still underestimate palladium, although in 2019 it grew over 58 percent

Investment opportunities

Quotations depend on supply and demand, policies and the scale of the expected global economic slowdown. Due to the risk aversion caused by the epidemic - investors closely follow the market of raw materials and agricultural commodities, because some of them give earnings to experienced players who still find this group of assets undervalued.

Much depends on the foundations and policy. The product that came under pressure is coffee. - Prices in New York began to fall sharply (erasing a strong rise from the end of 2019) earlier, but the prospect of a decline in consumption in China undoubtedly contributed to a temporary drop in the New York stock exchange below 100 cents per pound - analyst Bartosz Sawicki notes.

However, the expert points out that in the recently depleting world of raw materials there is one raisin, which the coronavirus is not afraid of, and which has risen almost 10% since the beginning of the year.

- Sugar impresses with its strength compared to other products. It is worth mentioning that this is a trend that started to crystallize back in 2020, and for several months the sugar price on the New York commodity exchange has been subject to a mild upward trend. The market for this commodity is tightening, it even goes into deficit. It will make it possible to reduce the stocks accumulated after several years of harvest - Sawicki explains.

Sugar and its sweet strength

Buyers' strength comes from, among other things, problems with the supply of sugar in some key sugar cane and sugar beet growing regions - mainly in India, Thailand and the European Union. Demand for sugar exceeds supply. Especially when it comes to ethanol produced from sugar, which also remains high, which further supports the demand side. 

- From the fundamental point of view, it should be emphasized that the global harvesting seasons 2019/20 and 2020/21 will be characterized by crops lower than the consumption of the raw material. In the first case, it should amount to about 6 million tons. It is worth mentioning that initially a minimal surplus was assumed. In the second, according to the first estimates of the International Sugar Organization, the deficit will exceed 3,5 million tonnes. As a result, the massive increase in global stocks after the 2017/18 and 2018/19 harvest will be completely nullified. Balancing the market will support the return of raw material prices to levels in line with historical averages - is evaluated by analyst Bartosz Sawicki.

High wrestling is an element that prevented the stocks from firing stronger. Along with their reduction, the upside potential of this market should be revealed. There is also a greater likelihood of an increase in trading volatility. In the current location, stocks in India, globally the most important raw material consumer, are particularly important. Despite the lower production caused by excessive rainfall, floods and flooding at the end of the monsoon season, they are estimated at over 50 percent. annual sugar consumption in this country. This is a major factor that may limit exchange rate increases.

However, three other trends should also be noted.

- Firstly, high wheat prices compared to sugar will increase the acreage of European grain crops relative to sugar beet. Secondly, the relationship between fuel and sugar prices in the world markets will favor such a structure of sugar cane processing in Brazil (sugar vs. ethanol) that will result in faster than currently valued absorption of global inventories. Third, an important factor that has acted as a handbrake in price increases in recent months is the lowest-ever level of the Brazilian real. - enumerates Sawicki and explains that "The valuation of the currency of the world's largest producer of goods in some periods has a dominant impact on global prices of raw materials. In 2020, the BRL / USD exchange rate should not, in the light of market consensus, continue the increases, and in our opinion there is room for strong recovery that would support sugar prices. "

Source: Press material, Brokerage House TMS Brokers