The Bahrain Sugar Refinery "Blues"

“Blues” is a soulful word for unhappiness typically caused by life’s trials and tribulations.  More so, “blues” is an American musical genre that is rich in themes of loss and longing. Both interpretations might aptly be applied to Bahrain's Arabian Sugar Company (ASC).

This large stand-alone sugar refinery came on stream in February 2014. Its owners saw big potential to fill a yawning supply gap in the Middle East and North Africa (MENA), with Bahrain’s local consumption only around 50,000 tonnes a year. Destinations including Saudi Arabia, Kuwait and Qatar were targeted. However, the refinery stopped production in October 2017 due to a lack of working capital to continue operations. The refinery was widely reported to have struggled to recoup start-up costs and had clocked-up large debts, including energy expenses. All the while, the primarily Gulf-based lenders which financed the refinery were hoping for it to boost throughput and capture more market share in the region.

In May this year there were reports that a Saudi investment company and another partner were looking to buy the refinery. However, this buyer interest seemingly has not yet resulted in a deal and a restart to refinery operations. The Bahrain Sugar Refinery “Blues” seemingly still plays strong. At least for the financiers the blues will continue until a buyer is found, but how likely is that in today’s world sugar market environment?

 Transitioning from the Blues to Rock ‘N’ Roll?

Is there a real possibility of transitioning from the “Blues” to “Rock N Roll”, where the refinery is sold to new investors and operates at a profit? Several key stumbling blocks are evident. Prudence is required in any decision to invest and restart operations. A potential investor would need to be fully aware of and be fully briefed on the key factors determining potential refined sugar sales and the level of remuneration from the refinery both locally and regionally.

 1.      Key Competitors and Market Competition

There is significant competition in prospect for the Bahrain sugar refinery. In addition to the presently inactive Bahrain sugar refinery with an estimated 600,000 tonne capacity, there are three other large sugar refineries in the surrounding region. These are: the large Al Khaleej Refinery, Dubai, UAE (2 mln tonnes) and the Savola refinery – United Sugar Company, Jeddah, Saudi Arabia. (1.5 mln tonnes). We also note significant sugar refining capacity in other countries in the broader MENA region – in Algeria, Egypt, Morocco, Tunisia and Yemen.  There is also the Etihad refinery in Iraq which has a capacity of around 1 mln tonnes annually.

There are large standalone refineries in countries with low energy costs, located near port facilities, capable of trading and storing large volumes of raw sugar, mainly of the VHP form, and ultimately supplying refined sugar to their own fast growing domestic markets, and, at times, re-exporting to neighbouring countries.

The reliance of each refinery on re-exports to neighbouring countries varies, depending on the size of their domestic market and the margins earned from local market sales. Those destination refineries best placed to compete with other refineries within the region (and with EU exports) are those that sell most of their white sugar in protected local and regional markets; benefit from tariff escalation (i.e. a higher tariff on whites over raws); and have access to cheap energy for refinery operation.

There has also been considerable investment in new refining capacity. Closest to Bahrain is the new refining facility in Saudi Arabia’s Yanbu.  Morocco’s Cosumar will start production at that refinery before the end of 2019. The refinery will have a capacity of 850,000 tonnes of refined sugar to be commercialised in the Saudi and regional markets. There is also a large refinery being constructed in Oman. In September 2018 it was reported that after a roughly five-year-long hiatus, construction work on the Sultanate’s first sugar refinery project was set to commence at Sohar Port and Freezone. Total investment in the venture is estimated at USD250 million. Project plans, as revealed by the promoters back in 2013, envisage a capacity of 700,000 tonnes per annum of refined sugar in the first phase, ramping up to 1 mln tonnes per annum within three years. Qatar was also reported to be building a sugar refinery in a bid to avoid supply disruptions after neighboring Gulf Arab states severed economic and political ties with Doha in 2017. In normal trading conditions, building a refinery in Qatar would make little commercial sense because of depressed sugar prices, surplus world stocks and the presence of regional refineries that could provide supplies.

Not only will potential investors in Bahrain Sugar Refinery need to understand the possible competition from other regional refiners, there is also the more recent threat of EU white sugar exports. This was revealed with the abolition of production quotas from October 2017,  which saw a surge in production (more recently moderated), a ramp-up in export volumes, and some displacement from MENA markets of re-exported sugar from regional refineries.

