London, Dec 17 - Weaker oil and the credit crisis have delayed some ethanol projects, dampening demand for sugar cane, but tight global sugar supplies and strong Brazilian use of biofuels will support the sweetener's price.
Brazil, the world's top sugar producer, is a major supplier of cane-based ethanol.
Analysts, who see a possible correlation between oil and sugar prices due to the use of cane as a feedstock for ethanol, say sugar prices have so far spurned the drop in oil.
Jaspal Phull, research analyst at London's Stenham Asset Management, said the economic crisis had delayed new Brazilian ethanol mill projects.
"But fundamentals remain strong, and that's why wealthier groups are still investing in new plants," Phull said. "The main positive fundamentals are the global sugar deficit and booming ethanol demand in Brazil."
Last month the International Sugar Organization forecast a global sugar deficit of 3.6 million tonnes in 2008/09 (Oct/Sept), rising to around 4.5-5.0 million tonnes the following season.
Analysts said a tightening global sugar market should ensure that sugar prices remain resilient despite the fall in oil.
"The sugar market is reasonably stable because the fundamentals are supportive, as there is a (global) deficit after two years of surplus," said Sergey Gudoshnikov, a senior economist at the International Sugar Organization (ISO).
Gudoshnikov said even if sales in Brazil of flex fuel cars, which can be powered by petrol or ethanol, slow down, each additional new car sale signals fresh demand for the biofuel.
BRAZIL CURRENCY
Antonio de Padua Rodrigues, technical director at Brazil's Unica -- Sugar Cane Mills Association, said, "On Brazil's domestic market, I don't see any big worry (caused by low oil prices) as gasoline and diesel prices at the pumps are not linked with oil prices."
He said that since September 2005, petrol prices had not changed even though oil prices had moved between roughly $145 and $45 per barrel.
Padua Rodrigues said that the drop in oil prices had been offset by the depreciation of the Brazilian real currency.
The real currency has lost more than half its value since reaching a nine-year high in August.
Crude oil rallied to a historic peak of $147.27 per barrel in July, but headed rapidly south on fears that the global economic slowdown will be much worse than expected.
Benchmark crude stood at $44.87 per barrel on Tuesday, up 36 cents or 0.8 percent from Monday.
Although traders often note similarities in fluctuations of intra-day crude and sugar futures prices, since the end of 2007 oil prices have fallen by 53 percent, while raw sugar has risen by 5 percent, suggesting tighter fundamentals in sugar.
"On a macro-level, lower oil prices take some of the political urgency out of biofuels programmes in various countries, and we may see these being slowed down or put on hold as a result," said Jonathan Kingsman, managing director of Lausanne-based Kingsman SA.
A major concern for the sugar market in 2009 was foreign demand for Brazilian ethanol, notably from the United States.
"In theory, U.S. ethanol production capacity is now greater than the mandated ethanol demand, so this would suggest no need for imports," Kingsman told Reuters.
But he added that some ethanol producers in the United States had gone into Chapter 11 bankruptcy protection and this might mean that some of that capacity goes offline.
U.S. corn prices would be crucial for cane-based ethanol.
"If they (corn prices) rise, then Brazilian ethanol might be competitive with U.S. (corn-based) ethanol, once again allowing imports," Kingsman said.
But a U.S.-based sugar and ethanol analyst said that oil at some $40 a barrel is irrelevant when the petrol price is fixed by the Brazilian government and it shows no sign of lowering it.