Market situation in Kazakhstan
With the end of the 10-year privilege on the import of raw sugar and the introduction of duty on raw sugar Kazakhstan withdrew from the import of Brazilian cane and Ukrainian beet sugar but switched to Russian and Belarusian sugar. For example, the import duty on raw sugar as of January of this year was US$ 240 per tonne (an average monthly price of $ 312.32 per tonne on the New York Mercantile Exchange).
Kazakhstan’s sugar consumption in 2019 (annual consumption is more than 400 thousand tons) was 45% domestic production, the rest was covered by imports. Domestic sugar was produced mostly from raw cane sugar imported from Brazil and to a lesser extent from domestic sugar beet.
In January – May 2020 Brazil did not supply a single kilogram of sugar to the republic, whereas in the first five months previous year Kazakhstan imported 56.9 thousand tons from that country for 18.7 million US dollars. A similar picture was observed for other major suppliers outside the Eurasian Economic Union (EAEU).
Sugar imports from the Eurasian Economic Union countries in January-May amounted to 206.7 thousand tons. This amounted to 70.5 million US dollars. Kazakhstan increased sugar imports by 2.7 times in quantitative terms and by 1.8 times in value terms by the year. In particular, 50.1 thousand tons were imported from Belarus for 14.4 million US dollars – an increase of 3.4 and 2.1 times over the same period last year, respectively. Russia imported 156 thousand tons of sugar for 55.9 million US dollars. The year’s growth was 2.6 and 1.8 times, respectively. The supply growth was accompanied by a simultaneous decrease in the cost of sugar: to 29 cents per kilogram of Belarusian sugar in 2020 from 45 cents in 2019 and to 35.8 cents per kilogram of Russian sugar from 51 cents in 2019.
Lower prices for imported sugar helped lower the cost of sugar in Kazakhstan. According to the Statistics Committee of the Ministry of National Economy, average sugar prices in June amounted to 208 tenge per kilogram, compared to 240 tenge in previous year.
In Kazakhstan, in January-June sugar production fell to 52,324 tons, or 56.3 percentage points. This year, according to the plans of the Ministry of Agriculture, the planting area under sugar beet was planned to increase to 22,000 hectares. This year, as against 19,600 hectares in 2019.
Theoretically, 4 million tons of local beet sugar is needed to fully supply the domestic market alone in order to produce 450-500 tons of beet sugar.
Despite the lack of sufficient raw materials in Kazakhstan сosts for the development of documentation, equipment, construction work and other investments are estimated at $ 180 million. The planned processing capacity will amount to 8 thousand tons of production per day. At the same time, the gross harvest of sugar beet in 2019 was 485.5 thousand tons for the whole republic, 178.8 tons in Pavlodar region, which is only 3.7% of the gross harvest in the country.
At the beginning of the year, only three out of seven existing sugar factories were in operation in the republic. Their total production capacity is 12.6 thousand tons of sugar beet per day. Thus, they can process 4 million tons of beets in 317 days, but the problem is that beets cannot be stored for such a long time. There is therefore a need to increase production capacity and raw materials, not to build new sugar factories.
Russia
The high harvest of beet led to a drop in sugar prices and made it a popular commodity abroad. Exports this season has more than quadrupled, making Russia one of the world’s top ten sugar suppliers.
In the current 2019/20 season, Russia will become the seventh largest sugar exporter worldwide. Between October 2019 and the end of September 2020, Russia will supply almost 1.8 million tons of sugar abroad. The main buyers are Kazakhstan, Tajikistan, Azerbaijan, Turkey, Uzbekistan, Belarus.
In 2020, sugar beet production in Russia decreased by 18%, due to a decline in profitability of its production last year due to low domestic prices for sugar.
According to the Ministry of Agriculture, 1 kg of sugar from domestic producers cost 26.59 rubles in mid-July 2020. In the 2019/20 season, sugar prices in Russia were the lowest in the world, according to Soyuzrossahar. At some point, the price of Russian sugar fell below the world price.
Since mid-July, the sugar prices of Russian producers have increased significantly, due to information on delays in the beginning of sugar beet harvest in the regions due to the lagging development of tubers.
In the next agricultural year 2020-2021 (for sugar from August 1 to July 31) Russia may reduce sugar exports by three times after record deliveries in the final season: overproduction lowered prices, sown area of sugar beet has decreased, there may also be some reduction in yield.
