Wilmar: on top of the world sugar mountain
A new power in sugar trading is buying unprecedented amounts of the sweetener on the US futures exchange, creating confusion in one of the world’s most volatile commodity markets.
The power is Wilmar International, a Singapore-based agribusiness whose major shareholders include the family of Malaysian billionaire Robert Kuok and Chicagobased Archer Daniels Midland. Wilmar, founded 26 years ago, is one of the world’s largest palm-oil producers but a relative newcomer in the sugar business.
Wilmar last week agreed to buy $US512 million ($673m) in raw sugar at the expiration of a popular futures contract on the ICE Futures US 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 tonnes of sugar in this manner since 2015, at a cost of $US2.3 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 worldwide 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 last September, Wilmar changed course and delivered excess sugar it owned to other traders on the exchange. Sugar prices fell 24 per cent 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 tonnes of sugar, representing about 8 per cent of the world’s production. Some analysts say Wilmar is 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 tradeable sugar and influence prices.
“They are a market mover,” Nick Gentile, head trader of New York commodities trading firm Nickjen Capital, said of Wilmar.
Jean-Luc Bohbot, the 48year-old Frenchman who runs Wilmar’s sugar business, said there was no evidence the company’s trades affected market prices. That is “very much an incorrect view”, he said recently. “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 said.
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. because of 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
Sugar is an extremely fragmented commodity, with a very large number of players around the globe
Mr Bohbot said the company has found it economical to buy 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.
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 .
In 2016, Wilmar’s sugar division posted a 33 per cent yearover-year increase in revenue to $US5.9bn, “an outstanding set of results”, according to the company, partly because of higher sugar prices. It earned $US125m from sugar last year, a profit margin of 2.1 per cent.
Wilmar entered the market through a $US1.5bn takeover of Australia’s largest sugar producer. It 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's global head of sugar Jean Luc Bohbot shaking hands with Burdekin cane grower Laurence Pavone after signing the agreement for 2017.