Big Sugar Order Gives Prices a Jolt

By Carolyn Cui And Julie Wernau 

One company's purchase of an unusually large amount of sugar is sending the market scrambling.

Wilmar International Ltd. bought 1.9 million tons of sugar on the ICE Futures U.S. Exchange and called on sellers to ship the order--the largest exchange delivery on record--as soon as possible. In response, prices soared in the normally sleepy sugar market.

In New York on Friday, raw-sugar futures for July delivery jumped 3.6% to 13.42 cents a pound on Friday, the largest one-day move since Jan. 6.

More than a dozen ships are now lined up at Brazilian ports to transport the sugar to Asia.

Wilmar placed the $547 million order through the exchange last Friday, but its effect on the market hadn't been seen until this week. It is unclear what motivated the purchase, but brokers surmised Wilmar likely is betting on Asia's growing demand for sugar. The company will be situated to benefit from the difference in prices for sugar between the U.S., where prices are lower, and in Asia, where they are higher.

Wilmar declined to comment.

The company's move to swiftly request delivery of its order has caught many by surprise. Some analysts think it could be the harbinger of stronger-than-expected global sugar demand, said Michael McDougall, head of the Brazil commodities desk at Société Générale in New York.

Trading houses are gearing up to fill the order. Sucden Financial Ltd., which is on the hook to deliver about a half million tons of sugar to Wilmar, said it had ample supplies to meet Wilmar's delivery demands. Other firms that owe Wilmar sugar including Noble Group, Louis Dreyfus Group and ED&F Man Holdings Ltd.

Noble and Louis Dreyfus declined to comment. ED&F Man didn't respond to requests.

Wilmar's ability to set off a sugar scramble underscores the delicate balances between supply and demand for commodities even at a time when the world is swimming with the sweetener. U.S. government figures estimate global sugar production is expected to surpass consumption by 1.5 million tons this year. Commodities are susceptible to temporary and regional shortages due to various factors, as they are mined and harvested in places around the world and go on a journey to get to consumers.

It is unusual for traders to take physical delivery through commodity exchanges because of anonymity concerns, the relatively complicated procedures and uncertainty of shipments, especially when sugar is readily available by other means. Companies can place orders through trading houses directly, as opposed to exchanges, without showing their cards.

The Wilmar delivery order came at a time when raw sugar supplies are getting tight in certain regions in Brazil, the world's largest sugar-producing nation. Sugar mills have already drawn down inventories to take advantage of a weaker Brazilian currency, new crop is still being harvested and producers are likely to devote much of the harvest to ethanol in light of rising oil prices and government incentives.

In a presentation to its shareholders in late April, Jean-Luc Bohbot, Wilmar's head of sugar, showed a world map with imbalanced sugar supplies. South America had a glut of sugar, with a surplus of 23 million tons between production and consumption, while parts of Asia saw a shortfall of as much as 13 million tons.

The scramble is focused in Brazil's Santos and Paranaguá regions, from where the majority of the sugar must depart, according to records filed with ICE. Timing can be tricky because as a new crop is being harvested, existing sugar supplies already are going to ethanol. Rain also could delay the harvest. Shipping records show that Wilmar booked at least one third of the 1.6 million tons of sugar waiting to leave Brazil.

According to exchange rules, Wilmar has until mid-July to call ships to ports for loading, but the company began ordering vessels immediately for loading. It is unclear why it is in such a rush for delivery.

"A lot of people who delivered were betting that the delivery would take some time," said Bruno Lima, head of sugar at INTL FCStone in Brazil.

In Santos, where a large amount of Wilmar sugar will depart, sugar prices have jumped over the futures prices in New York. At the same time last year, the Santos price traded below that in New York, as the Brazilian crop began to enter the market and weighted on local prices, brokers say.

The vessels were nominated in Brazil to ship sugar directly to Asia. But traders expect that sweetener eventually will find its way to China, as the country's sugar production this year is expected to fall to a multiyear low. China, the world's second largest sugar consumer after India, is expected to import more sugar as domestic usage continues to grow.

Biman Mukherji and Huileng Tan contributed to this article.

Write to Carolyn Cui at [e-mail]

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