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As a vertically integrated sugar producer Tongaat Hulett [JSE:TON] (TH) does virtually everything but eat its product for you. It plants the cane, grows it, harvests it, crushes it to extract raw sugar and then refines that for the final product on the shelf. It would probably like to eat the sugar for you if it could – lots of sugar.
Seriously though, it does speak somewhere about the importance of sugar but only as part of a healthy diet. What TH needs to do is pump out as much sugar as it can. Apart from the lucrative market in South Africa, the global market is in that happy position (for exporters) where demand exceeds supply, which ensures a strong export price.
But there was little icing on the top for TH in its 2011 annual report. The big problem is that to get its integrated model working fully – and profitably – it needs to process as near to capacity as possible. TH can produce around 2m t of sugar/year. Only 445 000t were produced in SA – as CE Peter Staude notes in his review, the lowest in many decades for TH. That knocked operating profit from its South African operations into a loss of R7m against a profit of R136m in its previous financial year.
The main problem was near drought conditions in SA’s sugar growing season, particularly in KwaZulu-Natal, where TH grows most of its cane. That shows the big risk with this business, and probably any other agricultural business. A good crop depends on good rains (at the right time). If that doesn’t happen there’s nothing you can do about it.
But not getting enough sugar through the system adds to TH’s woes. Milling and refining are largely fixed costs operations. So Staude notes in the report the decline in sugar production led to higher costs per ton of sugar produced. Still, TH was able to export 17% of sales, which earned it R3 272/t at the attractive world sugar price of US$18,5c/lb. In the previous year exports were worth just more than R3 000/t.
The annual report ends on a more cheerful note, with TH recording increased land under cane, expected better yields and improved sugar prices having increased the value for the crop at its 31 March 2011 year end. Maybe it’s not so tough being a sugar baron.
Seriously though, it does speak somewhere about the importance of sugar but only as part of a healthy diet. What TH needs to do is pump out as much sugar as it can. Apart from the lucrative market in South Africa, the global market is in that happy position (for exporters) where demand exceeds supply, which ensures a strong export price.
But there was little icing on the top for TH in its 2011 annual report. The big problem is that to get its integrated model working fully – and profitably – it needs to process as near to capacity as possible. TH can produce around 2m t of sugar/year. Only 445 000t were produced in SA – as CE Peter Staude notes in his review, the lowest in many decades for TH. That knocked operating profit from its South African operations into a loss of R7m against a profit of R136m in its previous financial year.
The main problem was near drought conditions in SA’s sugar growing season, particularly in KwaZulu-Natal, where TH grows most of its cane. That shows the big risk with this business, and probably any other agricultural business. A good crop depends on good rains (at the right time). If that doesn’t happen there’s nothing you can do about it.
But not getting enough sugar through the system adds to TH’s woes. Milling and refining are largely fixed costs operations. So Staude notes in the report the decline in sugar production led to higher costs per ton of sugar produced. Still, TH was able to export 17% of sales, which earned it R3 272/t at the attractive world sugar price of US$18,5c/lb. In the previous year exports were worth just more than R3 000/t.
The annual report ends on a more cheerful note, with TH recording increased land under cane, expected better yields and improved sugar prices having increased the value for the crop at its 31 March 2011 year end. Maybe it’s not so tough being a sugar baron.
