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Illovo looks to Africa to replace lost EU sugar sales

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Illovo Sugar, warning of the threat to European Union business as the bloc moves to being a "net exporter" of sugar, flagged the potential for growth in Africa, where consumption will grow far faster than the world average.

The South Africa-based sugar group, which also has operations in countries such as Malawi and Zambia, signalled a tougher time ahead for exporters of the sweetener to the EU after the bloc in 2017 liberalises a regime which has forced it to accept World Trade Organization trade limits

While Europe's sugar prices may rise "temporarily" ahead of the reforms, thanks to a dent to EU production from the knock-on effect of weak values, "post-reform, Europe will move to a net exporter and sugar prices are expected to drop to export parity".

While imports to the EU will continue, the benefits from concessions the EU makes to sugar producing nations, such as Belize, Jamaica and Zambia, labelled as least developed countries "will reduce", Illovo said.

'Valuable alternative'

The group, which is controlled by UK-based Associated British Foods, flagged for itself a "shift in sales mix away from the EU".

However, it also noted the potential for growth in markets nearer home, with Africa placed for increased consumption from annual rates of 17.6 kilogrammes per head closer to the 38.5 kilogrammes per head seen in Europe.

Indeed, African sugar consumption, boosted by "high levels of population growth, urbanisation and improvements in life expectancy", will see "sustained" growth of 3.2% a year, ahead of the world average generally seen at about 2-2.5%.

Countries such as Ivory Coast, Zambia and Tanzania will see sugar consumption rise by 5-6% a year, basis on population and economic growth forecasts, Illovo said.

"Regional markets remain a valuable alternative to the EU market, with pricing above world market levels," Illovo said, flagging also its ease of access to many African markets provided by trade deals within the continent.

'Stressed growing conditions'

The comments came as the group unveiled results for the April-to-September half showing a 75% tumble to 233.9m rand in earnings, on revenues down 7.5% to $5.49bn rand.

Underlying earnings per share fell to 71.7 rand cents during the same period from 171.1 cents a year earlier.

The decline reflected, besides "sustained pressure on export prices" amid weak markets for most of the period, a dent to volumes from drought in southern Africa which has sent Johannesburg corn prices soaring too.

"These stressed growing conditions have not only reduced [cane] yields but also increased vulnerability to pest and disease such as yellow aphids," Illovo said, noting a drop of 20% year on year on cane supplies to its South African mills.

Sales volumes dropped 12.5% to 698,000 tonnes.

'Encouraging price recovery'

However, the group forecast some improvement in performance ahead, in that headline earnings per share, while down 58% at the half-year stage, would come in a more modest 25-45% lower for the full year to the end of March 2016.

"Whilst volatile currency fluctuations will continue to challenge sugar market conditions, the recent recovery in world market prices is encouraging," Illovo said.

"Growth in downstream earnings is anticipated with record ethanol production and electricity co-generation assisted by the benefit of a strong US dollar on pricing."

Illovo shares closed down 0.6% at 16.10 rand.

By Agrimoney.com

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