LONDON/BEIJING (Reuters) - A slide in sugar prices driven by excess supplies may be given fresh impetus soon, with China, one of the world's top importers, likely to cut back on purchases after a sharp jump in stocks.
China's sugar stocks more than doubled last season, leading many to expect a significant fall in purchases in 2012/2013. So far, trade flows have held up well, but action stopping short of an official duty hike is expected soon to clip inflows.
"If China were to continue to buy large tonnages of sugar, that would be a bullish signal. But I believe that imports will slow to a trickle," said sugar analyst Robin Shaw from London-based brokerage Marex Spectron.
Inflated domestic prices in China have provided a strong incentive for private buyers to import sugar from a world market overflowing with surplus supplies and which is now trading at its lowest levels in nearly three years.
Raw sugar futures touched 16.81 cents a pound on May 16, the lowest level on a front-month basis since July 2010.
Large cane crops in key producers such as Brazil, Thailand, Australia and Mexico have generated a substantial global sugar surplus this season. Top exporter Brazil is currently harvesting its massive crop in ideal weather.
Stockpiling by China in 2011/2012 removed a substantial chunk of that season's global surplus from the market.
Dealers said other major buyers such as Indonesia were unlikely to fulfil a similar role this season, leaving the market awash with supplies.
The International Sugar Organisation (ISO) earlier this year forecast a global surplus of 8.53 million tonnes in 2012/2013, surpassing the prior season's surplus of 6.48 million tonnes.
Dealers said the Chinese authorities would likely put pressure on private importers not to bring in sugar.
"All you need is for a customs officer not to process your documents for 10 days, triggering huge demurrage costs, and you would not want to import again," said one trade source.
China has kept domestic prices high to protect its growers and address a yawning gap between rural and urban incomes.
The country's farmers face among the highest sugar production costs in the world at around 30 cents per pound, compared with roughly 18 cents to 19 cents per pound in Brazil.
"I think it is a difficult situation for the government - they want to support China's farmers, but costs are spiralling higher," said Mr Tom McNeill, a director at commodity analyst Green Pool in Brisbane.
Refineries in China are able to buy up to 1.9 million tonnes of quota sugar every year under an agreement with the World Trade Organisation.
Companies without quotas, which face import taxes of 50 per cent, have also been able to profit on imported sugar due to the large gap between domestic and global prices. Premiums between Zhengzhou and London futures are over US$300 per tonne.
A sugar trader at an international company in China said: "Even if the economics are there, I believe the government is not willing to see too many non-quota imports. I believe they will put pressure on private importers."
The high domestic premium has led to talk that China could seek to cut private imports by raising non-quota import duties, but many dealers see this as an unlikely outcome.
"The Chinese built up their stocks by six million tonnes over the past two years. You can't go on buying indefinitely," one senior London-based sugar trader said.
But several dealers doubted a duty increase was imminent.
"Since China introduced its import quota system, it has never been adjusted," said analyst Zhan Xiao from Xinhu Futures.
"China is not like other countries such as Russia or other import countries that adjust the tariff according to import volumes," he said. "China has no precedent for this kind of adjustment. So in the mid-term to short-term, it's relatively hard to introduce such a measure."
The high domestic sugar premium has also sparked smuggling, which officials estimate at between 500,000 and one million tonnes a year, as well as the legitimate tariff-paying imports.
Dealers said a renewed crackdown on smuggling by the Chinese authorities would be another way to keep a lid on imports.
"The government has said it will strengthen management of quotas. There are no specific details but they could step up their efforts in investigating smuggling," said analyst Hou Yating from Dalu Futures.
Chinese sugar imports so far in 2012/2013 were nearly 1.3 million tonnes, compared with the 1.77 million tonnes imported in the same period of 2011/2012, according to the ISO. Those totals, however, exclude any sugar smuggled into the country.