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Commercial Director’s review

Larry Riddle Commercial Director

Products

Illovo produces and sells a range of sugar, syrup and downstream products into domestic, preferential, regional and world markets.

Sugar

We sell a wide range of brown and refined sugar products to serve both our domestic and export customers. Our offerings include:

• Industrial sugar: Mainly in refined bulk form, sold primarily to soft drink, confectionery, canning and repacking customers. Most of this sugar is sold into markets in the countries in which we operate.
• Pre-pack sugar: Refined and brown sugar which is pre-packed in paper or plastic of various pack sizes for direct consumption in domestic markets. It is sold to retail and wholesale customers and directly to consumers through our wide network of warehouses and distribution channels. In South Africa and Malawi, pre-pack sugar is marketed under the Illovo brand name, and in Zambia and Tanzania, under the Whitespoon and Bwana Sukari brand names respectively. In Swaziland and Mozambique, local market sugar is marketed on behalf of producers by their respective sugar associations.
• Bulk raw sugar for refining: Raw sugar which is primarily exported to sugar refineries via preferential access to EU and USA markets, or through world market sales out of South Africa.
• Specialty sugars: Sugar which undergoes additional or special processing to meet our customers’ unique requirements pertaining to flavour, grain size and colour, which is exported into high-premium niche markets in the EU and USA. An increasing volume of these exports is marketed under the “Fairtrade” label with price premiums returning directly to promote agricultural development among emergent cane farmers in our own countries of operation. Relatively smaller quantities are sold into Illovo’s domestic markets.
• Syrup: In South Africa and Zambia, Illovo produces a wide range of quality invert syrup products ranging from golden syrup through to the rich-dessert topping range. Illovo’s market leading syrups can be found nationally in retail, wholesale and industrial markets while customer-specific inverts are also supplied to many industrial customers and to growing export markets.

Downstream

As part of Illovo’s Strategic Intent to optimise the return on every stick of cane, a wide variety of niche, high-value downstream products are produced and marketed from the core commodity products of cane-fibre, sugar and molasses. Downstream products include syrups, ethanol, furfural and furfuryl alcohol, diacetyl, 2,3-Pentanedione, BioMass Sugar®, agricultural nematicides and an increasing supply of electricity. Lactulose is also produced at the Merebank site in South Africa.

Commercial review

Favourable market conditions and higher production levels impacted positively on sales resulting in the group achieving revenues of R13.2 billion, representing a 20% increase in sales compared to that of the previous year. This improved position was aided by an increase in sugar production of 5% compared to last year and better pricing being achieved on average in both domestic and export markets. The impact of low-cost sugar imports that have been flowing into both the Tanzanian and South African markets dampened group revenues in the current year but was mitigated by the improved performance of Illovo’s four other operations. In South Africa, duty-free sugar imports amounted to in excess of 460 000 tons (2013: 200 000 tons), while in Tanzania, world sugar imports attracted minimal duties and continues to threaten the viability of the sugar producers in Tanzania. It is pleasing to note that on 4 April 2014, it was announced that the South African Government had accepted the International Trade Administration Commission (ITAC) recommendation to increase import protection for the South African Sugar Industry. In Tanzania and the East African Community (EAC), a number of key stakeholders including influential government departments have in principle agreed to providing support to the industry similar to that of South Africa, and these government organisations will continue to be lobbied until adequate protection is provided against government-subsidised low-cost world sugars.

The downstream operations, which are based primarily in South Africa, have once again grown their combined revenue by 22% year-on-year. The group achieved a new ethanol production record and combined with improved pricing for furfural, are the main reasons for the growth in current-year downstream sales revenue.

Domestic sugar sales provide the foundation of Illovo’s marketing strategy and represented 58% of total sales. Sugar surplus to local markets is sold into preferential markets in the EU and the USA, and regional markets in Africa, while in South Africa, bulk raw exports to the world market are sold on behalf of Illovo through SASA. Export revenues from the downstream business represent more than 60% of total downstream revenue.

Sugar

Domestic markets

Sugar revenues continued to be underpinned by strong market shares in each of the domestic markets in which we operate, and in the year under review, domestic market sales represented 58% of total sugar sales volumes, despite the decline in the local sales in South Africa which were impacted by low-cost world imports.

Zambia’s per capita consumption of sugar continues to improve in line with buoyant growth of the economy, positively impacting domestic sales, which grew year-on-year. Despite a challenging economic environment in Malawi, with constrained consumer spending, the industry domestic sales volumes improved compared to the previous year. In Tanzania, low cost imports in excess of the normal deficit tonnage resulted in local producers experiencing difficulties in getting volumes away at remunerative prices, with larger than normal volumes held in closing stock over the financial year-end. Pricing for Swaziland sugar in the Southern African Customs Union (SACU) market was depressed due to the effect of cheap imported world sugar entering SACU. Domestic sugar sales in Mozambique were impacted by lower production attributed to difficulties experienced by the agricultural operation. High levels of economic growth in Mozambique did not, however, translate into higher domestic sales.

Export markets

Increased sugar availability due primarily to improved weather conditions in a number of the group’s countries of operation resulted in the sales availability of sugar increasing and enabled Illovo to take full advantage of relatively higher regional and preferential market prices. Illovo currently exports sugar to around 28 countries.

Regional markets

World prices declined in the current year with a further global sugar surplus expected in the international sugar season which ends 30 September. However, tight sugar supply conditions in Europe supported firmer African regional market prices with both Zambia and Malawi benefiting from improved market premiums.

