BMI V iew: We have revised up our forecast for South African sugar production in 2013/14 on favourable weather conditions, strong yields and plantings. Because global sugar prices have fallen below local production costs, cheap sugar imports - from Brazil in particular - are flooding the market. As a result, the local sugar industry has applied for an increase in the reference price at which sugar import tariffs kick in. This would especially benefit large producers, which have seen margins increase in spite of falling prices.
We have revised up our forecast for 2013/14 South African sugar production to 2.3mn tonnes (from 2.1mn tonnes previously) owing to favourable weather conditions and strong yields and plantings. This rise in production will increase South Africa's production surplus from 142,900 tonnes in 2012/13 to 405,800 tonnes in 2013/14, boosting the country's export potential. The country's largest sugar producers, Illovo Group and Tongaat Hulett, reported strong export volume growth in Zimbabwe and Mozambique, even though values were affected by lower sugar prices and unfavourable exchange rates.
|Staying On Top Of Demand|
|South Africa - Sugar Production & Consumption ('000 tonnes)|
Because global sugar prices have fallen below local production costs, cheap sugar imports - from Brazil in particular - are flooding the South African market, harming the domestic industry. The country is set to import about 400,000 tonnes of sugar in 2013/14, which compares with about 200,000 tonnes in past seasons. The projected 2013/14 export volume is equivalent to the output of three sugar mills, which could cause 40,000 job losses if import restrictions are not put in place according to local industry sources. In response, the industry is applying to have the threshold at which protective measures kick in more than doubled. The Sugar Association of South Africa (SASA) requested in March that the 'dollar-reference price' for imports of sugar into the country be increased from an existing US$358/tonne to US$764/tonne. This compares with a global price of US$339/tonne. This means that when sugar is cheaper than US$764/tonne (it is US$358/tonne currently), tariff measures apply to protect the industry. It is likely that the International Trade Administration Commission (ITAC) of South Africa, to which the request has been made, will accept the change.
|Still Low By Recent Standards|
|Front-Month ICE Sugar (USc/lb, weekly) & RSI (below)|
SASA has previously requested for an increase in the price at which sugar import tariffs kick in, in 2008 when global prices reached a low. At that point, the SASA applied for an increase in the reference price from US$330/tonne to US$400/tonne, premised on what it perceived to be a 60% distortion of international sugar prices. The request was not granted fully, but ITAC increased the reference price to US$358/tonne as a compromise. A similar type of decision could be made this time, especially as local production costs have risen significantly over the past five years.
|Select Companies - Operating Margins (%)|
We believe these issues have not affected the country's largest producers, which, because of their size and geographical diversification, managed to increase operating margins over recent years even in a context of collapsing global sugar prices. Illovo Sugar's margins have steadily increased from 12.7% in FY2011 to 17.1% in FY2013, while Tongaat Hulett's margins have been strong, increasing from 13.6% in FY2011 to 14.7% in FY2013. Both companies have reported more efficient cost management, especially at their mills, thanks to increasing scales and better technology. Also, investment in crushing capacity in neighbouring countries is starting to pay off, with booming local production compensating for high fixed costs.
|Rebound To Come|
|Tongaat Hulett - Share Price (ZAR, weekly) & RSI (below)|
In the event that ITAC grants an increase in the reference price, resulting in protective tariffs for imports, both Illovo and Tongaat Hulett would benefit from higher domestic prices, helping their margins further up in the near term. This could benefit their valuations, which decreased on a price/earnings basis in recent months. The decision would have contrasting effects on companies involved further down the line in the consumer sector. Tiger Brands, the Federation of Soft Drink Manufacturers and the South African Chocolate and Sweet Manufacturers Association have opposed the application, arguing that it would significantly raise their input costs or hurt private consumption growth.
|Notes: e BMI estimates. f BMI forecasts. Sources: 1 South African Sugar Association; 2 FAPRI.|
|Sugar Production, '000 tonnes 1||1,890.0||2,000.0||2,300.0||2,100.0||2,141.4||2,183.6|
|Sugar Consumption, '000 tonnes 2||1,810.0||e||1,857.1||1,894.2||1,966.2||2,037.0||2,112.3|