How Might Sugar, Ethanol and Packaging Be Hit by Iran War?

Insight Focus

Energy Prices Rally Sharply

The US and Israel’s war with Iran has now lasted for three weeks.

The Strait of Hormuz effectively remains shut to shipping, unless the vessels are deemed friendly by Iran. Access to the Red Sea is precarious, but possible. The reaction from the energy markets has been pronounced, but not as strong as you might expect.

Source: USDA

Around 20% of the world’s crude oil and LNG supply typically transits the Straits. Unfortunately, the only way that the Persian Gulf’s oil and gas can emerge is by sea; there isn’t enough infrastructure to get it out by land, though pipelines across Saudi to the Red Sea and across UAE to Fujairah are operational. However, energy from Qatar, Iran, Iraq and Kuwait cannot use these pipelines and so is currently stranded.

Energy from crude oil and LNG underpin almost every human activity. Higher energy prices will therefore lead to higher transport costs for goods, and then ultimately to higher inflation generally. We’ll take a look at the possible effects of crude oil prices sustaining at USD 100/bbl in 2026 and also consider what even higher prices might do to food and associated goods.

Food Price Inflation Ahead

Food will almost certainly become more expensive in the coming months, even though the Persian Gulf is not a major production region. Food supply chains are often unexpectedly complicated, and weaknesses sometimes only become apparent once they are strained.

The Russian invasion of Ukraine in 2022 is illustrative. After invasion, European natural gas prices strengthened sharply, and this led to shortages of salad vegetables of all things. Much of Western Europe’s salad vegetables are grown year-round in large greenhouses. Every aspect of the crop’s growth is controlled, using LED lighting, hydroponics and gas-fired central heating.

As natural gas prices rose, it became uneconomical to make salad vegetables in Western Europe in 2022. This meant the continent was more reliant on imports from the Mediterranean region, and once poor weather there hit yields there were shortages.

Source: ECB

Similarly, high natural gas prices led to the closure of European chemical plants that supplied carbon dioxide to carbonated beverage companies and to abattoirs to stun animals ahead of slaughter, risking supplies of meat and soda.

It is possible that a similar process may affect other food groups in other regions this time around, via subtle and as yet unknown weaknesses in supply chains.

Consider fertilisers. Making fertiliser is extremely energy-intensive – especially nitrogen fertilisers. Almost half of the world’s urea originated from the Arabian Gulf in 2025.

Around half of the world’s sulphur supply (used to make phosphates) also comes from the Persian Gulf. Even countries that make nitrogen fertilisers themselves often rely on imported LNG to provide the energy: countries like China (40% of global urea supply), India and Pakistan.

US Gulf physical urea prices are close to USD 550/tonne today, up USD 75/tonne since the Iranian war began. CFR prices in Brazil have also risen sharply to around USD 630/tonne – a USD 160 jump since February 27 and far above seasonal demand. During the shock that followed the Russian invasion of Ukraine in 2022, US Gulf urea prices exceeded USD 800/tonne at one stage.

Rising diesel prices are also a factor to consider. We don’t often think of farmers as users of energy, but tractors and harvesters require diesel. So do the trucks that bring seeds and fertilisers and other field inputs to the farm and take the resulting produce away.

In recent days, US retail average diesel prices have exceeded USD 5/gallon for only the second time on record. Other countries will be facing similar price rises. This is bound to further drive food price inflation around the world.

Source: USDA

The 2022 Russian invasion led to widespread inflation. Brent crude oil peaked at over USD 133/bbl in March 2022, and European natural gas peaked at almost EUR 340/MWh that August.

Food price inflation had already been rising due to the impacts of Covid-19, and the invasion sent it higher. In the UK, food price inflation rose from 5.4% in February 2022 to 17.5% in March 2023. US inflation rates went from 7.9% to 11.4% in the same period.

Source: BLS, ONS

This changed how consumers shopped in advanced economies – we saw an effect in the sugar market that we had not expected. We’ll cover more about this in the sugar section below.

If we assume that crude oil prices strengthen further in the coming months, perhaps as high as USD 200/bbl, this could have a worse effect on inflation than the Russian invasion of 2022. Consider US diesel prices, for example. US refining capacity is not optimised for diesel production and diesel margins can widen when oil prices rise.

We are not oil/oil products experts, but it’s not outside the realm of possibility that this could lead to retail diesel prices increasing to as much as USD 8/gallon — 60% above current levels. This increase would then pass through the food supply chain.

