As the Chinese proverb goes “When the wind of change blows, some build walls, while others build windmills.” To wit, the metaphorical turbulence that is the hallmark of the global sugar industry would indeed make it worthwhile to invest in windmills! In the midst of global glut, low sugar prices and reduced profitability, responses of top sugar companies have been fairly varied. EU sugar companies, unshackled from the protected market and support mechanisms and exposed to the vagaries of laissez–faire market, have had to come to terms with volatility they knew they were going to confront.
Sugar is, without doubt, the most volatile of commodities. Over two years ago, it was the best performing soft commodity, and last year, it was the worst. With replenished stocks, market fundamentals really do not point to any ease in prices anytime soon, despite early forecasts of a deficit in the 2019/20 season. Publicly listed sugar companies clearly face greater additional pressure from their shareholders, who are constantly seeking an increase in their company’s share price and increasing dividends.
The publicly listed and top sugar producing company Suedzucker recently announced the closure of 4 beet sugar factories in 2020 – 2 each in France and Germany – as a cost-cutting measure to save about €100 million (US$114 million) a year as it expects a loss of €150 million to 250 million for the financial year 2018/19 (end of February). The company produces around 5.9 million tonnes of sugar per year is aiming to cut the current capacity by 700,000 tonnes. Following the announcement, the company’s share price jumped 4.1% to €14.55.
Nordzucker, the second largest sugar producer in Germany after Suedzucker, and not a publicly listed company, has responded differently to squeeze in its profits. A recent trading update noted that net profit fell to about €17 million (US$19.6 million) in the nine months to end November 2018 from around €143 million in the same year-ago period. Sales fell 18% to €1.05 billion. Even though Nordzucker is planning a reduction in personnel and a comprehensive restructuring of its operations in a bid to save €20 million, the company is acquiring a 70 percent majority stake in Mackay Sugar, one of the few remaining Australian-owned sugar millers but has been weighed down with soaring debt levels of up to AU$180 million (US$129.2 million). The deal involves three of Mackay’s four factories producing around 700,000 tonnes of raw sugar annually for both the Australian market and exports. For Nordzucker, this is a strategic investment as it forays into the cane sugar sector and gain access to the structurally deficit Southeast Asian market.
The Brazilian sugar-ethanol giant and publicly listed company Cosan has also seen fall in its profits as net income was practically half in 2018 (Jan-Sept) compared with 2017. The company is launching an application (Payly) similar to Alipay, widely used in China, for payments and money transfers by smartphone. The bet could mean saving millions of reais in bank fees for the Cosan group’s companies and give it a foothold in Brazil’s booming financial technology scene. The company, which also has fuel and natural gas-distribution businesses, wants to convince at least some of its 20 million customers to fill their tanks or pay their gas bills through Payly. To get business owners to accept purchases made through the app, Payly will charge merchants a fraction of what they pay for credit cards in Brazil — 0.1 percent per transaction versus an average 2.63 percent on credit cards.
Dubai’s Al Khaleej Sugar, the world’s largest port-based refinery, re-started operations on 7th February after a shut down since mid-December hit by weak demand in white sugar export markets. The refiner lost its market in Iraq in 2015 when Etihad refinery commenced operations. Last year, the surge of exports from the EU sugar producers, competing in the white sugar market, forced Al Khaleej to reduce output by 20%. Looking at 2019, Jamal al-Ghurair, MD of the refinery, blamed subsidised Indian sugar exports for depressing prices and boosting competition in areas that Al Khaleej supplies during an interview with Bloomberg in early February.
To bowdlerise Tolstoy1, all companies finding themselves in a tight spot financially, respond very differently, even where they are operating in the same market.
1 The Tolstoy quote referred to is: “All happy families are alike; each unhappy family is unhappy in its own way.’