 1.      White Sugar Premium

The white sugar premium is one of the main determinants of immediate profitability of refining at destination. The ISO nominal white sugar premium - a widely accepted indicator  - shows the 3-year monthly average standing at USD80/tonne. Values have significantly varied about the average, reaching as much as USD105/tonne early in 2010 but touching less than USD60/tonne in mid-2017 and sub USD50/tonne since June this year. The premium averaged much higher in previous years, such as during January 2010-August 2013 when it ranged between USD90/tonne and USD160/tonne. Ascertaining the outlook for the white sugar premium remains an essential component of any investment decision to acquire and operate Bahrain’s sugar refinery.

 2.      Raw Sugar Procurement

Raw sugar for refining in the immediate region is typically sourced from Brazil. For instance, both Saudi Arabia and the UAE sourced over past years almost all of their raw sugar imports from Brazil: Saudi Arabia -  99 % from a volume of 780,000 tonnes (2015-17) and UAE -  96% from an average volume of 880,000 tonnes (2015-17). Both nations also import considerable volumes of white sugar from Brazil, India and the UAE amongst others.

In this regard the prospects of Brazil remaining the global dominant exporter of VHP raw sugar is crucial. This will in part depend on the extent to which a growing cane supply could be diverted away from sugar toward ethanol production. The RenovaBio is a new National Biofuels Policy which aims to expand the production and use of biofuels in Brazil in order to reduce greenhouse gas emissions from the transport fuel sector. It is being hailed as the most significant biofuel policy change in the history of the sector since the Próalcool programme was implemented in the 1970s.  Some analysts expect a higher allocation of sugarcane to ethanol next decade, suggesting a reduction in Brazil’s world market share for sugar exports. Even so, any easing in the exportable surplus of raw sugar from Brazil could well be met with boosted production from Thailand.

In terms of procurement costs, the cif price of sugar procured from Brazil and Thailand will directly reflect world market prices which today vary substantially according to global-supply demand fundamentals as expressed in the two relevant futures contracts ICE #11 New York for raw sugar and the ICE London white sugar futures contract.

World market prospects for both price and supply over the coming 3 to 5 years are paramount. Other key factors at play include exchange rates and also ocean freight rates for both inbound and outbound cargo.

 3.      Sugar Consumption Prospects

The accurate forecasting of sugar consumption growth can be a valuable tool for long-term investment decisions on the supply side. Forecasting sugar consumption growth can be a complex task that involves the measurement of the relationship between sugar consumption and several macro and microeconomic variables such as income growth, population growth, prices, social indicators such age structure of the population, level of urbanization and consumption preferences, as well as availability and prices of substitutes and import dependence, among others. Even so, at the global level the two key forces for rising consumption have been rising world population and income growth: people consume more sugar as their income rises. This also means people’s sugar consumption habits change with different income levels.

Any investor in Bahrain’s sugar refinery would need to ascertain the extent to which consumption growth may be slowing in the region due to the asserted links between sugar and health issues and the increasing incidence of governments moving to constrain sugar production though public policy such as sugar taxes. To the extent possible investors would also look to understand industrial vs tabletop consumption levels and trends, and the potential for alternative sweeteners – intensive sweeteners in particular – to cannibalise sugar consumption; particularly in the carbonated soft drinks sector.

As is evident in the above graphs, sugar consumption has grown strongly in the two sample countries – Saudi Arabia and the UAE – with annual average growth of 3.2% and 7% respectively. Projected population growth and per capita income are projected by the IMF to rise substantially out to 2024, implying significant additional consumption over coming years, in the absence of any substantial loss to anti-sugar sentiment and legislation.

5.    Geopolitics

Overlaying the above stumbling blocks is the crossing-cutting issue of geopolitics. Most important are trade embargos on Qatar and Iran, which significantly constrain potential markets. Alternatives like shipping refined sugar out of the Gulf to the Red sea is already very competitive. Furthermore, prospective ocean freight rates are inflated by a “war” risk premium.

In short, any potential investor needs to think long and hard about the marketing strategy it adopts.

