By David Brough
LONDON (Reuters) - Surging white sugar demand driven by China, and a buoyant whites-over-raws premium, are having a knock-on effect on the raws market, spurring refiners to step up production.
The premium, a measure of the profitability of refining raw into white sugar, has risen to around $100 per tonne, buoyed by the strength of demand for whites.
Trade sources said they expected Thai mills to prioritise output of white sugar to meet the increased demand but noted that Thai yields so far had been disappointing, potentially tightening white sugar supplies.
"I think partly it will be reflected in Thai production being diverted from raw to white sugar, which will definitely tighten raw sugar supply," said Tom McNeill, director of analyst Green Pool.
"But also additional raw sugar demand from refiners at better margins. We are now starting to feel the impact of the long awaited 2015/16 global sugar deficit, and the market is scrambling to find supply."
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Global sugar supplies are set to tighten as the combined impact of rising consumption, falling Brazilian output, receding prospects for Indian exports, and a very poor EU beet crop, have driven up deficit forecasts after four years of surpluses.
Thailand is the world's second-biggest sugar exporter after Brazil, which is currently in its inter-crop period. Brazilian supplies are tight after rainfall hampered the final stages of cane harvesting in the centre-south.
The increase in demand for raw sugar by refiners around the world, could help drive up raw sugar prices this year.
Tracey Allen, commodity analyst with Rabobank, said she expected raw sugar futures on ICE to rise to an average of 15.5 cents a lb in the fourth quarter, driven in part by increased physical raw sugar demand.
ICE benchmark raw sugar futures were up 0.03 cent, or 0.2 percent, at 14.91 cents a lb on Friday.
Allen said the structure of the ICE raw sugar futures market, in which front month prices were higher than subsequent months, reflected the tight availability of nearby sugar.
"As the refiners produce more whites, and draw down their raw sugar stocks, they will need to replace their stocks," she added.
Traders said they expected the flow of white sugar into China, much of it believed to be smuggled into the country, to remain strong in coming months, as Chinese authorities increased scrutiny of raw sugar import licences, and due to a disappointing domestic harvest.
"China's white sugar demand strength continues to surprise. It's incredible to think of the amount going in," McNeill said.
(Editing by Greg Mahlich)