By Carolyn Cui and Serena Ng
A new power in sugar trading is buying unprecedented amounts of
the sweetener on the U.S. futures exchange, creating confusion in
one of the world's most volatile commodity markets.
The power is Wilmar International Ltd., a Singapore-based
agribusiness whose major shareholders include the family of
Malaysian billionaire Robert Kuok and Chicago-based Archer Daniels
Midland Co. Wilmar, founded 26 years ago, is one of the world's
largest palm-oil producers but a relative newcomer in the sugar
business.
Last week, Wilmar agreed to buy $512 million in raw sugar at the
expiration of a popular futures contract on the ICE Futures U.S.
exchange.
Wilmar has been scooping up sugar by physically settling tens of
thousands of futures contracts and collecting the commodity from
ports across South America and elsewhere. The company has bought
more than 6 million tons of sugar in this manner since 2015, enough
to fill roughly 3,000 Olympic-size swimming pools at a cost of some
$2.3 billion.
The effects of Wilmar's moves have been the subject of debate
among traders. At one point in 2015, when sugar prices were at
multiyear lows because of a world-wide glut, Wilmar bought so much
that traders say the company in effect mopped up that year's global
oversupply. In the rally that followed, sugar prices more than
doubled.
Then, as prices peaked in September last year, Wilmar changed
course and delivered excess sugar it owned to other traders on the
exchange. Sugar prices fell 24% in the ensuing months.
"Everybody was looking at them," said Bruno Lima, head of sugar
and ethanol at brokerage INTL FCStone in Brazil. Last week, traders
and analysts ruminated on Wilmar's latest purchase and whether it
was a positive sign for sugar demand. Prices have edged higher
since.
Wilmar, which entered the sugar business in 2010, owns sugar
cane plantations, mills and refineries mostly in Asia. It also
trades sugar, buying raw sugar and selling it to refineries all
over the world. Last year, the company handled 13.5 million tons of
sugar, representing roughly 8% of the world's production. Some
analysts say Wilmar is now possibly the world's biggest sugar
trader.
The company's size and scale, however, are sowing concerns among
some traders that it could control a large amount of the world's
tradable sugar and influence prices.
"They are a market mover," Nick Gentile, head trader of New York
commodities trading firm Nickjen Capital, said of Wilmar. Around
two-thirds of the world's sugar production is consumed in the
countries that produce it, and the rest is traded
internationally.
Jean-Luc Bohbot, the 48-year-old Frenchman who runs Wilmar's
sugar business, said there is no evidence that the company's trades
affect market prices. That is "very much an incorrect view," he
said in a recent interview. "Sugar is an extremely fragmented
commodity, with a very large number of players around the
globe."
While Wilmar's sugar purchases and sales appear in some cases to
have preceded rising and falling prices, Mr. Bohbot said, "There is
no clear correlation" between the two. Over the past few decades,
sugar prices have gone in both directions when there were large
physical deliveries, he added.
Many producers, end-users and speculators use commodity futures
contracts to hedge price risks or make directional bets on prices.
Futures are often used as a guide for pricing in the physical
markets where actual commodities are exchanged.
Physical settlements of futures trades, however, are rare.
Exchange operator Intercontinental Exchange Inc. estimates that
fewer than 0.5% of trades result in the actual delivery of
commodities. The vast majority of futures contracts are unwound by
traders before they expire because most firms want to avoid the
hassle of transporting commodities to or from inconvenient
locations. With sugar futures, buyers don't know where in the world
they will have to pick up the sweetener until after the contracts
expire.
That hasn't deterred Wilmar. Mr. Bohbot said the company has
found it economical to purchase sugar in bulk using futures
contracts, because the exchange's rules require sellers to deliver
the sugar on board buyers' ships, which facilitates international
trading. In other commodity markets, such as grains or metals, the
handover usually happens inside warehouses in locations that often
might not be easily accessible.
Mr. Bohbot said Wilmar ships and sells most of the raw sugar it
buys to refineries in Asia and the Middle East, where consumption
is growing. This sort of trading, however, is often barely
profitable when shipping and other costs are factored in, he said,
noting, "There is very little margin, and sometimes no margin."
In 2016, Wilmar's sugar division posted a 33% year-over-year
increase in revenue to $5.9 billion, "an outstanding set of
results," according to the company, partly because of higher sugar
prices. It earned $125 million from the sugar business last year,
for a profit margin of 2.1%.
Wilmar entered the sugar market through a $1.5 billion takeover
of Australia's largest sugar producer. then hired Mr. Bohbot, who
has a long career in sugar trading, from a rival and tasked him
with expanding the sugar business internationally. Wilmar made many
acquisitions and entered into joint ventures with sugar producers
and refineries in countries including Indonesia, Myanmar, India and
Morocco. Last year the company formed a new venture with a major
Brazilian sugar producer -- a move likely to increase the volume of
sugar it handles.
Frank Jenkins, president of Jenkins Sugar Group, a trading firm
in Connecticut, said Wilmar's large-scale buying of sugar from the
futures market "is a symptom of the growth of their business."
Write to Carolyn Cui at carolyn.cui@wsj.com and Serena Ng at
serena.ng@wsj.com
(END) Dow Jones Newswires
March 07, 2017 05:44 ET (10:44 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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