London’s commodity lawyers have been hit with a sugar rush. While talk among sugar industry executives and traders gathered in São Paulo for the biennial sugar week focused on the massive fire at the Brazilian port of Santos, many of their legal advisers were frantically combing through trading contracts.
The port has the capacity to handle almost a third of the world’s sugar exports, and after suffering the brunt of the damage at its warehouses with 180,000 tonnes of sugar lost, Copersucar, Brazil’s largest sugar trader, wasted no time firing off force majeure notices. In theory, these letters should allow Copersucar legally to walk away from deals to deliver sugar.
But no one is sure.
The letters have triggered a chain reaction further down the supply chain with customers who received a notice in turn sending force majeure letters to their own counterparties, most of whom are balking at the move. They argue a force majeure only applies if the contract specified the sugar to be loaded at the Copersucar terminal that was damaged.
The situation is threatening to turn into a legal quagmire, and with the contracts written under English law, commodity lawyers in London are being kept busy. “At the moment notices are going up and down the chain,” says one London-based legal adviser.
Traders say the result of the legal wrangle will act as a “test case” for the use of force majeure and are keenly waiting to see what the lawyers turn up with.
For the market, the fire has led “backwardation” in benchmark prices – where the commodity for near-term delivery is more costly than those for future deliveries – as dealers are forced to scramble for the sweetener.
However, beyond the near-term effects, many analysts regard the fire as a non-event, especially with the harvest season in Brazil nearly over.
“The market has lost 180,000 tonnes of sugar, which is sizeable but in world statistics it is not significant,” says Robin Shaw, analyst at brokers Marex Spectron.
That could change if, as seems likely, the terminal is not repaired by the start of the next crop in 2014. In that scenario Brazilian exporters will have to use alternative terminals and ports, moving around the sugar by truck and rail to the south or north east, which would add to the cost.
Other commodity markets could also be impacted. Santos is a key port for Brazil’s agricultural exports, processing a quarter of the country’s foreign trade and over half its shipments of agricultural produce such as corn. And it is already notorious for its delays – truck drivers often have to wait up to five days just to offload.
“We are not so worried about sugar, but we are worried about grains,” says the chief executive of a leading trading house.
The Commodities Note is a regular online commentary on the industry from the Financial Times.
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