The market is getting interesting: not only we see the higher correlation between the daily movement of ZCE sugar and Shanghai Stock Index; also there were some ridiculous mispricing due to the heat and fear of the market, if you still remember what happened last Thursday night when ZCE touched its second consecutive down limit of 7% in the opening of the market. It was mainly due to the lack of liquidity in the opening of evening market and the sharp fall of price triggered massive stop-loss order set by the brokerage company.

A few things we should be excited about: 1. A huge misprice (ZCE1509 @4860 while cash market @5200) 2. Slower correction, both of which indicated ZCE a less efficient market (more trading opportunities and bigger edge on your side).

So cheer up and bon appétit!

Cash market:

Mills:

The cash market for the past two weeks was weaker than expected: Nanhua group lowered its sales price by 150RMB in two consecutive days to boost sales but the trade volume was rather disappointing. Some argued Nanhua group was not representative as they are financially struggling (mainly caused their real estate project in Nanning and their aggressive acquisition – they are in talk with Yongkai Group about their mills in Dongjiang; also, they are negotiating with the bank about the mills owned by Fenghao Group).

Other mills are not in good shapes as well due to their poor risk management and investment in other areas: real estate and stock market. Still, I don’t see a sudden drop of cash market given their aims of averaging a higher sales price and prosperous perspective for the coming season.

End users:

White import could be higher than we expect. Under the AIL scheme, end users with production permit can apply out-of-quota import license subject to further approval on quantities. We hear many factories (mainly food and beverage producers) are actively importing white to fulfill some of their sugar uses. Each transaction is small (MY estimate: maximum is about 2,000 tones per month with about 20-40 qualified companies participating) but we should not ignore the snowball effect.

Through our talks with some end users, they indicate they have to rush to buy at this stage and are waiting for a “better price” (at somewhere 4800?)

Sales and Stock level Analysis

Our estimate for July sales could be disappointing again given low trading volume in the cash market. The official figure for Guangxi’s June sales is at 310K tones; I expect July sales to be with in the range of 350-450.

 Industrial Stock level in Guangxi is one of the few bullish factors in the market. By end of June, we see only 2 mil of stocks sitting in the warehouse of Guangxi Mills in comparing with 3.45 mil the year before.

All in all, we are still bullish in the long term. See my adjusted balance sheet.

Assumptions:

AIL continue to apply with additional 400K quota to be assigned to please all parties

Possible reserve sales of 1 mil;

Consumption growth rate at 3%;

In short-term, the sentiment is lost and it requires more patience in such market. Still, we are paying close attention to a. the AIL allocation meeting rumored to be held in Sep. b. any weather risks that could further lower our consumption c. the advised sugarcane purchase price set before the beginning of new season (it could largely affect the cost of production and later acreage reduction) d. import figures for Q3 and Q4 (as per discussed with you over the wechat).