BMI View: We expect Thailand to slowly grow its market share in the international sugar sector, as exports will continue to be propelled by the country's strong competitiveness, its proximity to key importers and the integration of the Association of Southeast Asian Nations region. However, Thailand needs to step up the efficiency of its supply chain and improve the quality of its cane and sugar if it is to maintain its status as a sugar export spearhead.
The announcement made by Japanese firms Sumitomo and Nissin Sugar in September 2013 that they will invest US$8.2mn in Thai sugar producer Kaset Thai International Sugar is the latest confirmation of our view that Thailand is on track to continue its impressive ascent in the global sugar market. The country is now firmly established as one of the most stable and price-competitive sugar exporters; its exports have more than doubled over the past decade, enabling Thailand to overtake Australia in 2007 as the second largest exporter in the Asia Pacific region. Thailand now accounts for 14% of global exports, compared with 10% a decade earlier. We forecast sugar output in the country to grow by 9.1% on the 2011/12 level out to 2016/17, which will help the production surplus swell to 8mn tonnes and will certainly continue to boost exports.
|Further Growth In Sight|
|Select Countries - Sugar Exports (% of total volume)|
Thailand benefits from good price competitiveness thanks to cheap labour and relatively abundant land resources, acquired through deforestation. The country has managed to greatly improve sugar yields, which are currently not too far below Australia's, the most efficient sugar exporter in terms of sugar income returns and yields. Moreover, although overall output costs have been increasing lately, pushed up by rising wages (the government introduced in 2013 a minimum wage policy across all industries of THB300/day, see chart below) and land prices, Thailand continues to enjoy some of the lowest production costs in the world, along with its traditional competitors Brazil and Australia. According to various estimates, including from the Thai Office of Cane and Sugar Board and the University Of São Paulo, Thai sugar mill production costs hover around USc18/lb, the same as in Australia and to USc17-19/lb in Brazil, and compared with more than USc20/lb in India and Europe. Most importantly, Brazil's competitiveness has been eroded in recent years (production costs were at a low USc14/lb in 2010), and its cost advantage over Thailand and Australia has shrunk, levelling the export market.
|Thailand Well Placed|
|Select Countries - Sugar Cane Yields, tonnes/ha (LHC) & Sugar Yields, tonnes of sugar/tonne of cane (RHC)|
The sector is also being supported by strong international demand for sugar and Thailand's proximity to high import growth markets in Asia, notably China and Indonesia. The gradual integration of Association of Southeast Asian Nations (ASEAN) countries, through the implementation of the ASEAN Economic Community (AEC), will open up further markets such as the Philippines and Indonesia, which are usually heavily protected from cheaper Thai sugar by high tariffs and tight import regulations.
From a regional perspective, Thailand's north east (including Khon Kaen, Roi Et and Loei provinces) and central (provinces around Bangkok) regions are the outperformers in terms of volume output and production efficiency. At the farm level, research conducted by Khon Kaen University concluded that the north-east region enjoys the fewest logistical hurdles, such as queuing times at mills, thanks to better transport and sugar-handling infrastructure as well as good transportation planning. Meanwhile, the east, which comprises Chonburi province, has the highest production costs (owing to long distances, high land costs) and one of the least efficient sugar supply chains. In fact, production in the north-east provinces has been rising over the past decade, while sugar farms and mills are slowly pulling out of the east.
|Strong Impact Of Minimum Wage Law|
|Thailand - Average Wage By Industry, % chg y-o-y|
Thailand will need to remain highly competitive and therefore address the weaknesses of its sugar sector if it is to remain in the race to supply Asia and the Middle East's soaring demand. Indeed, the industry is facing challenges that could limit growth in the coming years. First, the government has maintained a tight grip on the sector since 1984,via the state-controlled OCSB, which regulates domestic and export marketing, domestic sugar prices, and the distribution of revenue between sugar cane growers and millers. The government aims to keep sugar cane farms in business, and ensures an elevated and stable cane price. This system is advantageous in that it ensures a steady flow of cane, even in times of low international prices; however, it shrinks the margins of mills when global prices are low. We see downside risks to sugar production growth coming from a potential change to the system - which is not likely in the next years - as a drop in support could disincentive farmers to plant sugar, further tightening the already low availability of cane. The question of cane availability will only grow more acute in coming years following the ongoing steep increase in production capacity. Indeed, a flurry of investment in the downstream sector is expected to bring the country's crushing capacity from 800,000 metric tonnes of cane per day in 2011 to 1.2mn tonnes in 2017 (the country produces around 100mn tonnes of cane a year).
Volatility in area harvested and yields also poses a downside risk to Thailand's bright sugar output growth rates. The sector remains vulnerable to weather - specifically to levels of rainfall - as more than 85% of the country's cane is rain-fed. The quality of the cane also leaves a lot to be desired, as harvest mechanisation is low, and the majority of the fields are still burned in order to facilitate harvest. This practice, which is still prevalent in Brazil but has been dropped in Australia, reduces cane quality.
|Country||LPI Rank||LPI Score||Sub-Indicator Scores|
|Customs||Infrastructure||International shipments||Logistics competence||Tracking and tracing||Timeliness|
|Note: Score is out of 5, 5 being best, 1 worst. Source: World Bank|
Finally, improving supply chain efficiency will be critical for Thailand to maintain its profile as a low-cost exporter. Although Thailand enjoys slightly better infrastructure than Brazil overall, especially in the key sugar-producing regions, the country still must significantly step up its custom clearance efficiency (speed, simplicity and predictability of formalities) and the quality of its logistics service providers (transport operators, brokers), according to the World Bank's Logistics Performance Index ( see table).