Illovo Braces for Difficult Year as Sugar Prices Fall

By Carli Lourens

Illovo Sugar Ltd., Africa’s biggest producer of the sweetener, said sugar will probably decline to between 15 U.S. cents and 17 U.S. cents a pound this year, making it a “difficult” for the company.

“There are a lot of guys out there saying the fundamentals in terms of physicals would support an upward movement in the price,” Managing Director Graham Clark of the Mount Edgecombe, South Africa-based company said by phone from Johannesburg today. “But speculative activity might put a lid on that.”

Raw sugar for immediate delivery fell 35 percent to 20.05 U.S. cents a pound from 30.64 U.S. cents in January on the Coffee, Sugar and Cocoa Exchange’s No. 11 sugar spot price/global index, a representative price for world sugar prices. It traded at an average 23.22 U.S. cents a pound so far this year from 18.79 U.S. cents last year.

An annual 1.5 percent to 2 percent rise in global consumption, growing Brazilian ethanol-industry demand for sugar and the unprofitable position of some producers at current prices favor global sugar prices, Clark said.

“But fundamentally, you’re going to have a lot of fund activity,” Clark said. “I think it was a speculative run that knocked the price off its highs.” An expected output increase in Brazil, the largest sugar producer, is also negative for prices, he said.

India and Brazil

Commonwealth Bank of Australia slashed its raw-sugar price forecasts on increased supplies from India and Brazil. New York sugar prices may average 14.7 U.S. cents per pound in the June quarter, compared with a previous forecast of 22 cents, it said in a May 6 report.

While Illovo has “limited direct exposure” to world sugar prices, the “crisis in the euro zone and its impact on currency values is likely to have a negative” effect, the company said today in a statement to the stock exchange in Johannesburg. London-based Associated British Foods Plc owns 51 percent of Illovo, according to Illovo’s website.

Illovo’s share price declined in Johannesburg trading even after the company announced a 249 million rand ($32 million) capital reduction. The stock fell 78 cents, or 2.6 percent, to 29.70 rand, giving the company a market value of 13.7 billion rand.

Earnings excluding one-time items dropped 19 percent to 1.71 rand a share in the year through March. Illovo said in November earnings on that basis will be between 10 percent and 20 percent lower than in the previous year.

Consensus Forecast

“Our results are probably at the bottom end of the consensus forecast,” Clark said. That “may be a bit of a disappointment.”

Tongaat Hulett Ltd., Illovo’s biggest rival, posted an 8.9 percent increase in profit for the 15 months through March 31 from the same period a year earlier. Illovo’s profit on that basis fell 10 percent.

Illovo’s sugar production rose to 1.69 million metric tons and the company made progress with expansions in Zambia, Mozambique and Swaziland that should help boost output to 2.6 million tons in the “medium term,” Clark said.

Illovo will spend “just under 2 billion rand” on expansion and other projects in the year through March 2011, he said.

--Editors: Karl Maier, Ana Monteiro

source: businessweek