China has bought 300k tonnes white sugar from Pakistan.
This sugar is expensive; $375/mt FOB, but might enter China duty-free.
This might displace other origins from China, so is bearish for the world market.

Pakistan China Free Trade Agreement

China has bought 300k tonnes white sugar from Pakistan.
This sugar is expensive; $375/mt FOB, but might enter China duty-free.
This might displace other origins from China, so is bearish for the world market.

Pakistani Sugar Will Be Competitive on a Landed Basis

200k tonnes of this sugar will come from the state of Punjab and is being sold at $375/mt FOB.
This is expensive given that containerised Thai refined sugar is currently offered at No.5 + $10, equivalent to $335/mt FOB today.
And the zero duty doesn’t quite make Pakistani sugar the cheapest on a landed basis in China.
We had previously expected Pakistan’s domestic surplus to be kept in-country seeing as the Imran Khan administration had ruled out offering further export subsidies.
However, this sugar is now being shipped, which is negative for the world market.

China’s Annual White Sugar Imports

Increased Demand?

It is still unclear how much sugar China will import in 2019.
We understand that Quota has been issued to refiners and state-owned enterprises, and we have seen raw sugar vessels nominated to China from Brazil in recent weeks.
Cuban raws are also sailing to China under the usual 400k tonne annual government to government deal.
However, refiners have not been allocated their 2019 out of quota import licences (AILs) yet.
Part of the delay may be because Brazil has challenged Chinese administration of its sugar import programme at WTO, and a proper Chinese response to the challenge is due imminently.
We expect China to award 1.5m tonnes AIL this year, giving a total of 2.9m tonnes sugar imports, including 2.45m tonnes raws imports and 468k tonnes legitimate whites imports in 2019.

China’s Import Allocations

However, we don’t yet know under which programme Pakistani sugars will enter.
Will they be allocated as quota sugars? Or will a new government to government quota similar to that given to Cuba be created?
Our instinct is that the total legal sugar import allocation will not be increased from the 2.9m tonnes above.
Therefore, the sugars shipped to China from Pakistan will displace those from other world market origins such as Brazil.
This is negative for the world market; it adds to the sugar oversupply.

We understand that the 300k tonne sugar quota was included in the latest iteration of the Pakistan China FTA in return for Pakistani government support to build a high speed train link between the two countries.
Pakistan is on the verge of bankruptcy; a team from the International Monetary Fund is in Pakistan now to negotiate a bailout package.
Restrictions were recently placed in luxury goods imports to try to stem the outflow of foreign exchange reserves.
Pakistani Prime Minister Imran Khan recently reduced uptake of Chinese investments into domestic railway projects, saying Pakistan couldn’t afford Chinese loan repayments.
Pakistan currently owes China more than USD 10b for infrastructure projects.
The headline project thus far has been the development of Gwadar Port, which links China’s Belt and Road Programme with its Maritime Silk Road.

Development of Gwadar Port

China has recently reduced the interest on loans linked to Gwadar to 0%; Pakistan now only needs to repay the principal.
However, the true value of Gwadar can only really be unlocked if China can link the port to its own borders via road or rail, hence China’s interest in a high speed rail link to Pakistan.
Both governments acknowledge that a high speed rail link is unlikely to be completed before 2030.
The 300k sugar quota awarded to Pakistan could therefore be a multi-year incentive to ensure Chinese investments are preserved and continued.