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ABF shares rise as it flags easing in sugar headwinds

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Associated British Foods revealed an easing in the headwinds facing its sugar division, flagging a drop in inventories, and the rate of price declines, in the European Union, and raised values in China.

The tea-to-clothing group, which controls businesses such as the UK's British Sugar and South African-based Illovo, flagged "some signs of recovery" in EU sugar prices, which have been undermined both by the weak world market and the prospect in 2017 of the ending of production quotas.

Data last week showed white sugar prices averaging $417.0 a tonne in the EU in May, down 27% year on year, but with the month-on-month pace of decline slowing to 0.5%.

The market improvement comes as quota stocks of sugar "are now reducing across the European Union", Associated British Foods (ABF) said, adding that this trend was likely to continue.

"With lower production forecasts generally across the region, further reduction [in stocks] is expected next year."

UK output to drop

In ABF's key UK market, the group's own quota stocks would be eroded by the knock-on effects of a cut in sugar beet sowings of more than 20%, under a shake-up of farmer contracts which has also seen the price paid to growers for the crop cut by £3.70 per tonne to £20.30 per tonne.

"The new crop for the 2015-16 season has made good progress but, with a reduction in the area under cultivation… sugar production is expected to be closer to 1.0m tonnes leading to a fall in our quota stock levels," the group said.

The UK's last beet harvest came in at 1.45m tonnes.

Meanwhile, while flagging continued hiccups in South Africa, where drought is cutting cane volumes, in China, ABF noted a "recovery in market prices", which had "improved" the profitability in its operations in the country.

'From surplus to deficit'

The group also flagged long-term hopes for the EU's difficult bioethanol market, to which ABF is exposed through 94% control of Vivergo, which is with Ensus, one of the two large UK-based grain ethanol plants.

ABF, which in May bought BP's 47% stake in Vivergo, revealed on Thursday that it had paid "a nominal consideration" for the shares.

"The bioethanol market is currently weak and we foresee that we may need to run this plant at a small loss in the short term," ABF said.

However, as blending rates for ethanol nudge higher towards 2020, "the European ethanol market is forecast to move c which we expect to lead to a price increase over time".

Shares rise

The comments came as ABF also revealed flat like-for-like sales at its Primark clothing chain, which is now to be expanded to Italy as well as the US.

And it restated expectations of a "modest decline" in underlying earnings per share for its full financial year.

Associated British Foods shares stood 5.0% higher at 3076p in morning deals in London.


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