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Chinese sugar price fall prompts ABF shutdowns

Associated British Foods said that the extent of the decline in China's sugar prices, in which it sees little change of recovery, has dragged its in-country operation into a loss, and prompted it to close two processing plants.

The tea-to-retail giant said that while better Chinese crops meant its sugar sales volumes would rise this year, the drop in prices prompted by the improved domestic harvests, against a background of weaker international prices, had sapped profitability.

"As a result of much lower sugar prices, our operations in China will be loss-making this year," Associated British Foods said, in a trading update for the six months to early March, the first half of the group's financial year.

While the company fails to give a country-by-country breakdown of its sugar operations, the China operation in 2011-12 was reported as showing a "lower operating profit".

Chinese sugar quirks

The extent of the easing in sugar supplies means China's sugar prices are expected to remain "at this level for some time", ABF said, a forecast which had prompted it "to reduce our cost base".

"At the end of this campaign, the small beet factoring at Wangkui and Baolongshan have been mothballed," the group said, revealing a £22m charge against the closures.

The comments reflect the latest sign of the quirky dynamics of a Chinese market in which domestic prices, while well below 2011 highs, remain above world market prices, propped up by government measures to support the domestic industry.

Chinese sugar costs an estimated 30 cents per pound to produce, compared with a figure of about 18 cents a pound estimated for Brazil, the top sugar producer and exporter, around the level of current New York futures prices, the world benchmark.

The relatively high domestic prices are fuelling sugar imports, sometimes illegal, at levels far exceeding initial market expectations.

The International Sugar Organization last week hiked its forecast for Chinese sugar imports for the 2012-13 marketing year, ending this September, to 2.50m tonnes from 1.115m tonnes despite raising its estimate for domestic production too, by 250,000 tonnes to 14.6m tonnes.

Earnings downgrade

ABF restated that profits in its Spanish division would be lower too, hurt by a higher reliance on cane rather than beet as processing feedstock, and in the UK, dented by a decline in beet yields and quality, which suffered like other crops amid one of the country's wettest yields on record.

These setbacks, as well as those in China, have offset a better performance in the group's southern African division, Illovo, to leave overall sugar profits lower for the half year.

Panmure Gordon forecast ABF's earnings before interest, tax and amortisation (ebita) in sugar would come in at £145m for the half year, down £30m year on year.

The broker cut its estimate for divisional ebita for the full financial year by £12m to £433m, despite forecasting a £10m boost from the weakness in sterling, in which ABF reports its results.

Shore Capital reduced its forecast by £22m to £418m.

Retail fillip

However, at a group level, Panmure Gordon maintained its full-year earnings estimates, and Shore Capital increased its forecast, thanks to a performance at the Primark retail division which ABF termed "outstanding".

Primark sales soared 23% in the half year, lifted by store expansions and a 7% rise in like-for-like sales.

Associated British Foods shares closed 0.8% lower at 1815p in London.

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