Tate & Lyle issues mixed trading update
is on track to recover next year's higher energy costs, though its
not all good news.
Overall, the company claims to be happy with the results and says that the outlook for the year to 31 March 2006 has not altered.
It points out that major projects such as the expansion of the firm's Alabama Splenda sucralose facility and the construction of its new Singapore facility are on schedule. The expanded Alabama facility is expected to commence commissioning in April, as planned, thereby doubling the capacity acquired in April 2004.
But the firm faces a number of other obstacles in addition to higher energy costs of course. Its ability to retain a monopoly on the lucrative global sucralose market with its patented Splenda product has been called into question, with Pharmed Medicare recently claiming that it has developed an alternative patent-pending process that would put the firm into direct competition with the UK ingredient giant.
Splenda is a significant earner for Tate & Lyle. Sweeteners are enjoying considerable growth as food and beverage makers seek to slice the calories from their formulations - and Splenda seems to be winning the battle. Nearly fifty per cent of the 942 new food and drink product launches featuring sweeteners contained only sucralose, reports analysts Mintel, for January to June 2005.
But market analyst Morgan Stanley warned recently that an over-reliance on Splenda could damage the firm's long-term prospects once the monopoly is lost.
One thing is clear however - as with other major sugar producers, the firm is facing very difficult market conditions in Europe. As a result, its Ingredients Europe business is forecast to perform poorer than last year.
The European market for sugar and related products has been affected by both an oversupply of sugar. Tate & Lyle says that, as expected, the calendar 2006 sweetener pricing round has been exceptionally challenging.
After higher energy costs, it expects in local currency terms total net margins for Ingredients, Europe to be below those achieved in calendar 2005.
The anticipated oversupply of sugar in Europe has also affected the group's European cane refineries and sugar beet operations in East and Central Europe. Market pressure has intensified in the last few months and is expected to lead to a modest decline in earnings for Sugars, Europe in the balance of this financial year and a further decline in the year to March 2007.
And reform of the EU's outdated sugar regime, which will see the price of the commodity cut by 36 per cent, will make life even harder.
Things look better for the Ingredients, Americas division, which has substantially completed the negotiation of its calendar 2006 sweetener sales contracts. These contracts, as in previous years, are a mix of toll business (where Ingredients, Americas receives a fixed processing margin) and conventional supply contracts (where Ingredients Americas accepts risk on the price of corn, which it covers on the futures market).
Tate & Lyle expects in calendar 2006 to more than recover the higher energy costs. It also anticipates achieving higher total net margins on value added food ingredients and other products.