* Trade believes China building more sugar warehouses
* China acting to protect its rural economy
By David Brough
DUBAI, Feb 5 (Reuters) - China is storing a growing mountain of sugar it does not want or need as inflated domestic prices, designed to protect farmers who face some of the world’s highest production costs, attract imports from a global market overflowing with supplies.
A more than doubling of stocks last season had led many to expect China to sharply reduce purchases in 2012/13 but imports now look set to exceed expectations, traders and analysts attending the Feb. 2-5 Kingsman Dubai sugar conference said.
“The Chinese took people by surprise last year. Early guesses for imports for China this year were between zero and 2 million tonnes,” Michael McDougall, senior vice president at Newedge USA, said.
McDougall said China may want to maintain high domestic prices to transfer wealth between the urban and rural areas “so they could surprise to the upside this year.”
It is seeking to support its rural economy to help tackle rapid urbanization.
China imported 4.19 million tonnes of sugar in 2011/12, according to the U.S. Department of Agriculture. There are 1.9 million tonnes of duty free imports allowed and tariffs are payable on additional supplies of “out of quota” sugar.
“Private buyers continue to import out-of-quota sugar that the country does not need. This opens up the possibility of China becoming the ‘buyer of last resort’ for the world sugar market,” Jonathan Kingsman, head of agriculture at news provider Platts, said.
He said he believed China was building new warehouses to accommodate additional supplies.
USDA pegged China’s sugar stocks at the start of the 2012/13 season at 3.605 million tonnes, up from 1.621 million tonnes a year earlier.
China has among the highest sugar production costs in the world - at around 30 cents per lb, compared with roughly 18-19 cents per lb in Brazil.
Cane costs some $75 per tonne in China, compared with around $30 per tonne in Brazil and Thailand.
A drop in the global raw sugar price to less than 20 cents a lb from a peak of more than 36 cents set almost exactly two years ago has created a huge gap between domestic prices in China and the cost of imports.
This has sparked smuggling, which officials estimate at between 500,000 and 1 million tonnes a year as well as legitimate tariff-paying imports.
Mike Gorrell, head of the Imperial Sugar Company, a unit of Louis Dreyfus Commodities, said China could potentially import 2-3 million tonnes of sugar this year.
“If they want it, they can do it,” he said.
Several delegates in Dubai said the Chinese were likely to pile into the market again if the price was right even though they had accumulated hefty stocks last year.
“Chinese stockpiling does not mean they won’t step up again if the price is right,” said Toby Cohen, head of analysis at London-based merchant Czarnikow.
“This year they’re going to build stock.”
Cohen said China’s stocks-to-use ratio could potentially rise to between 50 and 70 percent, from current levels of around 35 percent.
Jonathan Drake, head of RCMA Sugar, said that Chinese buying of some 4 million tonnes last year accounted for around 8 percent of global trade, and Chinese participation in the global trade was not substantial enough to drive the international sugar market.
“It won’t solve the problem of the global sugar surplus,” Drake said.
The global sugar market is facing a third successive global sugar surplus in 2012/13.
A Reuters poll last month projected this year’s surplus at 8.5 million tonnes.
Jamal Al Ghurair, head of the Al Khaleej Dubai refinery, one of the biggest refineries in the world, told Reuters he believed that ICE raw sugar prices could fall to close to 16 cents per lb this year from their current levels of just over 18 cents, pressured by over supply from top exporter Brazil and weak demand from Russia. (Editing by Nigel Hunt and William Hardy)