Rabobank has modelled that even with crude oil holding at USD 100/bbl for the rest of the year, US and Euro area inflation would rise above 3% in 2026, from 1.9% now. Consumers could then start trading down in food retail, as they did in 2022 and 2023, especially if consumers have to allocate more of their spending to transport fuels. If inflation led to higher interest rates, the effect could be even more severe. Food manufacturers could also struggle to pass through increased costs.

Sugar – More Pressure on Consumption

Food price inflation has the potential to change sugar consumption habits around the world. This happened during the food price inflation we experienced after Russia’s invasion of Ukraine in 2022.

We’d previously believed that sugar was largely immune to recessions and price shocks because it was so cheap and so enjoyable to eat. People changed their shopping and eating habits, and sugar consumption has been hit since 2022.

It’s possible that this repeats in 2026, but perhaps we can take some comfort from the fact that the situation is a little different this time around.

In 2022 the world was already struggling to cope with tangled supply chains following the Covid-era lockdowns in 2020 and 2021. Russia’s invasion of Ukraine then added an energy shock onto this already difficult situation. Todays’ energy price reaction has been similar, but luckily, supply chains are not also recovering from a global pandemic.

If sugar rallies alongside crude, there’s a lot of selling pressure to come from producers. In the first instance, we think that there could be as much as 200,000 lots to come to the market, which would help drive the commercial short towards a more normal 50% of open interest. This is likely to still keep prices in the range at which mills in Centre-South Brazil would make ethanol, not sugar, and would be countered by speculative buying or buy backs.

Investors are also coming back into the long side of commodities thanks to the inflation trade. In theory, speculative buying could exceed 450,000 lots, which would move specs back towards a more normal net long position.

However, this also implies further selling from producers, which could lock in increased sugar production in CS Brazil, which isn’t necessarily required if the driver for the rally is an energy price shock. It’s possible the trade starts to sell the raw sugar spreads in response to poor demand to counterbalance the market. But the implication is that the flat price and spreads might see some extreme prices on occasion in the coming months.

Higher energy prices also mean higher production costs for sugar, though this is not often directly relevant for futures prices (sugar producers sometimes operate for months at a loss). However, as we’ve hinted at in the discussion above, sugar is linked to the world’s energy markets through cane ethanol in Brazil and India.

Ethanol – In Demand?

Brazil’s ethanol market is the most market-orientated, so we will examine this in detail.

The dominant fuel distributor in Brazil is Petrobras, which is majority-owned by the state. Petrobras fixes the ex-refinery price of gasoline, partly in reference to international energy markets but also partly to achieve the government’s objectives.

The cost of living is a major factor in Brazilian politics, given that over two thirds of the population live on less than BRL 3,250 (USD 620) per month.

Source: IBGE

As a result, Petrobras doesn’t often change its gasoline price and tends to adjust faster when international prices are falling and slower when they are rising.

Today, Brazilian gasoline prices are roughly 50% below international gasoline prices. In theory, this gives Petrobras scope to increase local ex-refinery gasoline prices. However, it has indicated that for the time being it won’t pass the energy market volatility through to consumers.

The longer the conflict persists, the harder it will be for Petrobras to maintain this view.

Today, it’s the cane harvest off crop, and so Brazilian hydrous ethanol prices are close to 15.50c/lb in raw sugar equivalent terms. If at some point Petrobras needs to pass through the full cost of USD 100/bbl crude oil with the USD/BRL at 5.2 and ethanol/gasoline pump parity at 65%, local ethanol prices could rise to 18c/lb.

Scenario 1: Brent at USD 100/bbl

This could be positive for sugar prices too but also implies gasoline prices near BRL 7/litre. The last time pump prices reached this level was in 2022, when high gasoline prices caused political stress. The government ultimately forced ex-refinery gasoline prices lower and adjusted fuel taxes to offset rising pump prices. Even this wasn’t enough to stop President Bolsonaro from losing the election.

Indeed, already this year Petrobras has increased ex-refinery diesel prices by BRL 0.38/litre but offset some of the increase by reducing PIS/COFINS taxes on diesel by BRL 0.32/litre. The price increase for diesel was 16% higher, but diesel prices had been 72% below international levels.

This year is also a presidential election year, which makes it less likely Petrobras will adjust gasoline prices materially higher. The last four elections in Brazil have been decided by less than 2% of the vote. We think the chances of ethanol prices reaching 19c/lb in sugar equivalent terms is low.

