OurProducts_2012-10-22

Expand all Collapse all

• Commercial review

  Commercial review

  Favourable market conditions impacted positively on sales resulting in the group achieving revenues of R9.2 billion, an increase of 13.1% year-on-year, despite a 7% reduction in sugar production. Notwithstanding the challenges associated with lower sugar availability, our sugar business performed well. Improved pricing, an improved average rand/US Dollar exchange rate and other marketing-related initiatives resulted in sugar revenues growing by 12.1%.
  The downstream operation, which is based primarily in South Africa, has a large export component which benefited from higher sales volumes and firmer prices, together with a more beneficial rand/US Dollar exchange rate.
  Domestic revenues which generally afford the higher-priced returns provide the foundation of Illovo’s marketing strategy. Sugar surplus to local markets is sold into preferential markets in the EU and the USA, and regional markets in Africa, whilst in South Africa, bulk raw exports to the world market are sold on behalf of Illovo through SASA. Export revenues from the downstream business represent more than 60% of total downstream revenue.
  
  

  Sugar

  Domestic markets

  Sugar revenues continued to be underpinned by strong market shares in each of the domestic markets in which we operate, and in the year under review, domestic market sales represented 64% of total sugar sales volumes.

  Total SACU market sales increased year-on-year by 9% to 2.1 million tons. Part of this good growth was attributed to the presence of local traders who purchased the sugar in South Africa and exported it to neighbouring countries. South African brown sugar was also delivered to Swaziland to supply its own domestic customers, thus freeing up the equivalent tonnage to be sold into the EU market at preferential premiums.

  Notably strong domestic sales performances were achieved by Illovo in Malawi and Zambia. In Swaziland, sales reflected good growth due to an improved share of industry sales following the strong sugar production performance at Ubombo. Tanzania’s domestic sales volumes, although less than recorded in 2010/11, benefited from improved prices. A challenging economic environment in Mozambique, with constrained consumer spending, resulted in industry domestic sales declining 15% compared to the previous year.

  Good progress has been made in optimising our outbound logistics in a number of the countries in which we operate. In Malawi, the new distribution warehouse network has already resulted in tangible improvements being realised, despite the challenges associated with limited and erratic fuel supplies in that country. In South Africa, work has commenced with the construction of a new custom-designed central warehouse facility in Pietermaritzburg which will streamline the storage and distribution of sugar to all segments of the domestic market, at a lower cost to our group. This project is planned for completion in 2013.

  Export markets

  The lower sugar availability due primarily to the drought in South Africa, together with unseasonable weather in a number of the group’s other countries of operation, constrained Illovo’s ability to take full advantage of the higher world, regional and preferential market prices. Illovo exports sugar to 25 countries.

  Regional markets

  The higher world price in the early part of the 2011/12 season, coupled with a tight sugar supply situation in Europe, supported firmer regional market prices, with both Zambia and Malawi benefiting from improved market premiums.

  Preferential markets

  EU export market prices firmed in line with the tight sugar stocks position in Europe, despite attempts by the European Commission to initiate measures to alleviate the shortfall. These measures included allocating further volumes of out-of-quota sugar into the domestic market and allowing tranches of imported sugar into the Union on a reduced duty basis. Current marketing conditions in the EU are likely to continue due to the impact of reduced internal supply despite a bumper sugar beet campaign throughout most parts of the region. On this basis, EU prices are forecast to remain firm albeit lower than the prices prevailing last year.

  Demand for our premium speciality sugars was strong and record sales were achieved. During the year, group preferential exports to the EU and the USA reached record levels of approximately 416 000 tons.

  Sugar market segmental analysis
  %	2011/12	2010/11
  Domestic markets	64	65
  Preferential markets	27	18
  Regional markets	8	11
  World markets	1	6
  Total	100	100

  
  

  Downstream

  Downstream operations continue to play an important and vital role in our business, with downstream revenues increasing by a pleasing 24% compared to that of 2010/11 on the back of higher production levels of furfural, improved market prices in all market segments and the benefit of a weaker exchange rate. Downstream revenues benefited from electricity exports to the national grid in Swaziland for the first time, signifying the commencement of an exciting new phase in our quest to extract as much value as possible from a stick of sugar cane.

  Whilst the group’s range of downstream products is primarily aimed at export markets, the Merebank and Glendale distilleries remain important suppliers of ethanol to the South African beverage, pharmaceutical, personal care, flavour, printing and packaging market segments. Relatively small volumes of furfural and its derivatives, including Crop Guard®, a furfural-based agricultural nematicide under the Agriguard range of products, as well as lactulose, a natural laxative, are sold in the local South African market. Illovo syrup, a well-known brand in the South African domestic market, retained its status as the market leader and the launch of the new peanut butter and syrup product has been well received by the trade.

