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This article is an extract from the F.O. Licht International Sugar & Sweetener Report - May 18, 2017

Strength in beet sugar production and the recovery in Thailand have been the major drivers for changes in the rankings of the world’s top companies in this sector. Our data suggest that the world's Top 20 sugar companies greatly expanded their production in 2016/17 but remained below the 2014/15 levels.

All in all the world's top companies produced around 49.8 mln tonnes of sugar in 2016/17, up 3.3 mln tonnes on the year (+7%). At the same time world production is forecast to rise to 176.9 mln tonnes against 169 mln (+5%).

This strong response to better prices on part of the leading companies has already started to be reflected in the balance sheets of most firms. Profits are up and the debt level is falling, albeit only slowly.

Of course, views differ as to how longlasting the recovery may turn out to be. Particularly in Europe uncertainty seems to persist with regards to the effect of the abolition of quotas later in 2017. Producers there will try to gain market share in the immediate aftermath which could negatively impact margins as a result. In the cane sugar world on the other hand there is the risk that prospects of a surplus in 2017/18 is putting an end to the period of firmer prices which could at least slow down the recovery process.

The changes in this year's rankings at a glance

With a few exceptions all of the Top 20 companies recorded gains in production in 2016/17. These were particularly huge in the European Union given the sharp rebound in sugar production there.

After its profits had fallen to multiyear lows in 2014/15 the world's longtime leader in sugar production, Südzucker, managed a turnaround last year. This momentum has been maintained in 2016/17 (Mar/Feb) as well: Both sugar production and operating profit were sharply higher. This recovery meant that Südzucker, which had fallen to No. 3 last year, was able to reclaim the worldwide No. 1 position. This could be repeated next year as the company plans to increase production following the abolition of sugar quotas in the EU.

Last year's No. 2, Raízen, defended this position despite almost unchanged production. This comes as a disappointment as the company had expected to produce a record volume in the justconcluded 2016/17 season. Even though some increases in production may be on the cards for 2017/18 these will not be big enough to attack the No.1. Tereos produced more in both Brazil and France and this helped the company to climb one notch to No. 3. Given further growth forecast for 2017/18 the company may even move past Raízen next season.

Mitr Phol of Thailand also moved higher to No. 4 following better production results in all its locations with the exception of China. For 2017/18 production is forecast to rise again as the situation in Thailand will improve further. However, at the moment it does not seem likely that this will suffice to move past Tereos or Raízen.
The biggest loser in the league was ABSugar. While its production units in Africa bounced back in 2016/17 this was not enough to compensate for the losses in all other locations. While the company plans to produce more at its European locations the situation in Southern Africa could also ease.

While the output figures would suggest that the sector has regained at least some of its former strength, the current financial situation is far from rosy for most companies. Many cane sugar mills have accumulated huge debts over the last couple of years and it will take more than just one good season to rectify this.

The situation of beet sugar producers is somewhat different. After two good seasons the overall financial health of the companies in question is comparably better. The outlook for 2017/18 is clouded by expectations that players in the EU will try to maximize market share at the expense of margins. It could take 23 years before a new equilibrium will emerge and the situation will return to normal.

Beet sugar producers on a growth path


Beet sugar companies lifted their production in 2016/17. Overall those corporations where the bulk of production comes from beets raised their output by around 2.4 mln tonnes accounting for over 70% of the total increase among the Top 20.

Germany's Südzucker saw the biggest increase in output of all companies after its poor 2015/16 season. Overall the company churned out 4.8 mln tonnes (raw value) from beet against 4.1 mln the previous year.

This recovery is also showing in the balance sheets. In 2016/17 (Mar/Feb) the European market leader posted a higher operative result (EUR426 mln against 241 mln) to which the sugar business made a substantial contribution.

In the short and medium term the abolition of the sugar production quotas in 2017/18 will make sure that competition will remain intense on the EU market. This would also speak against an ongoing recovery of margins in 2017/18 and beyond. After all, most of the leading companies in the bloc have announced that they would expand production once the quotas fall in order to seek opportunities both at home and on the international market.

Tereos of France will also be one of the driving forces on the EU market in 2017/18. For the next season it plans the processing of 19 mln tonnes of beet (including ethanol) against 15 mln in 2016/17. This could easily lift sugar production to over 2 mln tonnes. On top the company said that it will produce 1.8 mln tonnes in Brazil, a new alltime high. If all production plans materialize it could well be that Tereos may move beyond Raízen to the No. 2 spot.

Profitability at ABSugar, last year’s No. 1, was on the way to recovery in 2016/17 as a result of (slowly) improving EU sugar prices. At the same time the slimmeddown presence of the company in China made itself felt.

In the UK the company produced a smaller crop as it continues to work off the surplus stocks accumulated in the 2014/15 surplus year. For the next season output is forecast to rise sharply as ABSugar contracted about 25% more beets to exploit the opportunities that arise from the abolition of sugar quotas in the EU. Illovo's production is expected to recover to 1.7 mln tonnes as Southern Africa has been enjoying a more normal rainfall pattern. For 2017/18, only little change in production can be expected. While the UK will produce considerably more sugar, the contribution from China will shrink as the company now only operates two plants there.

Nordzucker managed to climb to No. 6 from No. 8 following a better beet crop at its various production sites. The 13 plants of the group were operating for an average of 104 days, a figure that was higher than just 88 days in the previous year. In total, Nordzucker processed some 15 mln tonnes of beet, up from 12.5 mln in the previous year.
In Germany, the campaign lasted 103 days and yielded some 13.5 tonnes of sugar per ha, up from 13.0 a year ago and also above the fiveyear average of 12.8. The two Danish plants enjoyed above average beet yields while sugar production per ha was flat on the year at 13.1 tonnes.

