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.
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