Ethiopian Jazz and Sugar

Ethiopian Jazz is considered one of Ethiopia’s greatest innovations, and is arguably the country’s most recognisable music genre. “Ethio-jazz” suffered a near death in the 1970s but was revived from the early 1990s when Ethiopia became a democracy following the ousting of the communist military government.

Using a clearly loose analogy, Ethiopia’s sugar industry today – whilst not near-death -  is in a sorry state; so can the industry be revived to become the Ethiopian Jazz of the sugar world?  

The Ethiopian Sugar Corporation (ESC), a government owned entity, plans to privatise ten partially completed sugar mills and three older mills that are operating in some capacity. The move to offload the mills to private investors may not be easy. Whilst the government sets about valuing the mills and conducting all other due diligence to undertake the privatisation process -including the form and mode to engage foreign investors and the local private sector in a competitive tender process - will potential investors be attracted to an industry established with great ambition but which has been compromised by a centralised approach and apparent ongoing mismanagement? Can both foreign and local investors achieve for Ethiopia’s sugar sector something akin to that unique and famous fusion of traditional Ethiopian music with jazz, Afro-funk, soul, and Latin rhythms?

 To better understand the challenge and the opportunity for Ethiopia’s sugar industry to revive and flourish, a short description of the present day industry is called-for.

 The sorry state of Ethiopian sugar

In 2010, the Ethiopian government formed the state-owned ESC and started an ambitious plan to construct 10 new sugar mills at a cost of more than USD 2 bln. Much of the funding came from India’s EXIM Bank. The ESC’s ambition is shown in the below graphic (described in 2018): to become a world-competitive sugar industry producing 4.6 mln tonnes of sugar sometime after 2020. This is a huge jump from the industry’s 2017-18 performance of around 600 thousand tonnes production which remained insufficient to meet domestic consumption of some 100 thousand tonnes higher. Even allowing for considerable consumption growth over future years, the ambitions clearly included exporting significant volumes to neighbouring deficit countries and markets further afield.

Today, even while the ambition remains, the ESC is in financial crisis with none of their ten mills fully completed and commissioned.  The ESC’s construction program suffered chronic delays and over expenditure, reportedly due to corruption and mismanagement within the chosen contractor - the Ethiopian Metal & Engineering Corporation (MetEC), which is the army’s business branch.

Looking at the below table - released by the ESC mid-2018 -  Ethiopia’s sugar mills have 51,000 tonnes cane/day (TCD) of fully operational capacity, producing only 600,000 tonnes of sugar annually. Some assessments suggest up to 25,500 TCD capacity, whilst “operational”, is mostly idle due to a lack of sugarcane. Furthermore, as can be imputed from the table around 24,000 TCD is still under construction at the operational mills. Then there is a massive 96,000 TCD capacity under various stages of development (or not).

The Ethio-jazz of the sugar world?

The government has already issued a Request for Information encompassing some 15 preliminary requests for potential investors. From the provided information, the government hopes to know how many investors prefer to buy the whole assets of the Corporation, or whether their interest is to partake in a partial joint venture with the government, or whether some investors might request to have contract agreement modalities for investment. Reportedly, all options are on the table and the government will consider plausible interests of any kind.

In this brief article issues like ensuring adequate cane supply for the privatised mills - will local farmers be given the opportunity to supply cane on a smallholder/outgrower basis? – have not been touched upon. Nor has the possible number of sugar projects under construction that may be scrapped after an objective economic/technical evaluation. Finally, how radically different might the government’s sugar policy be going forward? Could for instance, the ESC be radically re-tuned to be the sole trading and export agency with a mandate to buy sugar and ethanol from the privatised industry?

Can Ethiopia’s sugar industry be revived to become the Ethio-jazz of world sugar? Most critically, in addition to all the engineering, technical and financial assessments, potential investors will need to understand and form bottom lines concerning prospective growth and pricing in each of 6 key revenue streams. These include the domestic sugar market, export sugar markets (regional and further afield), the domestic ethanol market, regional ethanol markets, the domestic electricity market and the domestic molasses market. In short, to mimic the success of Ethiopian Jazz, potential investors will have to succeed in fusing a considerable array of “melodies and rhythms” in making their assessment of any investment in Ethiopia’s sugar industry.