According to the data of the Monitoring and Forecasting System of Production Safety of the Ministry of Agriculture of Russia on August 5, 2020 the prices of white beet sugar amounted to 27.94 rub. /kg (+1.1% per week).
Since the beginning of the year (by December 2019), consumer prices for sugar have increased by 20.1 per cent, and for the year (by July 2019) by 7.0 per cent.
In general, sugar production cycles in Kazakhstan and Russia differ significantly. The clear seasonality of production in Russia indicates the use of own raw materials (sugar beet) between August and January (figure 1). Production volumes are sufficient for annual consumption and external sales.
Figure 1. Production and prices for sugar, gross yield of sugar beet in Russia
Source: Federal State Statistics Service of the Russian Federation
In Kazakhstan, production (until 2020) was carried out year-round, with no particular seasonality observed, as in Russia (figure 2). This is mainly due to the dependence of imported raw materials due to insufficient domestic raw materials. Thus, the gross sugar beet harvest in 2019 in Kazakhstan was 0.56 million tons and in Russia 54.4 million tons. Lack of raw materials and low level of production leads to the lack of self-sufficiency and the dependence of sugar prices on the main importer, Russia. Thus, since the beginning of 2013, the correlation of prices in Kazakhstan with prices in Russia has been 96.1%.
Figure 1. Production and prices for sugar, gross harvest of sugar beet in Kazakhstan
Source: Committee of Statistics of the Ministry of National Economy of the Republic of Kazakhstan
World sugar market
As of August 7 of this year, white sugar is trading at USD 372.25 / t on the world’s major exchange markets, up 5.8% from the previous month.
Further price regulation will depend on the recovery of the economies of the countries after the coronavirus pandemic, due to which there has been a sharp decline in sugar consumption worldwide. For example, in China (in the 2018/19 season, China accounted for 9.1% of world consumption), according to forecasts, sugar consumption in the 2019/20 season will decrease to 14.8 million tons, or 6.3% compared with last season.
The second factor influencing prices will be the dynamics of sugar production in the world. In many countries, producers have reduced the area of cane and sugar beet plantations due to low sugar prices, and weather conditions also played a negative role.
Large sugar producers such as India, Thailand, China, the United States and Mexico have already announced significant production cuts. According to Reuters, the 2019/20 season will be the worst season for the Thai sugar industry in 10 years, with drought as the main cause. According to the International Sugar Organization (ISO), sugar production in Mexico this year will be lower than a year earlier. In Russia, we will remind, is expected to reduce crops by 17.5%, to 945 thousand hectares.
Against this background, the world leader in sugar production, Brazil, stands apart, where, due to favorable weather conditions, an unprecedented sugar cane harvest is expected. Due to a decrease in the attractiveness of ethanol production (energy prices have dropped sharply this year), the share of processed raw materials sent to sugar production amounted to 43.8% (28.7% in 2019). The export situation, which is favorable for Brazil, also remains due to the depreciation of the real.
It should be noted that the correlation of world exchange prices for sugar with prices in Kazakhstan is not significant and amounts to 51.3% (Figure 3). In this regard, global trends in price changes in the world will not significantly and directly affect prices in the country. Prices in Russia will remain the main reference point for price changes in Kazakhstan. At the same time, global trends may affect the sugar market in Russia.
Figure 3. Comparison of exchange prices for sugar with prices in the Republic of Kazakhstan and the Russian Federation, tg/kg
Source: Committee of Statistics of the Ministry of National Economy of the Republic of Kazakhstan, Federal State Statistics Service of the Russian Federation, Sugar Futures London – (LSU) (https://ru.investing.com/commodities/london-sugar)
Conclusions:
- A decrease in sugar production in Kazakhstan is expected due to an increase in raw material costs by at least 5% and a gradual depreciation of the tenge against the US dollar. This will lead to a complication of the financial condition of the existing sugar factories and an increase in dependence on imported sugar;
- The decrease in the price of sugar compared to the prices of 2019 is due to the high supply for sugar in the world, including the record sugar beet harvest and sugar production in Russia;
- There is a high dependence of the price of sugar in Kazakhstan on the price in Russia;
- A significant decrease in sugar production is expected this year, including the collection of raw materials (cane, sugar beet). At the same time, the value of forward contracts is growing. At the same time, against the backdrop of the pandemic, sugar consumption is also expected to be estimated at 3%;
- Based on the above, sugar prices in Kazakhstan are expected to rise over the next 12 months.
Appendix
Sugar imports to Kazakhstan by country