In Poland sugar yields of 12.8 tonnes per ha were up considerably on the previous year’s 10.0 tonnes.

Prodimex of Russia made a strong entry into the Top 20 after processing a record beet crop. Russia's biggest sugar producer completed its record 2016/17 season on February 12 after 196 days. This compares with 144 days the prior year. Beet processing had begun on August 1 and climbed to 10.5 mln tonnes against 7.4 mln in 2015/16. Beet white sugar output reached an alltime high of 1.4 mln tonnes. For 2017/18 a similar level can be expected as the company continues to invest in capacity expansions.

Cristal Union aims to become the thirdlargest EU sugar maker by lifting its beet area in France by 22% in 2017. In order to sell this additional production, Cristal Union is building a distribution network in Europe and in particular in sugardeficit countries. In this context the conclusion of commercial agreements in Greece and Poland, the acquisition of the Eridania brand in Italy and an investment with ASR in a refinery in Brindisi as well as the acquisition of a stake in Croatian sugar producer Viro is of strategical importance. Moreover, the company is currently mulling the purchase of two factories in Serbia and Portugal. In addition, the investment in a brand new refinery in Algeria, together with the local LaBelle agrifood group, could also eventually open up a number of African countries for its beet sugar.

In conclusion one could say that the EU sugar companies are marching in two opposite directions. Those operating on the periphery of the bloc are likely to see their market share challenged by product from the surplus regions. Over time this will mean that production in those regions will fall while it is likely to rise in the high yielding parts of the continent.

Cane sugar companies recover only slowly from surplus years

The sugar industry in Brazil is starting to see some light at the end of a very long and dark tunnel. Total debt of the Brazilian sugar and ethanol industry reached BRL86.13 bln (BRL27.52 bln) at the end of February 2017, according to Archer Consulting calculations.
That amount is 5.95% lower than total debt recorded at the same time last year. The main reason for this decline is the appreciation of the Brazilian currency in relation to the dollar.

According to Itaú BBA bank, the improvement in cash generation of sugar mills since last year puts the sector on a better financial footing in 2017/18. However, the low competitiveness of the industry will limit growth and the inflow of new money into the industry. According to the bank, the ratio of net debt to sugarcane processed by Itaú BBA's client companies is expected to remain practically stable in the 2016/17 crop compared to 2015/16, at BRL128 per tonne and will decline to BRL105 per tonne in the 2017/18 harvest. The ratio of net debt to EBITDA (earnings before interest taxes, depreciation and amortization) is expected to be two times in 2017/2018, compared to 2.7 times in 2016/17 and 3.5 times in 2015/16.

The improved cash generation and profits have been mostly used to pay interest, with increased financial expenses.Following the rise in sugar prices quite a number of groups have increased their investments to raise capacity. In most cases the growth in sugar output will come at the expense of ethanol as the overall cane crushing capacity has remained unchanged.

The world’s largest cane processor, Raízen, was just able to defend its No. 2 position this year as its output failed to meet expectations. Overall the company crushed less than 60 mln tonnes of cane, unchanged on the year. This compares with initial expectations of up to 64 mln tonnes. For 2017/18 the company is more optimistic again. According to the projections, the current year could yield up to 63 mln tonnes of cane and up to 4.7 mln tonnes of sugar, tel quel.

Raízen invested BRL1.190 bln in 2016, up 24.3% yearonyear. In 2017/18 investment is expected to increase to BRL2.12.4 bln due to the completion of projects related to productivity improvement, new logistics and infrastructure projects.

Biosev, Brazil's No. 2 sugar producer, crushed a total of 31.5 mln tonnes of cane in the 2016/17 (Apr/Mar) campaign. This was up on 31.0 mln tonnes in in the preceding seasons. For 2017/18 it plans to crush up to 33.5 mln tonnes of sugarcane, an alltime high.

The largest cane sugar producer outside Brazil is Mitr Phol of Thailand. Thanks to consistent growth in all of its four locations except China, it made good one place and is now ranked at No. 4, its highest position ever. The increase was most pronounced in Laos (+34%), followed by Australia (+8%) and Thailand (+0.5%). Production in China declined by 1.7%.

Under its long-term growth plan Mitr Phol's crushing capacity will rise to 21 mln tonnes of sugarcane per year by 2021 from the current crushing capacity of 12 mln tonnes.
Helped by the good cane crop in Australia Wilmar managed to defend its position at No. 7. On a groupwide level, Wilmar Sugar crushed a total of 16.86 mln tonnes at its eight mills in Australia – about a million tonnes more than the preseason forecast and almost 1.2 mln tonnes above last season's results.

Thai Roong Ruang was one of the biggest gainers in the 2016/17 rankings after it ramped up production at two new mills in Thailand. In the just completed season it crushed close to 15 mln tonnes of cane against less than 14 mln the prior season. For next year output can be expected to rise again as the new mills will raise cane throughput.

Outlook

The corporate landscape in the sugar world saw a fundamental reshuffling following the better beet crop in the EU.
In 2017/18 the cards will again be stacked in favour of EU beet processors after the abolition of sugar quotas has triggered an expansion process there. Brazilian mills will find it hard to greatly increase production given expectations that the cane crop in the Centre/South will be lower. By contrast, Thai millers can be expected to produce more next season but it will be difficult for them to improve their position in the rankings as this would require a huge jump in output.

Despite the improved situation on the world market M&A activity remains subdued. There have been a couple of acquisitions in Brazil, the biggest of which were in the context of Petrobras’ exit from the industry. Many mills continue to be on offer but progress has been held back by their exorbitant level of debt.

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