Commercial director’s review
“The improvement in group revenue was aided by better pricing being achieved on average in the domestic markets and an improved group sales mix”
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 re-packing customers. Most of this sugar is sold into markets in the countries in which we operate.
- Prepack sugar: Refined and brown sugar which is prepacked 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, prepack 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 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 lactulose. Electricity is also co-generated at all our sugar factories using bagasse and biomass as bio-renewable feedstock for the boilers. Surplus electricity produced in Swaziland and, to a lesser extent in Mozambique, is sold on to the national grid on a commercial basis.
Commercial review
Despite bearish market conditions, the annual group revenue of R13 267 million was R77 million up on the previous year notwithstanding a 3% decline in sugar production volumes and the devaluation of the Zambian Kwacha. The build-up in global sugar stocks, the continued weakening of the Brazilian Real, the announcement of a large export subsidy for Indian sugar exports and the low crude oil price have provided a negative outlook for the world sugar price (No.11) which has traded at its lowest level for six years during the current financial year. The world market price has an indirect impact on the regional market sugar prices in Africa and this market segment represents a significant and growing market for the Illovo group. EU market prices have continued to trend downward in the run up to the deregulation of the EU sugar industry in October 2017. The main reasons behind this have been the effect of "exceptional measures" used by the European Commission in previous years to increase supply of "in quota" sugar together with the improved supply prospects from existing ACP/LDC countries and new quota holders in Latin American countries. The EU Commission has intentionally operated a policy to increase supply to the market in an attempt to move internal European prices closer to world market levels, which has materially impacted revenues from this market segment.
The improvement in group revenue was aided by better pricing being achieved on average in the domestic markets and an improved group sales mix with all but the Mozambique domestic markets growing in 2014/15. The impact of low-cost sugar imports that have been flowing into both the Tanzanian and South African markets continues but at a much reduced rate and this has positively impacted sales for the current financial year.
In South Africa, duty-free sugar imports amounted to approximately 137 000 tons (2014: 460 000 tons) and it is pleasing to note that the International Trade Administration Commission’s (ITAC) recommendation to increase import protection for the South African sugar industry has helped protect the industry from subsidised low-cost world market sugar.
In Tanzania, world sugar imports have historically attracted minimal duties and the Government of Tanzania has recently implemented measures to protect the local industry through the implementation of tariffs provided against world sugars.
In Mozambique, imported sugar from the world market has displaced local market sales which has impacted the local producers and small-scale cane growers as these imports have meant that equivalent volumes are sold into lower returning export markets. Engagement with the Government in Mozambique on this matter is positive and a fair outcome is anticipated early in the new financial year.
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The downstream operations, which are based primarily in South Africa, have once again grown their combined revenue by 20% year-on-year. The group achieved a new ethanol production record and combined with improved pricing and weakening of the Rand which boosted export earnings are the main reasons for the growth in current-year downstream sales revenue. Furfural and furfuryl alcohol prices have been under pressure in the current financial year due to weak demand for furan resin driven off low steel demand in the Chinese market. Annual sales of furfural and furfuryl alcohol have also been impacted by the lower crop at Sezela due to the dry weather conditions on the South Coast. Export revenues from the downstream business represent more than 60% of total downstream revenue and benefited from the devaluation of the Rand in the current financial year. |
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Domestic sugar sales provide the foundation of Illovo’s marketing strategy and represented 63% of total sugar sales volumes (2014: 58%). Sugar surplus to local markets is sold into preferential markets in the EU and the USA and regional markets, while in South Africa, bulk raw exports to the world market are sold on behalf of Illovo through SASA. |
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 63% of total sugar sales volumes.
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, 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 in the prior year experiencing difficulties in securing sales, with larger than normal volumes held in closing stock over the financial year-end. All of the carry-over stock from the prior year plus the current year’s production was sold in the 2014/15 financial year and is attributable to Government interventions to stem the flow of world market imports. Swaziland sugar sales in the Southern African Customs Union (SACU) market also increased due to the effect of a reduction of cheap imported world sugar entering SACU which was also the case for South African sugar sales in the current financial year. Industry domestic sugar sales in Mozambique were positively impacted by improved production and although the domestic market sales increased, the high levels of economic growth in Mozambique did not translate into the growth of sugar consumption expected. Low-cost imports into the country impacted negatively on domestic sales revenue.
Export markets
A decrease in sugar availability primarily due to dry weather conditions in South Africa resulted in overall exports declining in the year under review. A priority for the group is always to sustain its domestic markets and any surplus to domestic market requirements is then exported. Illovo currently exports sugar to around 28 countries.
Regional markets
Regional market sales grew by 29% year-on-year despite South Africa not having sufficient volumes to export. Prices in the region came under pressure due to the lower world market prices.
Preferential markets
EU prices in the current year were significantly below those of the prior year due to the additional supply measures adopted by the EU Commission to improve stock levels, which had reached uncomfortably low levels in Europe in 2013 and which still impacted pricing in 2014. The EU sugar supply position changed from a deficit to a surplus in the current financial year, putting pressure on prices as additional sources of supply become available to EU refiners. The oversupply in Europe and Euro currency weakness will likely impact prices in the new financial year, mitigated to some extent by an improved market mix.
Demand for our premium speciality sugars was strong in the current year, and these products have proven to represent a sustainable niche market. During the year, group speciality preferential exports to the EU and the USA reached record levels.
