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THAILAND: Nation grieves for King Bhumibol, but limited impact expected for sugar system reform

Market Summary

October 24, 2016 - Headlines for Thailand have been dominated over the past week by the death of King Bhumibol Adulyadej after 70 years on the throne. There is no indication of an impact on sugar, trade business or the currency, which had already eased a bit against the dollar due to the king’s illness.

The topic of sugar quota abolition has already been on the agenda for a while, together with the discontinuation of the fixed price system for domestic sales.

The death of the king is unlikely to change much in the global picture, as the government was already supposed to have its view on these topics. Still, the government could delay the scrapping of quotas in order to ensure smooth succession subsidies.

On the physical spot market, since early this year Thai HiPol FOB prices have been significantly higher than Brazilian VHPs (the premium hitting over 250 points in April and August), underpinned by solid and consistent regional demand -- mainly from Indonesia.

Analysis continues below...

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Since the end of September, however, HiPol's premium to VHPs has been shrinking. The main factor explaining the narrowing arbitrage could be that with higher New York futures, Thai raws' duty advantage into Indonesia evaporates (unlike Australia and Brazil which pay a fixed duty, the duty on Thai raws is 5% of the New York price).

If New York prices continue going up, then the duty advantage will disappear completely. Another factor could be that Indonesia is turning to other origins, mainly to Brazil as well as Australia, because of Hi Pol prices remaining so high for so long. In fact demand from Indonesia is already being filled by Brazil.

Finally, the carryover of over 500,000 mt from the last crop, still unsold and the quality of which might now be an issue, could be weighing on Thai raws cash values.

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