No sweet times for Illovo Sugar

Illovo's Zambian sugar factory.Picture: Supplied

Illovo's Zambian sugar factory.Picture: Supplied

Published Dec 1, 2015

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Johannesburg - Challenging fundamentals, including regional drought, reduced demand for sugar in Malawi and sustained pressure on export sugar prices cut Illovo Sugar’s profits in the first half of the year.

However, the company said yesterday that it was optimistic that lower production and improving sugar prices would be a silver lining for the group in the coming year.

Illovo, which has operations in Swaziland, Zambia, Malawi and South Africa, saw first-half profit dropping 82 percent to R141.8 million as a drought in sub-Saharan Africa caused output to decline.

Revenue fell 7 percent to R5.5 billion.

As a result of the drop in profit, Illovo expects to cut up to R1.2bn of costs over the next two years to cope with low prices.

The company said the recent recovery in world sugar prices was “encouraging” and should be buoyed by a deficit in supply.

According to Illovo, raw sugar has risen 48 percent after falling to a more than seven-year low of US10.13 cents a pound on August 24, while the white variety has climbed 23 percent from a six-year low reached on August 20.

Interim headline earnings per share fell 58 percent to 71.7c, Illovo said.

Sugar production fell 9.3 percent to 1.16 million tons.

“While this interim reporting period has been extremely difficult on a number of fronts – the consistent ongoing growth in world and African sugar consumption, the expectation of a global production deficit, a shift in sales mix away from the EU and operational efficiency improvements – signal improved medium-term prospects,” Gavin Dalgleish, the managing director of Illovo, said.

Vulnerability

The group said persistent lower-than-normal rainfall across the southern African region had impacted major river, dam and lake levels, putting stress on growing conditions. This had also reduced cane yields and increased vulnerability to pests and disease.

“Recent forecasts suggest that the global sugar balance will move towards a production deficit in the current year which, together with speculation in the market, has contributed to a recent recovery in world market prices off seven-year lows.

“Initiatives to improve the sales mix and to develop regional markets will benefit the full year earnings, while structural cost reduction programmes will continue to build on the good results achieved to date,” Dalgleish said.

In South Africa, the drought has reduced the total cane supply to the group’s factories by 20 percent on a comparable year-on-year basis as well as flood damage in Mozambique in January, which further decreased late season cane supply.

“A recovery in sugar production during the 2016/17 season is expected, but will be limited by the continuation of the drought in South Africa and is dependent on a return to normal summer rainfall levels across the other Southern African operations,” Dalgleish said.

Illovo in April concluded the acquisition of Kilombero Sugar Distributors (KSD), a company in which the group holds a 20 percent investment.

KSD held the exclusive right to market and distribute the group’s sugar production in Tanzania.

The group had acquired the business to allow it direct access to existing customers in Tanzania as well as to exert increased influence over marketing and distribution decisions.

Dalgleish said the company was positioning itself as an African player and gradually moving away from the EU – a key market for Illovo – due to upcoming reforms that would see the EU becoming a net exporter of sugar.

The dismantling of EU production quotas in late 2017 will force sugar producers in the region to compete freely on the world market.

Illovo shares on the JSE yesterday fell by 0.62 percent to close at R16.10 , which valued the company at R7.4bn.

* Additional reporting by Reuters

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