SOUTH AFRICA: Illovo seen as the winner after EU reforms
Published: 03/11/2010, 10:34:39 AM
South African sugar producers Illovo Sugar and Tongaat Hulett have been hard at work to take advantage of sugar reforms in the EU, but Illovo is likely to do better than its rival, according to South Africa's Business Report.
In a recent report, Kagiso Asset Management equity analyst Rubin Renecke said that of the two companies, Illovo was by far the better positioned to benefit from the EU reforms because of the countries in which it operated and the expansions it had done.
Renecke said Illovo operated mostly in African, Caribbean and Pacific countries and least developed countries, and the bulk of its expansion had been in anticipation of the EU reforms.
The group expanded its operations in Zambia and Malawi by buying farms and investing in irrigation equipment and plantings, which was followed by expansions in Tanzania and Mozambique.
The final phase of the reforms that kicked in last year aims to restructure the EU market. This follows the dumping of excess sugar supply by the EU onto the world market some years ago.
As a result of the changes, sugar supply from the EU has fallen by about 6 million metric tonnes. This shortfall will be picked up by African, Caribbean and Pacific countries and least developed countries.
Renecke said: "Illovo management recognised that increased volumes meant a decrease in the unit cost of production as well as guaranteed export prices."
Illovo operates in Swaziland and South Africa in addition to Malawi, Zambia, Tanzania and Mozambique . The firm is also working on a greenfield project in Mali.
In the medium term, Illovo's production is set to expand to about 2.6 million tonnes a year from the current 1.8 million tonnes, with most of its sugar going to protected markets.
Mohamed Shafee Loonat, a portfolio manager at Element Investment Managers, said while Illovo was more focused outside South Africa than Tongaat, both companies were operating in low-cost producing countries with good irrigation so in terms of their sugar businesses they would both benefit equally from EU sugar reforms.
Illovo's greater focus outside South Africa is underpinned by the fact that it has recently sold two mills in South Africa. With its majority shareholder Associated British Foods, it already has good access to European markets.
Loonat said Tongaat, which is more focused on South Africa, believed in the longer-term prospects for the South African sugar industry that could benefit from the finality of land reform as well as potential from green energy production, be it ethanol or electricity.
Renecke said Tongaat's prospects for taking advantage of EU reforms were also good, but to a lesser extent than Illovo. The company has invested substantially in Mozambique and Swaziland and these investments have been timed to coincide with the liberalisation of the EU sugar market.
Tongaat also has substantial operations in Zimbabwe that will have significant earnings potential once economic and political stability is achieved.
Renecke said when production in Zimbabwe reached 600 000 tonnes, compared with the 290,000 tonnes produced there last year, it would be the lowest cost producer in Africa.
Tongaat said last week that the aim was to take sugar production from the 957 000 tonnes milled in the 2009/10 season to the group's installed annual capacity of 1.9 million tonnes over the next few years.