Tate & Lyle defiant in face of sugar regime change
expansion plans despite warnings that proposed changes to the sugar
regime could begin to affect business as soon as 2007, writes
Anthony Fletcher.
"I am pleased to confirm that trading for the first quarter was in line with our internal expectations and marginally ahead of the corresponding period in the prior year, said Tate & Lyle chairman Sir David Lees at yesterday's annual general meeting.
"We have also announced capital projects to more than triple the sucralose production capacity acquired under the realignment of the Splenda Sucralose activities in April 2004 and our new joint venture plant with DuPont to produce Bio-3G from renewable resources should begin to come on stream in our financial year ending 31 March 2007."
The firm also announced expansion plans for both its Sagamore and Loudon facilities in the US, which will involve capital expenditure totalling £100 million.
"These investments reflect our firm commitment to deliver against our growth strategy and in particular to grow the contribution from value added products," said Lees. "They were substantially provided for in the financial plans for the years ending March 2006 and March 2007."
But in response to new proposals for reform of the EU Sugar Regime scheduled to take place on 1st July 2006, Lees said that although there would be no immediate adverse financial effect, things could be different as of 2007.
"If unchanged the impact of the proposals would be to reduce operating results by £20 million in the year ending 31st March 2007, £60 million in the year ending 31st March 2008, and £85 million in the year ending 31st March 2009," he said.
Lees said the most significant part of these impacts would be felt in the Food & Industrial Ingredients, Europe division, which produces isoglucose and other products, which compete with and are typically priced at a discount to sugar.
"The price reductions in the proposals will have a significant impact here, particularly as the raw material used in this business is either wheat or corn so, contrary to the position of, say, the beet sugar processors, the regime can provide no offsetting adjustment in input price to sustain margins," he said.
The company's cane sugar refineries in London and Lisbon would also be impacted by reduced margins as the lower sugar prices in the current proposals would not be fully offset by reductions in raw sugar prices.
"In essence we believe that the proposals as currently drafted are inconsistent with the Commission's stated undertaking to ensure the refining of sugar is carried out under the fairest possible conditions of competition,"said Lees. "In particular the proposals as stated have the effect of reducing the beet processors' margins by 44 per cent but the cane refiners' margins by 77 per cent in 2009/10.
"Margins for this purpose can broadly be described as the difference between what the cane refiners and beet processors receive for their finished products, which is the same, and what they pay for their raw materials, which is different."
The current proposals remain subject to negotiation and probable future amendment at the Council of Ministers and final approval in the European Parliament, a process that is anticipated to last until at least November 2005.
