Picture: ISTOCK
Picture: ISTOCK

London — EU sugar companies have emerged from the cocoon of production quotas and are now fighting to survive in a fiercely competitive world market with prices and profits plunging.

The EU’s largest sugar producer, Suedzucker, has said it expects to report an operating loss of €100m-€200m in its sugar segment in 2018-19 while its rivals are also struggling.

"At the current price level, there is hardly a sugar company in Europe which can still produce at a break-even," a spokesman for the EU’s number two producer, Nordzucker, said.

The EU abolished limits on sugar beet production at the end of September 2017, dramatically boosting output and paving the way for the EU to become a net exporter for the first time in more than a decade.

The rise in EU production has come at a time when appetite for sugar is declining in the increasingly health-conscious trading bloc, throwing supplies onto a world market already awash with the sweetener.

"Everyone can produce as much as they want and initially everyone only looked at the cost side of the equation and tried to reduce production costs by processing more beet and producing more sugar," FO Licht analyst Stefan Uhlenbrock said.

"But this leaves out of consideration that prices must collapse if all key players do the same and raise output massively and this is the situation right now. Over time this will result in a survival only of the fittest."

Associated British Foods, the parent of British Sugar, has been shielded to some extent by diversification. The company’s other businesses include fashion chain Primark.

About 16% of Associated British Foods’s profits came from sugar "so clearly it’s not the driving force", Hargreaves Lansdown analyst George Salmon said. "For sugar, they’ve been very clear, saying that removal of quotas causing a weaker sugar price is going to have an impact," he said.

EU sugar prices had been underpinned by production quotas and import tariffs under the regime that ended in September 2017 and were often far above world market levels.

The need to compete in a global export market has largely closed the gap.

The European Commission reported an average price for white sugar during January of €374/tonne, down €26 from December and the lowest level in records dating back to 2006.

"That gives you an idea of the speed at which the European market is converging with the world market.

"With London prices at around €280, it is likely the EU price has fallen further since January," said Agritel sugar analyst Francois Thaury.

Analysts expect the global sugar market to remain in surplus for at least two seasons and possibly longer following a sharp increase in production, particularly in India and Thailand.

Reuters