While big consumers of sugar are having a swell time with the global price meltdown of the commodity, the largest sugar producing firms are barely having reasons to smile as profits get increasingly decimated, and losses accumulate alongside the strife to stay afloat in the face of strong competition.
With the price depression weighing hard on Südzucker, the world’s biggest producer with over 4.2 million metric tonnes, it sadly sees over 100 million euros operating loss in its sugar segment between 2018 and 2019, even as its rivals also fight on.
For Nordzucker, the world’s sixth largest producer with about 2.5 million metric tonnes, the current price level has made it really difficult for sugar companies to continue production at break-even, according to reports seen by business a.m.
Since late 2011, the sugar market has been on a downward trend as a result of a global production surplus. Generally, rising production usually sends prices lower as it opens a possibility of either an equilibrium or an overwhelming demand.
Australia-based analyst, Green Pool, had forecast a smaller global surplus of 5.95 million tonnes for 2018 and 2019 following a huge surplus of 11.51 million tonnes in the current season. It expected the EU’s white sugar exports to grow to 3.50 million tonnes in 2017 and 2018, up from 1.38 million tonnes in the prior season.
After the European Union lifted the ban on sugar beet production in 2017, which boosted output and paved way for the region to become a net exporter for the first time in over a decade, the rise in production appears wrongly timed as sugar has continued to decline on health-conscious trading bloc, throwing supplies onto a world market already awash with the sweetener.
Stefan Uhlenbrock, an analyst at F.O. Licht said: “Everyone can produce as much as they want and initially everyone only looked at the cost side of the equation and tried to reduce production costs by processing more beets and producing more sugar. But this leaves out of consideration that prices must collapse if all key players do the same and raise output massively – and this is the situation right now. Over time this will result in a survival only of the fittest.”
Sugar prices had already been underpinned by production quotas and import tariffs under the last regime and were often far above world market levels. Consequently, the need to compete in a global export market has largely closed the gap.
The European Commission reported an average price for white sugar during January of €374 a tonne, down €26 from December and the lowest level in records dat- ing back to 2006. “ at gives you an idea of the speed at which the European market is converging with the world market. With London sugar prices at around €280, it is likely that the EU price has fallen further since January,” said Francois Thaury, sugar analyst at Agritel.
UK’s producers also appear to be sharing a similar fate as domestic consumers have begun to struggle with the government’s sugar tax which came into effect last Friday. The levy targeted at manufacturers of soft drinks stipulates that contents that contain 5gram of sugar per 100ml will be surcharged 18 pounds per litre, while drinks with more than 8gram of sugar per 100ml will suffer 24 pounds per litre sanction.
The soft drinks levy is the latest in a number of health taxes around the world as governments grapple with the rising costs of obesity-related illnesses. For food and drinks producers, the shift in political mood has meant formulation changes and strategic shifts, as they worry about which sector is likely to be hit next.
In response, many of the soft drinks producers have cut sugar levels in some of the most popular brands, including Irn Bru, Ribena and Fanta.
According to the UK Treasury, more than 50 percent of manufacturers have cut sugar from their recipes.
For instance, a standard can of regular Coke, currently costing around 70 pence in the UK, would be slapped with an 8 pence increase, while the same amount of Sprite (6.6g per 100ml) would go up by 6 pence. The cost of a 1.75ml bottle of coke would increase from roughly £1.25 to £1.49. Scottish favourite Irn Bru, containing 10.5g per 100ml will face a similar increase in Coke along with Red Bull 11g per 100ml, Dr. Pepper 10.3g per100mlandOldJamaicaGinger Beer 15.2g per 100ml.
The sugar tax further means consumers will pay an average of 8p more for a 330ml can of Coca Cola or Pepsi. Accordingly, most supermarkets labelled soft drinks have been altered for their sugar levels to stay below the levy’s threshold.
Manufacturers may however not bear the brunt in reality as the tax e ect would likely be passed on to customers and shops.
Although the Associated British Foods (ABF), parent of British Sugar, has been somewhat protected by diversi cation. The company’s other businesses include the fash- ion chain, Primark.
“Around 16% of ABF’s pro ts came from sugar so clearly it’s not the driving force. For sugar, they’ve been very clear, saying that removal of quotas causing a weaker sugar price is going to have an impact,” said George Salmon, analyst at Hargreaves Lansdown.
While sugar glut is indepen- dently su cient to drive lower prices, weak global consumption could strongly impact poor outcomes currently being experienced by producers.
If the consumption outlook of sugar becomes positive against what it is now, chances of a surge in prices will follow, according to a report of Futures Knowledge, which suggests an unlikely chance for consumption to soar in the near future.
Historically, the commodity shows a significant relationship with inflation rates and in fact considered an inflation-hedging tool. “This means that in inflationary environments, you can expect sugar to perform fairly, at least, relative to other agricultural commodities, although there are bound to be disparities at times.”
In a different conversation, the increasing demand for clean ethanol has been seen as a likely driver of oil prices in future. The effect of ethanol market on the sugar market appears mainly in the demand for sugar byproducts converted into ethanol. It is believed that as demand for sugar-based ethanol grows, sugar prices might also go up.
Moreover, the ethanol market indirectly establishes a growing relationship between oil prices and sugar price, according to FK.
“As oil prices go up, the demand outlook for alternative fuels, the class to which ethanol belongs, become positive, thereby driving prices up. So it means that as more of sugar is employed in the ethanol industry, sugar prices will become susceptible to factors that move oil prices,” it said.