  The group is a material player in most of the world markets in which it participates and exports furfural, furfuryl alcohol, diacetyl, 2.3-pentanedione, ethanol and lactulose to more than 80 countries. MultiGuard Protect, a furfural-based agricultural nematicide derived from sugar cane, has been successfully registered for applications on turf with the Environmental Protection Agency in the USA and sales have been made to over 120 golf courses in the south east states with positive initial experiences. Furfural and furfuryl alcohol prices have eased from the record levels seen earlier in the calendar year.

• Country operations: Markets

  Malawi

  During the year, the company achieved overall sugar sales of 292 000 tons, with approximately 58% of these being sold into the local domestic market under the Illovo-branded prepacked refined and brown sugar packs through the company’s chain of distribution centres situated throughout the country.

  The balance of 123 000 tons of sugar was exported to markets within Europe, the USA and regionally into neighbouring African countries. Malawi’s speciality sugar remained in strong demand in both the European and USA consumer markets. EU market prices strengthened in response to the higher world sugar price and tight sugar supplies.

  Transport logistics continued to present severe difficulties during the year in both the domestic and export markets with persistent fuel shortages, exacerbated by the shortage of foreign currency, hindering the efficient movement of sugar within the country and also to the ports for export.

  Zambia

  Domestic sales by Zambia Sugar increased from 143 000 tons in the 2010/11 season to 145 000 tons in 2011/12. The year was characterised by strong domestic economic fundamentals, a stable exchange rate and strong regional demand which supported higher prices and inhibited illegal imports from entering the country. Zambia Sugar again benefited from its well-established sugar marketing and distribution systems to reach all of its markets across the country.

  The demand was strong due to consumption exceeding supply in the region and higher world market sugar prices. The season saw an increased tonnage of duty-free, quota-free sugar exports to EU markets, increasing from 108 000 to 156 000 tons.

  Tanzania

  Total sales of approximately 113 000 tons were down 12% on the previous year due to sugar production being negatively impacted by unseasonal weather. This was partially offset by an increase in local prices in response to a shortage of sugar in the region. The Tanzanian government awarded import licences in excess of 200 000 tons to address the apparent shortfall and by year-end imported sugar was entering Tanzania and prices have since stabilised.

  South Africa

  Illovo sells raw, brown and refined sugar, speciality brown sugars, syrup, furfural and its derivatives, potable and denatured ethanol, and lactulose into local and international markets. Illovo’s domestic market sugar sales performance in 2011/12, given the reduced sugar availability for sale, particularly in the brown sugar sector, was pleasing. The group remains the major supplier of sugar to the South African industrial market. Regional market sales into the SACU, which has traditionally been supplied from Zimbabwe, were again boosted this year due to that country’s current sugar production difficulties.

  Illovo’s share of raw sugar exports to the world market, undertaken by SASA, amounted to 23 000 tons for the year, which were well below normal levels due to the impact of the drought. The average price realised by the industry, including hedging activities undertaken by SASA, was US25.41 cents/lb, representing a significant increase of US7.71 cents/lb compared to the previous year, due to the higher average world market price in 2011/12. South African sugar industry production in 2012/13 is expected to recover significantly due to the much improved cane crop. A total of 165 115 tons of world export sugar have been priced to date on behalf of the industry by SASA, at an average price of US23.8 cents/lb. Futures prices in early May 2012 for 2013 delivery are currently trading around US22.0 cents/lb.

  Ethanol revenues improved in respect of export drum markets. Local sales also benefited from increased premiums, particularly into the personal care, flavourant, printing and packaging market segments and achieved good growth. Record lactulose sales were achieved.

  Encouraging progress has been made in growing the Agriguard business which produces agricultural chemicals from furfural to combat nematode infestation in a wide range of agricultural crops and on turf at sports stadia and golf courses. The commercialisation of Agriguard in the USA commenced during the past year with sales to a number of golf courses taking place and good results being experienced.

  Swaziland

  Demand for Swaziland sugar in the SACU market remained strong. Swaziland continued to supply the EU markets with sugar in 2011/12 under duty-free, quota-free access. Revenues from EU sales during the season were impacted negatively by a weaker Euro, however, market prices have improved and will significantly benefit Swaziland and Ubombo in 2012/13.

  Mozambique

  A challenging economic environment in Mozambique, with constrained consumer spending, resulted in industry domestic sales declining 15% from the previous year. During the year, the value of the local currency strengthened notably against the Euro, the US Dollar and the rand. This had the effect of reducing export earnings in meticals.