Imminent reforms to the EU sugar regime - likely to be more radical than estimated - could slice millions off the sugar profits for Associated British Foods (ABF), the owner of British Sugar, and Danisco next year, predicts a recent report from Goldman Sachs.
At an investor seminar this month Danish sugar giant Danisco indicated that proposals for a renewed sugar regime could lead to a 30 per cent reduction in EU sugar prices and a 10 per cent reduction in beet volumes. Analysts at Goldman Sachs believe that ABF and Danisco could be in for a rough ride if this scenario occurs, forecasting a decline in sugar profits of close to 60 per cent for ABF and 40 per cent for Danisco.
Pressure to change the EU sugar regime is derived from a number of sources - not least the upcoming WTO trade talks next month. Added to this are enlargement of the EU and competitor suppliers to EU sugar.
By the end of the year the European Commission will have to present comments on the EU sugar regime to the council of ministers. A combination between this fact, and the WTO trade talks next month, in Cancun, Mexico mean that new proposals on the sugar regime are likely very soon.
The report suggests that there are currently four key options for the EU sugar regime, which are, no change, full liberalisation, reduction in EU production quota's and introduction of import quota's, significant price reduction and the cessation of effectively cross-subsidised exports.
'EU sugar profits are vulnerable because historically the EU sugar price has traded at two to three times the world price,' write analysts in the report. 'In a free market environment, not all sugar produced in the EU would be profitable. We estimate that ABF makes at least an 18 per cent margin at its sugar business British Sugar, Danisco makes a 14 per cent margin and Tate & Lyle an estimated 10 per cent margin.'
They highlight the fact that sugar accounted for 40 per cent of ABF's EBITA in 2002 and 47 per cent of Danisco's. 'For Tate & Lyle, the impact of change on their sugar business is likely to be lower as operating margins for their EU sugar operations are only around the 10 per cent level,' adds the report.
That reform of the current EU sugar regime will have an impact on dominant European sugar players is an evidence. But the question is, by just how much? The analysts at Goldman Sachs envisage the following: 'Feeding through a gradual change in the sugar regime along the lines of a 30 per cent price cut and a 10% volume decline reduces our ABF DCF value by 70p to 630p and for Danisco by 9 per cent to Dkr368.'