Business Case in Focus African sugar industry

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Business Case in FocusAfrican sugar industry a
rising star

• Introduction
•  Sugar is the only commodity that is produced
  from two very different crops sugarbeet and
  sugarcane. Globally, sugar is produced in 119
  countries 7 grow cane and beet, 41 grow beet
  only and 71 grow cane only. According to the
  analyst Czarnikow, beet sugar production
  accounted for 19 of the global sugar production
  in 2013/14. This is forecast to rise to 20 in
  2014/15. As table 1 suggests, bulk of the sugar
  is produced from cane in countries in the
  tropics.
• Asia, which has a structural deficit in sugar, is
  the largest sugar consumer and key driver for
  global imports (see table 2).
• Prices outlook
•  Following a succession of years with global
  surplus, tide has turned, and the balance sheet
  for 2014/15 season is likely to show deficit.
  Industry analysts Cazarnikow and Rabobank
  indicate deficits of some 0.5 mtrv and 0.9 mtrv
  next year, respectively. The prospect of deficit
  is widely acknowledged amongst other senior
  analysts in the industry. But it is unlikely that
  the bearish pressure on sugar price will be
  lifted anytime soon, largely because high
  stocks/consumption ratio (see table 3). During
  the past four years of surplus, with prices
  depressed, there has been huge accumulation of
  stocks. What appears to be marginal deficit in
  2014/15 is unlikely to prompt a revival in sugar
  price.

Table 1.
Table 2.
Source FO Licht
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Table 3.
The probable drivers on price development in the
foreseeable future include the following   Bearis
h Replenished stocks dampening minor supply
shocks Sugar production from new build projects
coming online adding to global output Speculators
maintaining a large net short position in New
York sugar futures. In the week ending August 12,
speculators increased their net short position by
15,042 lots, bringing it to 56,432. In a review
of impact of speculative trading activities by
Commonwealth Bank of Australia in October 2013,
the bank found correlation between speculative
trader positions and prices to be an
exceptionally strong 92. EU sugar producers
expanding production to wrest a larger market
share come the abolition of quotas in
2017 Currency markets have a significant impact
on global prices.    
According to a study by the Commonwealth Bank of
Australia (CBA), depreciation of the Brazilian
Real (BRL) again the US dollar softens the impact
of declining US denominated sugar values.
Since 1st January 2011, the BRL has depreciated
38 against the US, while the Indian Rupee has
depreciated 40. The correlation between US
sugar prices and the US/BRL over the period is
negative 78, according to CBA. With elections
looming in Brazil, economy in recession,
uncertainty over the weak BRL remains.
Bullish Weather is the biggest joker in pack.
Drought and floods were responsible for reducing
sugar output by some 10 million tonnes in 2009
which subsequently triggered the 30 year high in
sugar prices. With precipitation 40 below in
Brazils main cane growing region Centre South,
some analysts have revised down sugar output as
cane quality has been adversely affected by
drought. 2014/15 campaign may end a month
earlier. In India, rainfall deficit since the
start of monsoon season is 18 (as of
June). Brazilian mills diverting more cane to
produce ethanol in preference over
sugar Consumption demand in Asia remaining
strong, and rising in emerging economies
  Barring no game-changing incidents in the
foreseeable future, it appears that next few
years may see stabilization of sugar prices,
probably hovering in the 18-24 cents/lb range.
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• Competitiveness of the African Sugar Industry
•  In a recently published study in International
  Sugar Journal, looking at investment in the
  global sugar industry reported in the press over
  the past year, 14 sugar producing countries in
  Africa have received the lions share greater
  than investment in all the sugar producing
  regions combined. These are Sudan, Ghana, Kenya,
  Nigeria, Tanzania, Ethiopia, Angola, South
  Africa, Swaziland, Mozambique, Malawi, Zambia,
  Algeria and Egypt. There are multiple projects in
  several countries, for example, in Angola, two
  factories with capacities of over 250,000 tonnes
  sugar are planned, in Ethiopia, seven new
  factories are scheduled to come online in
  2015.This is a superb vote of confidence by
  investors convinced of the potential of Africas
  sugar market and the competitiveness of the
  individual countries sugar industries.
•  As table 1 suggests, Africa currently plays a
  cameo role in the global sugar sector. But
  despite this, it boasts some of the lowest cost
  sugar producers in the world. In a study by LMC
  International and Overseas Development Institute
  couple of years ago, the following countries had
  sugar production costs ltUS 400 Swaziland,
  Mozambique, Ethiopia, Malawi, Sudan, Tanzania,
  Zambia and Zimbabwe. Add to this South Africa.
  Most of the companies operating factories in the
  low cost countries are owned by large private
  groups, e.g. Illovo, Tongaat-Hulett, Kenana.
•  Factors informing the competitiveness of these
  industries include
• Suitable climate and fertile soils for growing
  cane along with availability of water for
  supplementary irrigation
• Availability of relatively low cost labour to
  support agricultural operations
• A long, dry season facilitates a long campaign
  lasting up to at least 180 days which supports
  high throughput in sugar factories and spreads
  overheads
• Shift towards large-scale agro-industrial
  enterprises - factories with capacities well over
  100,000 tonnes and attaching these with
  biorefineries to produce co-products such as
  ethanol
• Supportive government policy structure that
  includes protection of local industries from any
  dumping of sugar from global market and thereby
  investing confidence in private sector investors
  and allaying any fears of risk of their
  investment. There have been exceptions, where
  through alleged corruption, smuggled sugar has
  damaged industries in Tanzania and Kenya
• An established collaborative structure between
  millers, growers and researchers to support high
  productivity and production of quality cane. This
  is largely true of mostly corporate farming
  (e.g.Kenana in Sudan) and or plantation
  agriculture (e.g. Illovo in southern Africa). The
  challenge remains in those countries where cane
  to factories is supplied from small scale
  growers.