SHANGHAI: China may find itself targeted by sugar smugglers thanks to the restrictions that the country has placed on tariff-free imports at a time when its own prices of the sweetener are far higher than those of the world market, Rabobank warned.
White sugar futures for the best-traded September contract touched 5,299 renminbi per tonne last week on China’s Zhengzou exchange, the highest in 10 months, and equivalent to $862 per tonne.
London-traded white sugar futures for August ended last week at $360.00 per tonne.
The gap means that the “arbitrage window is currently open”, Rabobank said.
‘Made smuggling more lucrative’
However, China’s decision to cap at 1.94m tonnes the sugar which can be imported with a low tariff rate of 15% “means that there is no rush to import sugar into China” nonetheless.
And although imports even with the more penal non-quota tariff of 50% might, in theory, make financial sense, China has rejected a series of cargos for, according to reports, unspecified “policy reasons”.
The gap could create an opportunity for sugar buyers importing through more informal channels.
“Current healthy price levels, coupled with weak international prices, have definitely made smuggling sugar into the country more lucrative”, Rabobank said.
“We may see an increase in such activities in the short run.”
Production prospects
The rise in Chinese sugar prices reflects largely lower-than-expected sugar production, with Rabobank foreseeing output down “substantially” in 2014-15, thanks to a 10% drop in cane acreage.
Australia-based analysis group Green Pool two weeks ago cut to 10.77m tonnes its forecast for Chinese sugar output in 2014-15, on a tel quel basis, a 19% drop year on year, citing the impact of a high, government-set price of cane on mill margins.
Rabobank added that while China “still has an estimated 6m tonnes” of sugar in state reserves, it is “widely acknowledged that these will not be released back into the domestic market any time soon”.
Both Rabobank and Green Pool forecast lower Chinese sugar production in 2015-16, as a drop in the mandated cane price, while improving mill margins, prompts growers to plant other crops.
“Current cane prices are simply not attractive for farmers, as rising labour costs and better paying competing crops like fruits, vegetables and peanuts mean that Chinese farmers will be looking at other more lucrative options for next season,” Rabobank said.
Green Pool has forecast a further drop in Chinese sugar output to 10.50m tonnes.
Brazil forecast
The comments came as Rabobank, in a quarterly report, pegged Brazilian Centre South sugar output in 2015-16, which started last week, at 31.7m tonnes, down 300,000 tonnes year on year.
The forecast reflected an estimate for the Centre South cane harvest of 575m tonnes, up 4m tonnes year on year, with 43.0% of the crop going to make sugar, rather than ethanol.
The output estimates are among the more downbeat for the Centre South which is responsible for some 90% of Brazilian cane and sugar production with, among recent estimates, Green Pool pegging output at 32.2m tonnes, FO Licht at 31.8m tonnes and Agroconsult putting it at 33.5m tonnes.
Rabobank said that variation in rainfall levels within areas of the Centre South “has been substantial, and a few regions have actually experienced less rainfall to date in 2015 than in 2014”.
