High sugar price may boost shift to premium products in China

By Dominique Patton

- Last updated on GMT

Related tags: Sugar, Cost, Marketing, British sugar

Food and beverage firms making premium products will cope best with
the current surge in price of both Chinese and imported sugar, with
higher margins to cover the rise in costs.

The buoyant prices could also encourage food and drink makers to look at alternative sweeteners in coming months.

Sugar prices in China have soared since November last year after a drought in one of the main producing regions, Guangxi province, halved the sugar cane crop.

The current price for standard grade sugar in the southern regions is RMB4960 (€515) per ton compared to about RMB2000 per ton during the same period last year.

The situation is compounded by the fast-rising demand for sugar in processed foods. China, the world's second biggest sugar consumer after India, produced 3.62 million tons of drinks containing sugar in the first two months of 2006, an increase of some 33 per cent over the same period of last year, according to the China Beverage Industry Association.

Yet this growth could slow down if manufacturers have to pass on raw material costs to retailers.

The Shanghai Daily​ reported last week that both Coca-Cola and Pepsico, said to be the country's biggest users of sugar, are selling at higher prices in Shanghai supermarkets.

McDonald's has also increased prices of its desserts by an average of RMB0.5 since February.

While the Chinese government has already announced the release of around 1 million tons of reserve sugar stocks, the price is set to remain high, according to a source from one of the region's biggest sugar trading houses.

"It will stay at around RMB4000-5000 this year,"​ he told AP-Foodtechnology.com​, explaining that China "only has about 800,000 tons in reserve"​ and would try to hold onto this.

Steve Flack, general manager of British Sugar's operations in China, the country's sixth biggest producer, said he was expecting total sugar consumption to be lower this year as less output drives up prices, and a strong sugar prices in other global markets make imports expensive too.

However he added that "the high price will encourage other sweeteners to be produced".

While most sweeteners are still more expensive than sugar, international firms are building awareness of sugar-free foods, particularly in the larger cities of China.

And with a smaller price gap between sugar and alternative sweeteners, selling the sugar-free concept may become easier. Dextrose is already cheaper than sugar now.

Manufacturers of premium products will also cope better with the higher sugar prices.

Frank Li, marketing manager of Nestle's ice cream and chilled business in China, said: "We definitely felt the pressure [from rising sugar prices] but we've been able to control our prices. If we can convince the consumer to pay more for the higher margin, impulse ice cream products, we can deal with higher costs."

More than half of Nestle's launches this year will be premium products, according to the group.

The market may see some relief in the long-term if farmers switch from other crops to producing sugar this year to benefit from the high prices. However this is likely to impact other food ingredients.

And China will continue to require imports. It produced around 8.8 million tons of sugar this year but consumed around 11 million tons last year. Demand is said to be growing by between 3-5 per cent annually.

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