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ABF offers hope of end to EU sugar hardships

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Associated British Foods offered some hope of an end to the European sugar price slump, but only after values have fallen lower than previously expected, and provoked continued concerns at rival Suedzucker.

Associated British Foods, whose sugar empire stretches from the UK to South Africa, said there were signs of an end to the drop in European sugar prices, which are being undermined by the removal of EU production quotas, besides by weak world markets.

"Early customer negotiations have commented for the 2014-15 UK contract round, and while prices remain weak, early indications are that they are now stabilising," Associated British Foods said.

The comment offered a rare glimmer of hope for producers in a market which has already seen values fall 21% year on year to E574 a tonne April, the lowest since September 2011, according to official data – declines which have badly hurt groups such as ABF.

'Simply too much sugar'

However, ABF acknowledged that values were stabilising around levels "lower than we previously expected", an observation backed by analysts at Credit Suisse, which said forward values for the 2014-15 year, beginning in October, were trading at E450m-500m a tonne.

"Early [price] indications for the new year are comfortably lower than we expected," by about E50 a tonne, the bank said.

"There is simply too much sugar in Europe - stocks are 1m tonnes higher - and competition is fierce," it said, restating a "neutral" rating on ABF shares, and a price target of 3000p, even though the food group on Thursday also raised its estimate for full-year earnings.

ABF, citing "better profit progress" at its non-sugar operations, including at its Primark clothes retail chain, said that its earnings per share for the year to September would beat last year's 98.9p, beating the in-line performance it had previously guided to.

'Increasingly difficult'

Separately, German-based rival Suedzucker, Europe's largest sugar producer, revealed a 71% drop to E45% in operating profits at its sugar operations in the March-to-May quarter, on revenues down 16.7% at E862m.

It voiced a more downbeat outlook on sugar, saying its sugar division will suffer a "significant drop in revenues" for the year to February 2015 because of the market conditions that it termed as "increasingly difficult".

"We also expect a significant decline in operating profit, mainly due to the increasing deterioration of the economic environment in the EU sugar market," Suedzucker said, adding that it was "reviewing cost structures" in its sugar division.

Nonetheless, Suedzucker shares rose 3.4% to E15.41 in Frankfurt, with the group's overall operating profits for the quarter, while down 54% at E106.2m, beating expectations for a result of E79m.

Associated British Foods shares fell 2.6% to 2921p in London.

Production forecasts

The prospect of an end, from October 2017, in EU output quotas has prompted a pre-emptive response from producers, which sugar merchant Czarnikow highlighted on Wednesday "are already battling for market share ahead of quotas being removed".

Czarnikow has forecast a rise of nearly 5% to 17.6m tonnes in EU sugar production in 2014-15.

Agricultural commodities trading house ED&F Man said last week that its initial estimate for output of 17.6m tonnes "may see some considerable upside".


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