Fire At Copersucar Terminal Turns Sugar Market Upside Down

Archer Consulting opens its commentary this week sympathizing with Copersucar. The news of the fire that broke out in their Santos warehouse earlier this past Friday Oct 18th left all of us in the sector saddened. We are sure that Copersucar, which has always done business in a serious and transparent manner, will be able to overcome this situation, a sad page in their history book of success. Our wishes of a positive outcome go out to them.

The fire at the Copersucar terminal at the Santos port on Friday turned the market upside down. What we had occurring was that Nassim Taleb, the trader, professor and writer, calls a “Black Swan” in his book which bears the same name. It is an unforeseen event that causes an enormous impact. It is named this way since up to the beginning of the XVIII century; it was believed that only white swans existed, up until someone in Tasmania discovered a black one. This bird is now a synonym of improbable events.

The fire caused the covering of good portion of the selling hedges against Mar/14 at the NY sugar exchange and made the market explode, reaching 20.16 cents per pound, the highest traded price in the first expiration month since December 22nd last year. The total volume traded this Friday was close to 400.000 lots, the second highest in history, losing only to the volume seen on Jan 18th 2008, when 410.033 lots changed hands. Although we should note that the open interest at that time was 1.113.000 lots.

The NY sugar market ended up closing the week with Mar/14 trading at 19.50 cents per pound, a substantial high of 57 points or 12.50 dollars per ton. The remaining months along the price curve to Oct/16 closed higher between 22 and 42 points (approximately 5 to 10 dollars per ton).

Panic moments, lack of information about the extent of the losses and rumors flying around culminated with “get me out of this position” in the worst way. This distorts the price quotes and will do so until the dust settles and people begin to assess the fact of how a physical market will deal with the fact of not having a terminal, which at times moves 530 thousand tons per month, in the most important sugar port in the country. Imagine the effect of this on future deliveries.

Although is rumored that 300.000 tons may have been affected (there is no confirmation of this volume at the time of writing of this report) what should affect the market is the premium. Up to last week the importers were a bit reluctant to put an offer out to buy sugar in the Center South. The buying ideas pointed to 70 to 90 discount points, typical of people who do not want nor need to buy sugar, but if it is there available, why not? Now things will change for sure. Whoever was in the comfort zone, sure that there would be sugar in volume and without any interrupted flow, will have to leave it and reassess.

The trading manuals recommend that in situations such as this, one should buy the spread to anticipate shipment, buying before so as to avoid the port congestion resulting, rolling the selling hedges from the nearby to the farther away months. The result of these actions is a firmer market and most importantly a much greater appreciation of the premium in the physical market. Whoever needs sugar now will have to pay for it.

We should then see an enormous activity with the spreads and depending on the behavior of the sugar premiums in the physical market, the migration of sugars that would go to the internal market to the export market will occur. In other words, we will experience a new market. If the receiving trading party of the immense October delivery (of which Copersucar is on the delivery side) anticipates the vessels nomination it is clear that there will be an appreciation of the physical market premiums.

According to the specialists, a terminal such as this one damaged by the fire, cannot be rebuilt in less than 8 to 12 months. We cannot comment on this and this may just be the result of the collective fear that was installed after the event. However, there will indeed be a significant change in the price formation of export premiums.
When it was on its way to a free fall last year, trading at 20 cents per pound, the NY sugar futures contract took 18 trading days to breach the 19 cents level. After that, it took another 7 days only to break 18 cents per pound. Then we had a long period of 179 days until it broke the 17 cents. After that, in free fall, it took 63 more days to print 16 cents and finally an additional 43 days to hit 15 cents per pound (in reality 15.93 cents). In other words, in its descent to Hades, the market went through 310 sessions, more than a year and two months to go from 20 to 15 cents per pound. Now we have seen it take only 68 sessions to move from 15.93 cents (on July 16th) to the 20.16 level reached Friday. Bears beware.

This coming week will be noted by the 7th edition of the Brazil Sugar Dinner, with the gala dinner occurring on Wednesday in Sao Paulo, when almost 800 people from various part of the world will come together. Cheers! We still have a month until the I Course on Logistics in Commodities takes place in Sao Paulo and it is already almost fully booked with only 4 openings remaining. If you are thinking of participating, register now!

Have a good week everyone and enjoy the Sugar week in Sao Paulo.

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