Australian Cane Crush Should Sprint Along After a Miserable Start

The Australian cane crushing season commenced early June, but was marred by wet weather. The Australian Sugar Milling Council (ASMC) reported on June 13 that there have been disruptions to the start of the season at virtually all mills in Queensland scheduled to be crushing. Wet weather has been a key contributor along with IT and plant commissioning challenges. They had been advised of deferred start dates in the Herbert, South Johnstone and Mulgrave areas while Tully had stopped for several days waiting for better weather conditions. Cane crushed in the first fortnight of the harvest tallied less than 205,000 tonnes. By the end of the third week (June 16) the crush was boosted to 668,000 tonnes; still trailing considerably last season’s tally of 1 mln tonnes cane.

The cane harvest in the Herbert region was due to start one week late on June 25 because of wet fields, while output from the district should be lower this year. Conditions are similar in some other parts of Queensland, while some regions like the Tablelands expect a larger harvest. Mackay Sugar started operations on June 4, with an estimated cane crush of 5.1 mln tonnes. Mackay Sugar announced a staggered start of the mills.  Farleigh started on June 4, Marian on June 6 and Racecourse on June 11. The 2019 crop estimate for Mackay is 5 mln tonnes based on an average cane production of approximately 74 tonnes/hectare. For Wilmar Sugar, 2 of their 8 mills started crushing on June 4, with the remainder following shortly after. The group plans to crush 15.4 mln tonnes of cane this year, similar to last year’s 15.44 mln tonnes, as bigger crops in the Burdekin, Proserpine and Plane Creek regions should compensate for the bad weather in Herbert. Sugar output is projected at 2.1 mln tonnes. Further south dry weather has impacted prospects for the Bundaberg region, with the sugarcane harvest likely to be down.  The harvest is yet to start in New South Wales. The harvest is thought to be down this season with some growers choosing not to harvest cane this year in response to low prices.

Australia’s 24 sugar mills should process 31.6 mln tonnes of cane, according to the ASMC, down 2.5% (almost 1 mln tonnes) on last year’s 32.5 mln tonnes, because of unfavourable weather during the growing season in some regions. Furthermore, sugar output is expected to fall below last year’s 4.7 mln tonnes. On the basis that the crushing season progresses well over coming weeks – allowing solid harvest progress and good sugar recovery, WKS suggests sugar production should be no lower than 4.5 mln tonnes. Should cane tonnage be higher than presently expected, (several analysts are still indicating as much as 34 mln tonnes), sugar production would come in close to last year’s 4.7 mln tonnes.

Subscribe to WKS’s Australian Cane Harvest Update Report.

Death of the Sugary Soft Drink Impales South Africa’s Sugar Industry

A year-old sugar tax has severely gouged South Africa’s sugar industry because the tax immediately forced sugary drink manufacturers to reformulate by dumping sugar and boosting use of alternative sweeteners. Sugar industries elsewhere may also be vulnerable to a sugar tax, especially those which rely to any significant extent on their domestic market and have yet to embrace diversification opportunities.

A tax on sugary beverages in South Africa went into effect in April 2018, slashing sugar use by the beverage sector.  Adding to the pressure, in February 2019, the Minister of Finance announced a 5% increase in the tax on sweetened beverages from 2.1 cents to 2.21 cents per gram of sugar content that exceeds 4 grams per 100 ml.  The “sugar tax” impacts both domestic and imported beverage products equally. The Health Promotion Levy adds 2.1cents per gram of sugar over 4g 100ml, representing an estimated 11% price increase on a standard can of Cola.

According to the Beverage Association of South Africa (BevSA), the beverage manufacturing sector has undertaken several measures to either avoid or minimize the impact of the sugar tax via “low” or “no” sugar products, reducing packaging sizes, and reformulating products to reduce the sugar content by combining with other sweeteners, including artificial sweeteners. The reduction in sugar usage by the beverage sector is calculated by the South African Sugar Association and South African Canegrowers Association to be over 30% (200,000 tonne) since April 2018.

