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China's struggle with sugar smugglers far from over

By Sarah McFarlane and Niu Shuping

LONDON/BEIJING (Reuters) - China's battle against sugar smugglers working across southern borders is failing as it keeps domestic prices higher than the world market to support its own production, officials say.

Beijing's policy of stockpiling to support domestic prices and keep its farmers growing cane will also keep the profit incentive firmly in focus for the smugglers.

"As long as there is a big price gap, smuggling will continue," Liu Hande, vice chairman of the government-backed China Sugar Association, told Reuters.

Traders and analysts estimate that between 500,000 tonnes and 1 million tonnes of sugar was smuggled into China in 2011/12, mainly from the world's second largest exporter Thailand, but often via third countries.

That is in addition to official imports of 4.26 million tonnes.

The world's top sugar importer's policy is keenly watched and its impact complex. Cheaper world prices encourage China to import more, which supports global prices and helps cope a little with a surplus haunting the market for a third season. Rising Chinese stocks, boosted by smuggling and higher domestic output, may weigh on local prices.

The Sugar Association said domestic sugar prices are quoted at 5,500 yuan ($883.80) per tonne in top growing region Guangxi and for smuggled sugar, the price is about 4,000 yuan ($642.70) per tonne.

"If such a price gap remains for this year, we believe smuggling volumes would be more or less the same as last year," said Liu Hande.

The association last year offered a reward of as much as 500,000 yuan (about $80,000) for tips and information on smuggling, but monitoring movements of sugar across the vast borders is a difficult task. It estimates more than 100,000 tonnes had already been smuggled into China since the start of 2013.

SMALL BOATS AND TRACTORS

The Xinhua news agency reported earlier this month that border police in the south province of Fujian seized 1,700 tonnes of sugar smuggled from Vietnam on Jan 9.

The contraband sweetener was smuggled by a local trader, who bought at a market in Vietnam and used fake customs receipts to try to avoid duties. The smugglers said the profit for smuggling the sugar was between 600-800 yuan ($95.20-$127.00) per tonne.

"The border authorities are pretty strict in inspection these days," said one sugar trader in China's Guangdong.

Smuggled sugar was repacked with faked domestic brands which were sold at a much lower price than real domestic brands. Many smugglers use small boats, which carried up to 3 tonnes, via border rivers to ship the sugar.

"The government has been cracking down on smuggling all the time, but the result does not seem very satisfactory, partly because these smugglers, like ants move their homes, move a bit by a bit to the country," said the China Sugar Association's Liu Hande.

"They also carry some sugar inside the country with small packages or load it on a small tractor, they have been using various ways to do it, and it is hard for the authorities to stop it completely."

According to Thailand's Office of Cane and Sugar Board, China bought 934,000 tonnes of Thai sugar between January and August 2012, up from 239,000 tonnes in the same period of 2011.

Thai industry officials said additional Thai sugar was carried into Cambodia before being smuggled to China through Vietnam.

"Cambodia imports around 400,000 tonnes of Thai sugar, but consumption was unlikely to be that high. So there should be a significant amount sugar that was re-exported to Vietnam and China respectively," said an official at the Office of Cane and Sugar Board.

ACCIDENT OR DESIGN?

News last week that China will sell 300,000 tonnes of old white sugar stocks to the domestic market will narrow the price gap with international sugar prices.

The government has also stockpiled a total of 1.5 million tonnes of Chinese sugar since late December at a price of 6,100 yuan per tonne, half of the 3 million-tonne volume it promised to buy during the current marketing year as part of its efforts to shore up domestic prices.

"It may be an accident and it may be intentional but by trying to maintain domestic prices to help the farmers, they are sucking in much of the surplus from the world market," said Jonathan Kingsman, head of agriculture at information provider Platts.

"It's very difficult to tell which one it is, but they are holding a lot of stocks. It's helping keep world sugar prices steady."

The U.S. Department of Agriculture pegged China's sugar stocks at the start of the 2012/13 season at 3.605 million tonnes, up from 1.621 million tonnes a year earlier.

Kingsman estimated China holds around 4.7 million tonnes of sugar stocks, equivalent to around one third of its annual demand.

In the 2012/13 October-September crop year China is expected to produce around 20 percent more sugar on the year, with analysts pegging output at around 14 million tonnes.

"Last year the government knew there was a big shortage of sugar in the country so they turned a blind eye," said a trader.

"This year they are in a much stronger position so they may turn less of a blind eye because they know there's enough sugar in the country and they want to protect the domestic price."

Global raw sugar futures prices hit their lowest level in more than two years earlier this month as expectations for a third consecutive global surplus weighed.

(Additional reporting by Apornrath Phoonphongphiphat in Thailand and Ho Binh Minh in Veitnam; Editing by Veronica Brown and William Hardy)

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