Squeezed margins knock starch supplier

Related tags Raw material costs Starch Tate & lyle

Higher raw material prices, a tighter competitive market place and
uncertainty over HFCS contracts in the US sees UK carbohydrates
ingredients company Tate & Lyle announcing a disappointing
trading update for the third quarter.

Profit for the financial year - up to end of March 2004 - remains uncertain as the company continues price negotiations - hit by rising corn and wheat prices - in both the US and Europe. Just how far margins will be squeezed will be clearer in the near future.

But at the European starch operations of Amylum - 20 per cent of groupprofits - considerably higher raw material costs and a very competitive market place will mean 2005 profits will be 'significantly below' those of 2004, according to the UK company.

"Raw material costs in Europe have reduced margins on Amylum's contracts agreed at that time [November] and subsequent pricing has not fully recovered higher net raw material costs,"​ said the company in a statement this week, citing weaker vital wheat gluten prices as excacerbating the situation. Wheat gluten is a protein sold to bakers to improve the quality of bread flour and despite the fact that the 2003 wheat harvest was low, protein levels were actually high.

Across the Atlantic at the company's US operation Staley the situation is no rosier. Again, price negotiations on contracts leave the financial situation less than clear.

"At Staley, while some of the 2004 sweetener sales contracts have been completed at increased prices, the negotiation of major contracts is ongoing and may take some weeks to conclude,"​ said Tate & Lyle. The contracts are being negotiated against a background of recent corn price rises, a factor set to heavily influence the final outcome on sweetener product margins.

On hearing the news, investment analysts Goldman Sachs yesteray cut earnings per share estimates (EPS) for the company by 6 per cent to 30.7p, down from 32.8p, for the year end this March, and by a significant 16 per cent for 2005.

"While the group announced that 3Q pretax profits are in line with expectations, it states that current HFCS [High Fructose Corn Syrup] contracts, not yet concluded, will influence the final outcome for Staley's margins,"​ said the analysts.

Staley accounts for 48 per cent of group operating profits but with higher raw material costs and a competitive market, risks may continue to be on the downside regarding Staley's margins, added Goldman Sachs.

A supplier of carbohydrate ingredients such as sweeteners and starches - from corn, wheat and sugar - Tate & Lyle is particularly vulnerable to any prices rises in these commodities. In November last year the bottom line started to show signs of pressures, with profit before tax, goodwill amortisation and exceptional items for the six months to 30 September 2003 falling 6 per cent from £126 million in 2002 to £119 million in 2003.

Corn and wheat are both experiencing strong gains in price as global demand, particularly for wheat, outstrips supply. Unless harvests for wheat pick up considerably in 2004, price pressures will continue well into 2005, squeezing the margins of Tate & Lyle.

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