El Niño a bit­ter pill for sugar pro­ducer Ton­gaat As the El Niño weather sys­tem’s ef­fects across South­ern Africa start to di­min­ish, sugar pro­ducer Ton­gaat Hulett cuts costs and hopes for bet­ter rains to re­turn to profit growth.

Finweek English Edition - - THE WEEK - Ed­i­to­rial@fin­week.co.za

con­sumers will con­tinue to pay more for sugar as the ef­fects of a se­vere drought feed through the pro­duc­tion chain and the govern­ment in­creases pro­tec­tion for do­mes­tic cane­grow­ers. In a year that saw the maize crop es­ti­mated at al­most half the level of 2014’s record har­vest, sugar pro­duc­tion at one of SA’s largest pro­duc­ers of the sweet­ener, Ton­gaat Hulett, is es­ti­mated to drop to be­low 1m tons in 2016/17. This is more than 30% lower than the 2014 pro­duc­tion.

“What hap­pened dur­ing the last sum­mer im­pacts on how much sugar we pro­duce in this fi­nan­cial year,” ex­plains Peter Staude, CEO of Ton­gaat Hulett. “Dur­ing the last sum­mer we re­duced ir­ri­ga­tion be­cause of the dam lev­els and we en­dured El Niño.”

This led to the out­look for the cur­rent fi­nan­cial year’s sugar pro­duc­tion to be “quite muted”, says Staude.

“Peo­ple are al­ready say­ing El Niño is dis­ap­pear­ing in the next sum­mer. I’m a bit scep­ti­cal about the fore­cast,” he says.

Ton­gaat’s cane fields in KwaZulu-Na­tal are mainly rain­fed whereas its fields in Mozam­bique and Zim­babwe are ir­ri­gated, ac­cord­ing to him. The com­pany’s sugar op­er­a­tions in South Africa were down to an op­er­at­ing loss of R5m for the 12 months end­ing 31 March after gen­er­at­ing a profit R261m a year ear­lier.

In Mozam­bique the op­er­at­ing profit dropped to R74m from R130m and in Zim­babwe it de­clined to R15m from R386m.

In Swazi­land, the com­pany’s Tam­bankulu Es­tate gen­er­ated an op­er­at­ing profit of R40m com­pared with the pre­vi­ous year’s profit of R29m. This was the only sugar divi­sion that re­alised a gain in op­er­a­tional prof­itabil­ity, mainly due to im­prov­ing sug­ar­cane prices, ac­cord­ing to the com­pany’s fi­nan­cial state­ments.

In to­tal, sugar op­er­a­tions saw a de­cline in op­er­at­ing prof­its to R124m from R806m a year ear­lier, ac­cord­ing to the state­ments.

An in­crease in the dol­lar-based ref­er­ence price of sugar, which is in fact a duty on im­ported sugar, to R1.32/kg dur­ing 2014 by the In­ter­na­tional Trade Ad­min­is­tra­tion Com­mis­sion of SA boosted pro­tec­tion for lo­cal sug­ar­cane grow­ers. It also acted as a buf­fer for rev­enues in a time that sugar pro­duc­tion came un­der pres­sure due to lower rain­fall.

In the mean­time, sugar millers such as Ton­gaat are con­tin­u­ing talks with govern­ment to en­able them to use bagasse – the mat­ter that re­mains after sug­ar­cane is milled – to gen­er­ate elec­tric­ity, ac­cord­ing to Staude. Sugar re­fin­ers would need longterm off­take agree­ments with Eskom to jus­tify large in­vest­ments in their re­finer­ies, he ex­plains.

Cur­rently, re­finer­ies do gen­er­ate power for own con­sump­tion. The tech­nol­ogy al­ready in place, how­ever, is old and only utilises about a fifth of the gen­er­a­tion po­ten­tial of bagasse, ex­plains Staude. Many of the re­finer­ies would, for ex­am­ple, need to in­stall new boil­ers, which would re­quire large cap­i­tal lay­outs, he says.

“We need pro­cure­ment deals,” he says. “They will come. Maybe not in the next 12 months.”

Peter Staude CEO of Ton­gaat Hulett

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