Preferential markets

EU prices in the current year were in line with the average prices for the prior year despite the additional supply measures adopted by the EU Commission to improve stock levels, which had reached uncomfortably low levels. The EU sugar supply position for next season has improved significantly, putting pressure on prices as additional sources of supply become available to EU refiners. This oversupply in Europe will likely impact on prices for EU exports by Malawi, Zambia, Swaziland and Mozambique in the 2014/15 season.

Illovo has been successful in lobbying the EU Commission in regard to the further reforms to the EU Sugar regime. The EU Commission has approved that the beet sugar quotas that are currently in place and which limit access for beet sugar into the EU market be abolished in 2017 and not in 2015 as originally intended. This extends the preferential access for Illovo’s operations into the EU for another two years

Demand for our premium speciality sugars was strong and record sales were again achieved. During the year, group preferential exports to the EU and the USA reached record levels.

Downstream

Downstream operations continue to play an important and vital role in our business, with revenues increasing by 22% compared to that of 2012/13. This position is on the back of higher production levels of ethanol at our Merebank and Glendale distilleries where record production levels were achieved. The new distillery in Tanzania also contributed to improved revenue from downstream products in the current year and this is forecast to grow in the 2014/15 year for its first full year of production.

Furfural and furfuryl alcohol revenue improved in the current year due to higher production levels at the Sezela mill and improved prices arising from demand in China and the EU. While the group’s range of downstream products is primarily aimed at export markets, the Merebank and Glendale distilleries remain important suppliers of ethanol to the South African beverage, pharmaceutical, personal care, flavour, printing and packaging market segments. Relatively small volumes of furfural and its derivatives, including Crop Guard®, a furfural-based agricultural nematicide under the Agriguard range of products, as well as lactulose, a natural laxative, are sold in the local South African market. Illovo syrup, a well-known brand in the South African domestic market, retained its status as the market leader. Illovo continues to explore downstream opportunities to diversify its product mix as evidenced by the newly built distillery in Tanzania which supplies its full output into the domestic market.

The group exports furfural and its derivatives to more than 70 countries. We continue to explore new markets for MultiGuard Protect®, a furfural-based agricultural nematicide derived from sugar cane, and are in the process of securing registration for access into the USA pre-plant food market, which if successful will provide a further opportunity to commercialise this product.

The group has a strong local market presence in each of the countries in which it operates with 58% of total sales marketed domestically. Overall, group sugar sales increased by 8% compared to the previous year, while downstream revenues increased by 21.5% on the back of higher production levels.

Country operations – sugar markets

Malawi

During the year, Malawi achieved a strong overall sugar sales performance, with approximately half of total sales sold into the domestic market under Illovo-branded pre-packed refined and brown sugar packs through the company’s chain of distribution centres situated throughout the country. The balance of the sugar produced was exported to markets within Europe, the USA and regionally into neighbouring African countries. Malawi’s speciality sugar remained in strong demand in both the European and USA consumer markets. Despite a depressed market in Malawi, local market sales grew in the current year and overall there was a strong sales performance domestically.

Mozambique

Sugar sales in Mozambique were impacted by lower production attributed to difficulties experienced in our agricultural operations. Economic growth in Mozambique continues to impress with growth in GDP of 8.1% in 2013, this did not, however, translate into higher domestic sales which from an industry perspective remained flat year-on-year. Export earnings declined in the second half of the year as a result of low prices in Europe which is the main reason for the decline in revenue.

South Africa

Illovo sells raw, brown and refined sugar, speciality brown sugars, syrup, furfural and its derivatives, potable and denatured ethanol, and lactulose into local and international markets. Illovo’s domestic market sugar sales’ performance in 2013/14 declined despite the increase in production. Duty-free sugar imports amounted to in excess of 460 000 tons (2013: 200 000 tons) and impacted domestic sales considerably, displacing an equal quantity of sugar of South African origin onto the world market.

Illovo’s share of raw sugar exports to the world market, undertaken by SASA, amounted to 209 000 tons which was up on the previous year of approximately 60 000 tons. The average price realised by the industry, including hedging activities undertaken by SASA, was US18.1 cents/lb, representing a decrease of 21% compared to the previous season average due to prices coming off high levels as the world sugar market remained in a surplus position.

Swaziland

Demand for Swaziland sugar in the SACU market was affected due to the effect of low-cost imported world sugar entering SACU. Swaziland continued to supply the EU markets with sugar in 2013/14 under duty-free, quotafree access. Revenues from EU sales during the season were impacted favourably by good market prices which benefited Swaziland and Ubombo in 2013/14.

Tanzania

The Tanzanian government awarded import licences at minimal duty in excess of the domestic market shortfall and this resulted in an oversupply of sugar in this market, resulting in local pricing coming under pressure. The business was able to secure export licences and sold 15 000 tons into the EU market. Notwithstanding this initiative the business finished the year-end with higher than normal stock levels. Dialogue with the Government of Tanzania and the East African Community is ongoing to ensure that domestic producers and small growers are fairly protected against dumping of cheap world market sugar.

Zambia

Domestic sales in Zambia increased in the 2013/14 season, building upon the previous year’s strong performance and resulting in a new sales record by our marketing team. The year was characterised by strong domestic economic fundamentals, a stable exchange rate and strong regional demand which underpinned good prices, plus increased sales into Europe.

Larry Riddle
Commercial Director

The commissioning of Illovo’s custom-designed central sugar warehouse and distribution centre in Pietermaritzburg in July 2013 has brought about meaningful storage and logistical savings in our South African operations.