Südzucker confident in longterm sugar viability

By Anthony Fletcher

- Last updated on GMT

Related tags Sugar European union European commission Eu

Südzucker is confident that the revised EU sugar reform offers
efficient producers long-term planning certainty, though it
predicts a fall in next year's income.

But at the very least, the reform compromise means that the EU's sugar industry has a viable future.

"Compared with the European Commission's proposal of 22 June 2005, we welcome the lower price reduction and the improved framework of the Restructuring Fund,"​ stated the German sugar giant.

Indeed, the reduction of the sugar reference price by a total of 36 per cent and the sugar beet price by 39 per cent is less than had been put forward in the Commission's initial proposal. In addition, this will now take place in four steps over the period 2006/07 to 2009/10.

On top of this, an average of 64.2 per cent of the income lost by beet growers as a result of the reduction of beet prices is to be compensated.

Südzucker's confidence comes after a recent Standard & Poor's Ratings Services study, which stated that the gradual nature of the reform provides 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 in the report, entitled "Sweet 'N Slow: Gradual Liberalisation Of EU Sugar Regime Preserves Credit Quality"​.

For this reason, Standard & Poor's affirmed its ratings on the two largest European sugar, starches, and sweeteners manufacturers, Südzucker AG (A-/Stable/A-2), and UK-based Tate & Lyle (BBB/Stable/A-2).

Südzucker assumes that the planned price reductions and the volume restrictions will lead to far-reaching structural changes in the European sugar industry. Producers in climatically less suitable beet-growing regions of the EU will likely accept the Restructuring Fund's offer, thus significantly reducing the present production capacity in the EU.

But because its factories lie in the most efficient regions with the highest sugar yields in Europe, Suedzucker believes it is in an excellent competitive position.

"At the WTO summit in December 2005 in Hong Kong it was resolved to stop all officially supported exports by 2013; the reform of the Sugar Market Regulation already largely takes this into account,"​ said the firm. "Further resolutions, especially on market access, are to follow later in the course of 2006."

However, Südzucker does not expect to match last year's income from operations in the 2005/06 financial year.

"The main reason for the weaker performance is the continued price pressure weighing on the market caused by the non-exportable surpluses resulting from the lack of declassification the year before,"​ said the company.

"This has led not only to considerable pricing pressure but also to an exceptionally high supplementary levy incurred, also as a result of the lack of declassification, on top of the production levy. Further burdens stem from the higher energy costs, with the result that income from operations in the sugar segment will fall well short of last year's."

Südzucker says that the focus of investment activity in the current financial year is on the special products segment. The biggest single project is the construction of the Orafti plant in Chile. Work is progressing according to plan; it is scheduled to come on stream in spring 2006.

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