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Danisco prepares for sugar reform to hit

By Anthony Fletcher , 10-Feb-2006

Danisco has unveiled a series of closures to safeguard its sugar activities in the face of widespread regulatory reform and increasing competition.

The closures include the sugar factory in Assens, Denmark, the sugar factory in Kpingebro, Sweden, the sugar factory in Salo, Finland and the sale of parts of the sugar quotas in Sweden and Finland.

The company says that these efficiency measures will affect up to 350 employees and reduce Danisco's total production of quota sugar by around 100,000 tonnes.

"I deeply regret that a number of our employees stand to lose their jobs on account of changes in the external circumstances for our business," said Mogens Granborg, executive vice president of Danisco.

"However, the efficiencies were planning are crucial to remain a frontrunner in the European sugar market and a workplace employing close to 2,000 people."

In addition, Danisco plans to join all sugar activities in one separate legal entity that remains 100 per cent owned by Danisco in order to improve cohesion and communication under the new market conditions.

Danisco estimates that once fully implemented, the EU sugar reform will reduce the estimated earnings level to DKK 600-750 million a year. This estimate assumed that the increase in energy prices in the autumn of 2005 would be of a temporary nature.

EU sugar reforms, which come into effect on 1 July 2006, feature a number of concessions designed to give European sugar producers a viable future. First there was the climb-down from the original proposed 39 per cent price cut to a figure of 36 per cent, and most significantly for sugar producers, there was agreement the sector would be compensated for, on average, 64.2 per cent of this price cut.

This has given the sugar industry reasons to be hopeful. A Standard & Poor's Ratings Services study, entitled "Sweet 'N Slow: Gradual Liberalisation Of EU Sugar Regime Preserves Credit Quality", said that given the gradual nature of the reform should provide a fairly protected environment for European manufacturers over the next four years.

We continue to believe that full deregulation in the EU market for sugar production and processing is remote," said Standard & Poor's credit analyst Olaf Toelke.

Danisco therefore still holds ambitions of being the preferred supplier on the Northern European sugar market.

"Danisco sees the sugar business as a significant and strong cash flow-generating activity that for many years has been one of the most efficient operators in Europe," said Danisco CEO Alf Duch-Pedersen.

"We see a basis for maintaining this position going forward and we will continue to invest in the development of the sugar business in line with the other product divisions."

A recent USDA report forecast a rise in EU sugar production, attributed to good weather and EU enlargement. The 2004 accession of 10 countries forming a 25-member state strong EU contributed about 3.7 million tones last year.

EU production is forecast at 21.2 million tonnes, with 3.6 million tonnes coming the new member states, mainly the Eastern European ones. Exports for 2006 are forecast at 7.1 million tonnes, a rise of 1.7 million tonnes on the previous year.

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