Sugar market in the Middle East appears to be saturated with number of refineries coming on-stream or about to. Weary of over-capacity in the regional market and competition for market share, Al-Ghurair, the CEO of the world’s largest and long established sugar refinery, was quite candid in February this year, saying “We are entering 2016 with more uncertainty than certainty”. In a rather atypical move, the refinery sold over 200,000 tonnes of refined sugar through the ICE Futures market against the expiry of March contract. This was the first sale of sugar from Dubai through ICE. Al Khaleej exported 500,000 tonnes of white sugar to Iraq in 2014, but with Iraq’s Etihad sugar refinery coming on-stream in February 2015, with capacity of 3250 tonnes/day, which is enough to cover local demand, that market dried up. It is clear that the move by Al Khaleej heralds turbulent times for the sugar refining sector in the Middle East.
The move by Al Khaleej came at a time when it was operating at 70% capacity, well below its production capacity of some 2.5 million tonnes. The refinery was established in 1992, the first one in the region. The company was previously was able to sell all its output in the region at a US$20-30 premium. But since 2000s, many new refineries have come on-stream in the region hoping to repeat the success it enjoys. These include refineries in Saudi Arabia, Oman, Iraq, Sudan, Yemen and Bahrain. But what is staggering is that investors appeared to have done little homework when it comes not only to competitive intelligence but also size of the local and regional market and the attendant risks from overcapacity.
New capacity additions to stand-alone refineries globally (1000 tonnes/day)
Source: FO Licht
In MENA (Middle East and North Africa) region, output of refined sugar is 8.5 million tonnes while total capacity is some 13.5 million tonnes. Consumption is around 15 million tonnes. Between 2016 and 2018, production capacity is expected to increase by around 4.7 million tonnes as new refineries in the region come on-stream. These includes: Al Reef Sugar Refinery in Jizan, Saudi Arabia which will commence operations by the end of 2017 with planned capacity of 1 million tonnes; Durrah refinery in Saudi Arabia under construction with planned capacity of 750,000 tonnes; the US$250 million Oman Sugar Refinery with annual capacity of 700,000 tonnes; and a new refinery in Algeria with a capacity of 350,000 tonnes.
It is simply difficult to comprehend the rationale behind building new refineries, particularly in Saudi Arabia and Oman. In Saudi Arabia, the refinery operated by the United Sugar Company refines enough sugar to match the local demand of 1.2 million tonnes. The two new refineries along with the planned expansion of capacity of 500,000 tonnes by 2017 at United Sugar Company, will invariably saturate the market, and force exports outside the region. As for Oman, the refinery with capacity of 700,000 tonnes is evidently unnecessary when local demand is 100,000 tonnes.
By 2018, the region will not only will have to contend with excess refined output of 6.1 million tonnes, but will also have to face competition from EU companies let loose in 2017 (following the abolition of sugar quotas), and are already gearing to expand output and make their presence felt in the premium white sugar market. Only time will tell how many refineries in the region will capsize.