ANALYSIS: White Sugar Premiums May Rocket As MENA Demand Surges

LONDON (Dow Jones)--World sugar refining premiums may reach record highs this year as worried Middle Eastern governments unleash pent-up demand into the lethargic white sugar market, industry experts said Tuesday.

Many refiners have reduced operations in recent months as demand has fallen and the white sugar premium--the differential between raw and white sugar prices which indicates their margins--has slumped to $60 a metric ton, below comfortable operating levels of around $100/ton.

Dubai's Al Khaleej Sugar, the world's largest standalone sugar refinery, has closed its refinery until Feb. 25 and other companies have been cutting back to trim costs while business is slow.

But now industry participants say growing demand from North African and Middle Eastern governments, as well as extra imports into the European Union, could push margins above $150 a ton as demand for whites grows while raw prices fall.

"We're starting to see some real-time buying," said Cyrus Raja, Al Khaleej's general manager. "Buyers have stayed away eating into their stocks but they will need to come back at some point, whatever the price."

Raw sugar prices have doubled since last May to 30-year highs of over 36 cents a pound due to fears of increasingly tight world supplies. A succession of weather problems, from drought in Russia to a cyclone in Australia, have slashed initial hopes of a surplus this season to replenish stocks diminished by two seasons of drawdowns.

Many importing countries in the Middle East--the world's largest deficit region--have held off purchasing in the hope that prices will fall. But now concerns over rising food prices, which have been blamed for sparking unrest sweeping the region, is bringing demand back to the market.

Although less essential to daily life than grains, sugar has been a key element in pushing up headline food inflation in many MENA countries. In Algeria, sugar prices rose 23.5% in the 12 months from November 2009, far outpacing other food prices, while in Tunisia, the cost of sugar rose 16.5% in 2010, against an average consumer price index rise of 6.8%.

"A lot of [Middle Eastern] governments that have been destocking sugar over the past two deficit seasons need to import sugar again," said Leonardo Rocha, a senior economist with the International Sugar Organization.

"Importers will have to come back to the market and any window of opportunity to import will be impelled by the availability of sugar from Brazil in April."

He estimates the long-term growth demand for the MENA region to average around 1.9% over the next decade, one of the strongest in the world.

Governments have already been acting to facilitate imports. Leaders in countries from Morocco to Saudi Arabia have boosted food subsidies in the wake of the crisis, targetting vital commodities such as cereals, oil and sugar.

Iraq's government almost doubled the food import budget in 2011 to $6 billion, according to a senior Iraqi grain board official. This month the country bought 200,000 tons of sugar--more than a quarter of its annual requirement--for $930/ton, compared with around $400-450/ton last year.

Egypt's central bank Monday extended an exemption on banks' cash cover requirements for sugar imports to facilitate buys, according to local press reports. "Given that there is a need to secure the country's demand during the next phase, the exemptions were extended until the end of this year," MENA news agency cited trade minister Samiha Fawzi Ibrahim as saying.

Analysts have forecast a surge in demand in the second quarter as exports from the world's top producer Brazil are expected to damp prices and ease tight market supplies. "Prices could go as low as 25 cents a pound, depending on the size of the Brazilian crop," said the ISO's Rocha.

But that could be short lived as the EU and Russia are both expected to start importing a combined total of around 7 million tons just as demand resurges from Middle Eastern countries.

Anlo Du Pisani, chief executive of Syria's National Sugar Refinery, which exports to Lebanon, Jordan and Iraq, said exporters may face a repeat of last year, when lineups at Brazil's ports reached more than a 100 ships, as the country's infrastructure struggles to keep pace with demand.

"I expect another lineup problem in Brazil as the Russian demand comes in," he said, adding that Middle-Eastern refiners are already seeing interest from EU importers. "When that comes in we'll see a bigger premium coming."

(Source: http://online.wsj.com/article/BT-CO-20110222-709970.html)