The beverage sector has also reported a reduction in demand of some re-formulated products, and gradual uptake of newly introduced products, as consumers have been slow in adapting to these new tastes and products.  Decreased demand may also be due to the growing anti-sugar sentiments and awareness that high sugar consumption is linked to obesity, diabetes, stroke and heart diseases. 

As a result, the beverage industry has reported that the sugar tax could result in massive job losses.  Recently a media outlet reported that Coca-Cola Beverages South Africa intends to retrench over 1,000 employees due to reduced production caused by the sugar tax.

South Africa’s sugar industry is not well placed to adapt to such a catastrophic slump in local sugar demand. Over recent years it has been struggling with low margins, low global sugar prices, competition from imports, and frequent droughts.  So far, there has been little potential to diversify away from sugar into the production of biofuels (fuel ethanol), biogas, biomaterials (plastics), or the cogeneration of electricity from cane bagasse, as the government has yet to introduce sufficiently supportive measures and policies to convince the industry to take a wholesale plunge into green energy and bioproducts.

Looking ahead, the extent and success of adaptation and structural change over the medium to long term in response to the viability challenges the sugar industry is facing – in part due to the “king-hit” of the sugar tax - will significantly depend on the level and nature of government support. In particular, the industry’s fortunes will be dictated in considerable part by whether or not the government commits to providing sufficient incentives for the sugar industry to diversify away from sugar, particularly into green energy. With sufficient incentive, milling companies can embrace new technologies for sugarcane and conversion pathways. Energy cane, with yields up to twice those of conventional sugarcane, and second-generation conversion plants, which can produce ethanol not only from the sugar portion of the cane but also the bagasse and trash, are two key technology vectors that can potentially boost commercial viability.

 Authors note: Material has been drawn from USDA: GAIN Report Number SA1904,  South African Sugar Industry Crushed by Not So Sweet Tax , 3 May 2019.

Who Still Believes in the World Sugar Price Cycle?

Looking at world sugar prices over the past 50 years there is anecdotal evidence of a recurring 5 to 6-year cyclical element to world sugar prices.

•        A price cycle in sugar is typically seen as reflecting the perennial nature of sugarcane which results in a delayed and muted supply response by farmers (and millers) to changes in world market prices.

•        Delayed and muted production responses are also symptomatic of government intervention in many countries that de-sensitises local prices from world market prices to varying degrees.

•        A global surplus builds over several years which typically sends prices down to levels that are insufficient to reward new investment in supply capacity.

•        Prices rebound when steadily rising global sugar demand is eventually met with under-investment in new production capacity, triggering a period of global sugar deficits. 

•        The price cycle is typically associated with 3-4 years of surplus followed by 2 years of deficit.

Few would argue that since late 2016 we’ve seen the down-phase of the cycle and perhaps even the bottom when prices in August 2018 reached 10 year lows. Since that time world prices rebounded a little (on the prospect of a more balanced global market outlook in 2018/19) but have since tended to remain range-bound between 11.5 US cents/lb -14 US cents/lb, struggling to break further to the upside. To the surprise of some, last week NY sugar futures broke to the downside, falling lower than 12 US cents/lb after trading between 12 US cents/lb-13 US cents/lb for as long as 7 weeks. This breakout to the downside has to be seen in the context of a prospective global modest deficit in 2019/20 (October-September). Analysts brave enough to look this far forward suggest a further slump in production as against a modest rise in consumption.

But even if world production in 2019-20 falls 1.5-2 mln tonnes short of consumption, as forecast by some observers, this would not lead to a genuine scarcity of supplies, after two successive seasons of production surplus. India’s stocks remain high in particular and would need to be reduced substantially before any upward momentum in prices can be sustained.

At the risk of being simplistic, and appealing to the global price cycle, we are unlikely to see a price upswing kick-in until later in 2020 - when the current low price environment will finally show through in lower sugar production. But prices would only rise significantly in 2021 should true scarcity bite and more sugar is needed from Brazil (a price incentive to make more sugar and less ethanol).  A price upswing is also predicated on India and other countries being able to stop producing a crop that still remains profitable for farmers. To the extent that sugar industries continue to show no or only limited supply response to the low world market price environment, there is a real risk that the sugar price cycle will be extended and hopes for a significant upswing by 2021 could prove too optimistic.