By David Brough and Rajendra Jadhav
LONDON/MUMBAI (Reuters) - A surge in white crystal sugar sales from huge domestic stocks could drive down the premium for refined white sugar over raw sugar and squeeze refiners' margins.
Large amounts of low-quality white sugar are being offered at a big discount to ICE August sugar futures, traders said, in deals that appeal notably to African markets such as Sudan and Somalia, and countries such as Afghanistan.
"The substantial offers of Indian crystal sugar could drag on the whites premium because if Indian sugar is cheaper than refined (higher quality white sugar), you would be tempted to take it," a London-based trader said. "You are losing a home for refined sugar."
Dealers quoted trades of Indian crystal sugar at some $320-350 per tonne, a substantial discount to August whites futures trading at $373.80 per tonne on Wednesday.
The premium of October white sugar futures over October raw sugar futures traded this week at about $90 per tonne, believed to be a comfortable level of profitability for large refineries such as Al Khaleej in Dubai.
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"Indian sugar is a different quality (to refined) and so cannot go to all homes (markets)," the London-based trader said.
India has high stocks of unsold sugar and is expected to have another big crop in 2015/16 - possibly 28-28.5 million tonnes - similar to 2014/15 and well above domestic annual consumption of some 24.5 million tonnes.
Indian sugar mills have contracted to export 200,000 tonnes of white sugar to neighbouring countries and the Middle East, trade sources in India said.
The deals were signed in the last few weeks and the cargoes were for July and August shipment.
"Mills can sign more export deals if demand remains there," said Rahil Shaikh, managing director of ED&F Man Commodities India.
The export deals came after a sharp fall in local prices after the government pushed mills to pay farmers for their cane.
"Mills were aggressively selling to generate liquidity. They badly need money to pay farmers," said Ashok Jain, president of the Bombay Sugar Merchants Association.
After years of surplus production, India, the world's top sugar consumer, is swamped with sugar. As a result, prices have crashed and many mills are struggling with big debts.
Sugar stocks are now expected to touch 10.3 million tonnes on Oct. 1, when the new 2015/16 season starts, up 37 percent from the previous year.
One dealer said if raw sugar futures prices, which hit a seven-week high of 12.80 cents a lb on Tuesday, continue to rise, Indian mills could offer crystal sugar in the raw market, potentially weighing on raw sugar prices.
(Editing by David Clarke)