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
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
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.
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.
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.