China Levels the Playing Field on Sugar Imports

As of 1 August, China is applying a 90% import tariff on all out-of-quota (OOQ) sugar. This is a change from the previous exemption given to origins that export less than a total of 3% of OOQ sugar into China.

Last year, as part of WTO safeguard measures, China imposed an additional 45% tariff on OOQ sugar imports that total more than 3% of the total OOQ. Sugar imports from origins that total less than 3% would be exempted from this addition and only subjected to a 50% import tariff. This measure, in effect as of 22 May 2017, was set to last for three years – with a gradual reduction of 5% annually, to 90%, and 85% in the subsequent year. However, due to the plunge in domestic sugar prices this year – from an average CNY 6,500/tonne in January 2018 to CNY 5,500/tonne in June 2018 (ex-mill Guangxi plus taxes) – the Chinese government has decided to extend a 90% import tariff on all OOQ sugar from all origins, as part of its protective measures of domestic sugar mills.

Having the same sugar import tariff from all origins means that the playing field has now been levelled, with the world’s leading sugar exporters accessing the Chinese market on level terms with smaller players. Even so, a high sugar import tariff of 90% for all OOQ sugar (instead of the previous 50% import tariff for smaller players) also suggests that illicit sugar flow will continue to find its way into the Chinese market. As world prices are being pressured – given a global supply glut, while both Thailand and India are witnessing an enormous increase in sugar production – this illicit flow can be expected to increase in the months to come. That said, given the proximity of Thailand compared to other western exporting countries, this change could be seen as a win-win situation for Thai sugar, through direct and indirect flow. In light of this, we think that artificial support to protect domestic sugar prices could bring about a backlash, as more sugar substitution can be expected to take place. Cheaper alternative sweeteners (the HFCS equivalent is about 20% lower than the ex-mill Guangxi sugar price) and an assumed increase in the illicit sugar flow would weigh on domestic prices.

As such, domestic sugar end-users need to manage their bottom line by hedging sugar prices to reduce exposure and, at the same time, increase the flexibility on feedstock choices, as well as on different downstream usages. Riding on low sugar prices, this also marks a good opportunity for Chinese sugar players to seek partnerships out of country, potentially looking to Thailand, given that country's proximity and sugar availability.

Author: Susanti Wang Zhiqing