China corn drive to cut imports of ethanol – but not of sugar

China’s drive to boost domestic corn consumption, and slash its huge inventories of the grain, looks a threat to a boom in imports of ethanol, but not to elevated sugar purchases, Green Pool Commodities said.

Tom McNeill, director at the Australia-based sugar and biofuels consultancy, said that China’s ethanol imports – forecast soaring 17-fold to 441m litres in 2015 – should “fall quite sharply” next year as a shift by Beijing towards encouraging production from corn begins to bear fruit.

China’s ethanol output, stagnant at 8.86bn litres this year, will rise by 3.6% to 9.18bn litres in 2016 as the country implements measures to boosts ethanol output, in a drive to stem oil imports and encourage consumption of its huge corn stockpile.

The US Department of Agriculture last week hiked by 23.8m tonnes to 114.4m tonnes – equivalent to more than half the world total – its forecast for Chinese corn stocks at the close of 2015-16.

“There has been significant improvement in capacity utilisation in corn ethanol,” Mr McNeill told the International Sugar Organization seminar in London.

In Jilin province, margins for ethanol producers had “improved substantially” thanks to an increase to 350 renminbi per tonne, from 200 renminbi per tonne, in subsidies, with lower costs of corn too, depressed by curtailed farm subsidies, also boosting profitability.

Import prospects

“We expect cheap corn, cheap corn ethanol to reduce ethanol imports,” Mr McNeill said, estimating buy-ins in 2016 at 150m litres, a drop of two-thirds year on year.

However, sugar imports will see only a modest decline, despite the growing competitiveness of corn-based sweeteners too, thanks to the weaker corn price.

Output of high fructose corn syrup (HFCS), the main corn-based sweetener, is expected to rise by some 200,000 tonnes to 2.5m tonnes this year.

And it is considerably cheaper, with sugar costing some 2.1 times as much, well above the 1.4 times typically considered the neutral level on sweetener substitution.

Mr McNeill said that bottlers, major consumers of HFCS, were upping use of corn-based sweeteners a little.

But with usage “already quite high”, Green Pool had trimmed by a modest 200,000 tonnes its forecast for Chinese sugar consumption.

‘Simply walking away’

Indeed, Chinese sugar demand, seen rising by 1.6% to 15.4m tonnes this year, will far outpace domestic production, which is being sapped by weak returns for growers, in particular of cane farmers.

“Farmers are simply walking away from sugar cane as a crop,” Mr McNeill said, with cane prices down more than 20% from peaks around five years ago, and better returns available from other crops.

Even so, costs of producing sugar in China, “in the low to mid 30s” cents per pound, were well above those in other countries – further enhancing the appeal of imports.

China’s rise to the world’s biggest sugar importer has been fuelled by the relatively high price of domestic supplies compared with international values – a gap that has reached as high as $600 a tonne, offering profits even for buyers of out-of-quota sugar.

Australian and Thai producers manufacture sugar for half that cost, with Brazil’s figure estimated by Green Pool at about 12 cents a pound.

“Given the outlook for cane production, I suspect that [sugar] imports will continue to increase over time,” Mr McNeill said.

Green Pool forecast imports in 2015-16 at 5.33m tonnes, a drop of 8.6% year on year, but a decline reflecting largely a one-off, knock-on effect from bumper buy-ins in the July-to-September period, the last quarter of 2014-15.


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