If Brent crude oil rose to USD 200/bbl and Petrobras passed through the full increase in local gasoline prices, hydrous ethanol could climb to 23c. But we do not believe that the government would allow anything like full pass-through of energy prices at this level to the consumer.

Scenario 2: Brent at USD 200/bbl

Meanwhile, in India there are moves to increase ethanol’s importance. There’s been talk of increasing ethanol blending in gasoline beyond 20% and using ethanol in the place of LPG for domestic supply given the disruption caused by the Gulf war.

Elsewhere, the Philippines is looking to import more ethanol from the world market to meet its E10 blend obligation and Vietnam is looking to roll out a mandatory E10 blend in June. Vietnamese import taxes on ethanol were suspended this month.

Meanwhile, Thailand seems set to incentivize use of E20 over E10. E20 is now cheaper at the pumps for the first time in almost a decade. We suspect increasing amounts of raw sugar could be diverted to make ethanol here.

Freight – Container Movements Bear the Brunt

The war in the Persian Gulf is causing profound problems in the world’s container freight market. Container lines have stopped shipping to the Persian Gulf, choosing to discharge afloat cargoes at safe ports and pause fresh bookings. Meanwhile, the Red Sea/Suez Canal security situation remains strained, and the region is extremely congested.

All of this means that many of the world’s containers are now not where they should be. Many have been dropped at ports unexpectedly, for the shipper to resolve. Ports in India and Bangladesh are already reporting backlogs and congestion. Equipment is also trapped in the Persian Gulf with no means to exit; we’ve seen one estimate that 500,000 TEUs are stranded in the region.

Source: Drewry

The container displacement is leading to longer shipping routes, longer transit times on other routes, extra transhipments (in some cases requiring trucking) and therefore greater costs throughout the supply chain.

On top of this, marine bunkers are becoming more expensive. Container lines have introduced emergency fuel surcharges across all routes, including backhaul routes and routes far removed from the Persian Gulf and Red Sea.

The impacts of all of this will be global, not regional.

For the time being, most of the ports on the UAE east coast and in Oman are still operating, though they are experiencing Iranian strikes. This means that regional trade is slowly being pushed to the heavily congested Red Sea, especially Jeddah and Yanbu. Ports in India, such as Nhava Sheva, are also experiencing a rise in congestion, as are Port Klang and Tanjung Pelepas, where cargoes are being diverted.

Container rates have already risen by 10-20% on global shipping lines. If crude oil rose to USD 200/bbl, the effect on container shipping would be profound. Bunkers account for at least 50% of the shipping cost, and this would be passed on to shippers through fuel surcharges. It’s also likely shipping lines would reduce capacity for non-economic routes, especially those which have longer routing. It is possible that container rates could double, which would still put them below post-pandemic levels.

Breakbulk shipping rates would also rise – marine bunker prices are a significant cost too. But breakbulk wouldn’t suffer from the same reduction in capacity that container shipping would, nor would it have stranded/displaced equipment. Breakbulk movements are less scheduled and so may be able to better adapt to bunker price rises. We therefore think higher oil prices will increasingly favour breakbulk over containers.

Packaging – Feedstocks Disrupted

The ocean freight disruption is having a major impact on the packaging industry, especially in East Asia. Around half of East Asian crude oil imports come from the Persian Gulf, and so the region risks running short of raw materials needed to make plastics.

For example, Chinese PET resin is made from crude oil derivative naphtha, which is converted to paraxylene, then terephthalic acid (PTA) before being polymerised. PTA can be up to two-thirds of the PET resin variable production cost. China imports paraxylene and PTA to make PET resin for export. The combination of higher crude oil derivative prices and higher logistics prices has led to a major cost increase for Chinese PET resin exports.

As a result, many regional plastics suppliers have been quick to issue force majeure notices and are shifting towards a preference for pre-payment for goods rather than accepting letters of credit.

Given the rising costs of container shipments, especially in the Persian Gulf and Red Sea regions, we are looking to convert movements to breakbulk shipment where possible. This arbitrage is starting to open in the Middle East and close to workable in East Africa. However, container movements remain more affordable in the Americas.

If crude oil prices were to increase to USD 200/bbl, the cost increases for Chinese PET resin exports would probably be non-linear. We think PET resin export prices could rise by around USD 250/tonne and we would risk plant outages due to lack of feedstock.