Sugar market segmental analysis
| % by volume | 2014/15 | 2013/14 |
| Domestic markets | 63 | 58 |
|---|---|---|
| Preferential markets | 20 | 23 |
| Regional markets | 10 | 8 |
| World markets | 7 | 11 |
| Total | 100 | 100 |
Downstream
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Downstream operations continue to play an important and vital role in our business, with revenues increasing by 20% compared to those of 2013/14. This position is on the back of higher production levels of ethanol at our Merebank and Glendale distilleries where record production levels were achieved. In its first full year of production, the new distillery in Tanzania also contributed to improved revenue from downstream products in 2014/15. |
Furfural and furfuryl alcohol revenue declined in the current year due to lower production levels at the Sezela mill and softer prices arising from dampened 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.
Downstream products
| Sezela downstream | |
| Products produced | Uses |
| Furfural | Mainly for the production of furfuryl alcohol and in lube oil refineries as an extractive solvent in the purification of base oils. It is also used for specialist applications such as the manufacture of grinding wheels, friction pellets for brake pads, crucible manufacture, and to a lesser extent as a flavour ingredient |
| Furfuryl alcohol | Used to produce a resin used in the foundry industry as a polymeric binder for foundry sands. It is also used for wood treatment, to produce acid-resistant coatings and certain pharmaceuticals, and as a flavour ingredient |
| Agriguard business products | |
| Crop Guard® | Used as an agricultural contact nematicide, at planting and within the growing season |
| MultiGuard Protect® | Developed and marketed as an agricultural contact-nematicide in the USA |
| Protect® | Used prior to planting, as a nematicide and fungicide |
| BioMass Sugar® | Used as phytofortifiers/soil improvers or as a liquid organic fertiliser |
| Flavourant products | |
| Diacetyl | Used as an ingredient in butter flavourings |
| 2,3-Pentanedione | Used as an ingredient in butter flavourings and as an intermediate in the manufacture of pyrazines |
| Natural methanol | Used in the manufacture of natural flavour ingredients |
| Merebank, Glendale and Tanzanian ethanol distilleries | |
| Products produced | Uses |
| Ethanol | A very high quality potable alcohol used by liquor industries for the production of branded alcoholic drinks (eg canes, vodkas, gins, rums, liqueurs and aperitifs) |
| Potable extra neutral alcohol (ENA) – 96.4% | |
| Anhydrous alcohol – 99.9% | Used in the pharmaceutical industry to produce pharmaceutical intermediaries and products (eg, in cough mixtures, alcohol is used to dissolve ingredients not able to be dissolved by water). Also used in surgical spirits, medical disinfectants, and in the production of solvents for use in the printing ink and flexible packaging industries |
| Rectified extra neutral alcohol (REN) – 96.4% | Also has pharmaceutical applications but mainly used in the personal care industry to produce cosmetics, hair care products, toiletries, fragrances and perfumes. In the food industry, it is used to produce flavours and spirit vinegar which is used in various pickling processes and in the production of condiments (eg, tomato sauce, chutney, mayonnaise and salad dressings) |
| Industrial alcohol – 95% | Used in the production of methylated spirits, solvents and thinners |
| Lactulose | Mild, natural laxative syrup |
Country Operations – sugar markets
Malawi
During the year, Malawi achieved a reasonable sugar sales performance, with over half of total sales sold into the domestic market under Illovo-branded prepacked 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 countries. Malawi’s speciality sugar remained in demand in both the European and USA consumer markets. Despite a challenging economic environment in Malawi, local market sales grew marginally in the current year and overall there was a credible sales performance domestically although the weakening macro factors in Malawi are beginning to impact the end consumer.
Mozambique
Economic growth in Mozambique continues to impress with growth in GDP of approximately 8.1% in 2014. This did not, however, translate into higher domestic sales which from an industry perspective declined year-on-year primarily due to imports of low-cost world sugar. Maragra’s domestic sales grew owing to higher production levels which were achieved in the year under review. Export earnings declined as a result of low prices in Europe and the weaker Euro against the US Dollar.
South Africa
Illovo sells raw, brown and refined sugar, speciality brown sugars and syrup into local and international markets. Illovo’s domestic market sugar sales’ performance in 2014/15 grew despite the decrease in production. Duty-free sugar imports reduced to 137 000 tons (2014: 460 000 tons) displacing an equal quantity of sugar of South African origin onto the world market. This represents a significant decline compared to the prior year and facilitated the destocking of cheap subsidised imported sugar in the year under review.
Illovo’s share of raw sugar exports to the world market, undertaken by SASA, amounted to 130 000 tons which was down on the previous year by approximately 80 000 tons. The average price realised by the industry, including hedging activities undertaken by SASA, was US17.5 cents/lb, representing a decrease of 4% compared to the previous season average due to the growing world surplus of sugar.
Swaziland
Demand for Swaziland sugar in the SACU market also benefited from the reduction in low-cost imported world sugar entering SACU. Swaziland continued to supply the EU markets with sugar in 2014/15 under duty-free, quota-free access which it will continue to enjoy for the foreseeable future. Revenues from EU sales during the season were negatively impacted by the weaker Euro and lower market prices which impacted the Swaziland industry and Ubombo in 2014/15 due to the surplus of sugar in the EU.
Tanzania
Dialogue with the Government of Tanzania and the East African Community to ensure that domestic producers and small-scale growers are fairly protected against dumping of low-cost world market sugar was successful. The Sugar Board of Tanzania has implemented protection in the current financial year through the application of tariffs on sugar imported from the world market which is expected to provide adequate protection for the Tanzanian sugar producers. These measures were to a large extent responsible for the improved commercial environment in Tanzania.
Zambia
Domestic sales in Zambia increased in the 2014/15 season, building upon the previous year’s strong performance and resulting in a new sales record. The year was characterised by strong domestic economic fundamentals and strong regional demand although pricing was impacted by lower world market prices.
Larry Riddle
Commercial Director
