Associated British Foods (ABF) will be selling white sugar for around 480 euro (or £408) a tonne next year compared with just under 600 euro/t (£510) today as the market finds a new price equilibrium following reform of the EU sugar regime, City analysts have predicted.
In a report examining ABF’s prospects under the new regime, Investec observes that the reforms - which aimed to create a more level playing field for the world’s producers - “looked to have achieved their policy objective of balancing supply and demand for sugar in Europe. With the residual inventory overhang now virtually worked out, the stage is set for the market to find a new price equilibrium.”
The EU reference or ‘base’ price for sugar will drop from 542 euro/t to 404 euro/t in October. “The big question is what level of price premium establishes itself over and above this figure,” says the report. “The number we have heard most frequently is 80 euro/t, so our best view for now is that ABF will be selling white sugar for around 480 euro/t in full-year 2010.” (This compares with just under 600 euro/t in 2009 - which is calculated by adding the current 542 euro/t reference price and a 40-50 euro premium.)
A “back of the envelope calculation” suggested that ABF’s gross sugar refining margins in the UK would contract next year, although the impact of this would be offset by not having to pay the EU restructuring levy anymore, it added. “It will also incur lower energy costs and increase sales of bioethanol. We see all this as consistent with our forecast of a decent improvement in ABF’s UK sugar operations in full-year 2010.”
But there was still considerable uncertainty over what price ABF would end up paying farmers for beet, it said. “Negotiations between British Sugar and the National Farmers’ Union (NFU) have opened up on their traditionally confrontational note [the NFU is demanding £34.50/t for 2011 vs the current £24/t].” This was unlikely to be met, predicted the report, “but the underlying negotiating logic of the NFU signals that the post EU sugar reform landscape is not a one-way profit ticket for ABF”.
In a separate note, Investec said Uniq was making “solid progress towards the aim of achieving a profit in the UK in the second half of this year”
“We are anticipating a stronger profit contribution from the UK in the second half. Last year, it showed a modest £0.5M profit for continuing businesses [sandwiches at Northampton, salads at Spalding, desserts at Minsterley, Evercreech and Paignton], but with some benefit from the additional sandwich volume from M&S and the final tranche of the Paignton move [the site is closing next month], we think the second-half profit could be closer to £4M to give a profit for the full year of c. £3.5M.”
However, with central costs of an estimated £6.3M, at a group level, Uniq would record a “small continuing EBIT [earnings before interest and tax] loss for the full year”, predicted Investec.