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October 17, 2010

South African drought may cut sugar output

by David Carte

KwaZulu-Natal is in the grip of severe drought and the SA Sugar Association (SASA) has cut its estimate of the sugar crop in the year to March to less than 2mt. That is 26% less than the record crop of 2.7mt in 2002/2003.

The listed sugar companies say damage will be real but limited because all three have diversified geographically and by product since the last industry-crunching drought in 1991.

The KZN coast is uncharacteristically even drier than the Free State and Gauteng, which are also waiting anxiously for the first summer rains. Cane in the fields around the new Durban International Airport is stunted and looks like grass.

Said Phil Barker, CFO of Crookes Bros: "The drought has affected KZN operations but these account for only 10% of operations today. The rest of our production is grown under irrigation around Komatipoort, in Zambia and Swaziland. That part of the crop is fine."

He said there was some concern when the world sugar price weakened earlier this year but it has subsequently improved. The strong rand is a major depressant on Crookes, which has diversified into bananas, deciduous fruit, barley and wheat.

Tongaat  aims to double its sugar production to 1.9mt (1mt) mainly by developing new lands in Swaziland, Mozambique and Zimbabwe. Development of cane production in SA appears to have been thwarted by land claims and other socio-political considerations.

The annual report says that in 2009 the area under cane in KZN decreased by 10 454 hectares to 130 594 hectares and this coupled with the reduction in yields limited sugar production in 2009 to 564 000 tons (2008: 644 000 tons). Sugar cane production per hectare of cane has declined by 30% from average levels of 64 tons per hectare.

Don MacLeod, deputy chair of Illovo, said only 40% of revenues and 18% of operating profits stemmed from KZN. Of that 18% only half was directly sugar production. The rest was downstream products derived from sugar, such as furfuryl alcohol and other chemicals.

"All our lands in Tanzania, Mozambique, Malawi are irrigated. That said, the strong rand is a problem."

The moral of the story: world sugar prices are good thanks to bad weather in a number of countries, also because a huge part of the global crop is going to ethanol for fuel. These positives are being offset by the strong rand.

All three of the listed sugar producers might have diversified production - but profit growth in sugar this year could be a lot more subdued.

The SASA estimates the crop to March each year, which means there are six months to go. Good rains in KZN could yet save the crop. But the worst case scenario - ploughing in reject cane and planting again, as in 2001, would be expensive and a major harness on profitability.

One sugar beneficiator said that the sugar industry has applied for a 21% increase in protection against imports.

The SA Sugar Association would say only: ""The industry is discussing a range of challenges with the government regarding its sustainability including the amount of imports coming into the country."

The SASA says imports in the year to March came to 102 000 tons, of which 90% came from Brazil. From April to August imports came to 55 566 tons, of which 90% also came from Brazil.

Moneyweb

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