Despite lower tariffs in China, Brazilian sugar may not get expected boost

. May 28, 2019
brazilian sugar imports

After two years, China has decided not to renew extra tariffs on Brazilian sugar past May 2020—when the current trade policy expires. However, while the move is certainly positive for Brazil—being celebrated as a win by both the Brazilian government and sugar producers—it doesn’t mean overall exports of the product to China will increase.

Allow us to explain.

</span></p> <p><span style="font-weight: 400;">Back in 2017, Beijing </span><a href=""><span style="font-weight: 400;">increased import tariffs</span></a><span style="font-weight: 400;"> on sugar from Brazil, Australia, Thailand, and South Korea—a move aiming at fostering the local market. The rule slapped a 15-percent fee on volumes of up to 1.9 million tons. Anything above that would be subjected to a 95-percent tariff (from 50 percent previously), set to progressively decrease. Currently, they sit at 85 percent.</span></p> <p><script src="" type="text/javascript" charset="utf-8"></script></p> <p><span style="font-weight: 400;">According to Brazil&#8217;s sugarcane industry association (Unica), the country used to export over 2.5 million tons of sugar to China. However, only 890,000 tons were shipped to the Asian powerhouse over 2018–2019 harvest—triggering Brazil to file a complaint at the World Trade Organization, which has since been dropped. </span></p> <p><span style="font-weight: 400;">On the positive side, knocking down barriers would increase supply and competitiveness in the Chinese market—lowering prices and, therefore, spurring demand. According to a recent </span><a href=""><span style="font-weight: 400;">report</span></a><span style="font-weight: 400;"> by the U.S. Department of Agriculture (USDA), &#8220;[Chinese] sugar imports is unchanged, and stocks are expected to fall for a fifth consecutive year because of the gap between domestic consumption and production.”</span></p> <hr /> <p><img loading="lazy" class="alignnone size-full wp-image-18104" src="" alt="brazil sugar exports" width="1200" height="800" srcset=" 1200w, 300w, 768w, 1024w, 610w" sizes="(max-width: 1200px) 100vw, 1200px" /></p> <hr /> <p><img loading="lazy" class="alignnone size-full wp-image-18103" src="" alt="brazil sugar exports to china" width="1200" height="800" srcset=" 1200w, 300w, 768w, 1024w, 610w" sizes="(max-width: 1200px) 100vw, 1200px" /></p> <hr /> <h2>Fierce competition</h2> <p><span style="font-weight: 400;">But Brazil is by no means the only country that will benefit from lower tariffs. According to Matheus Costa, Market Intelligence analyst at consultancy firm INTL FCStone, two of the world&#8217;s largest sugar producers may make further gains: Thailand and India. Both countries are geographically closer to China and may end the 2019–2020 harvest with higher stocks, helping to support the extra demand. Bangkok and New Delhi are also working to remove obstacles.</span></p> <p><span style="font-weight: 400;">“India is set to see smaller production next year, but it has high sugar stocks, so they may export them. Thailand may also finish the current harvest with higher stocks, which may create room for exports,” he told </span><b>The Brazilian Report</b><span style="font-weight: 400;">.</span></p> <p><span style="font-weight: 400;">According to USDA data, Indian sugar stocks “are down 4 percent but are more than double the minimum stock requirements from around three months&#8217; consumption.” In Thailand, high supplies will allow exports to reach “a record of 11.9 million tons, also lowering stocks.”</span></p> <p><script src="" type="text/javascript" charset="utf-8"></script></p> <p><span style="font-weight: 400;">Mr. Costa also warns about another phenomenon: re-exports. According to him, it is possible that some countries, which were not hit by Chinese tariffs, may have sold their product to China and imported Brazilian sugar for internal consumption, or even just repackaged it. With the normalization of Chinese tariffs, there may be an increase in exports to China, but not a change in overall numbers.</span></p> <p><span style="font-weight: 400;">“There might have been a change in trade flows, but not a reduction of Chinese consumption of Brazilian sugar. As China lifts its barriers, total exported sugar volumes may not be so different,” he explains.  </span></p> <p><span style="font-weight: 400;">He also alerts that it is too soon to predict other additional variables, such as oil prices, that also influence Brazilian mills&#8217; production. Since they are flexible, they may produce more ethanol or sugar depending on the demand; if oil prices rise, creating more demand for cheaper ethanol, producers have fewer incentives to produce more sugar. </span></p> <p><span style="font-weight: 400;">Currently, INTL FCStone estimates 37.1 percent of 2019–2020 of Brazilian Center-South sugarcane production will be turned into sugar—the lowest level since the 1997–1998 season. The production is estimated at 27.8 million tonnes.

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Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Before joining The Brazilian Report, she worked as an editor for Trading News, the information division from the TradersClub investor community.

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