House of Commons - Environment, Food and Rural Affairs

Select Committee on Environment, Food and Rural Affairs Minutes of Evidence

Memorandum submitted by Tate & Lyle European Cane Sugars (TLECS) UK Operation (O73)

EXECUTIVE SUMMARY

TLECS support regime arrangements which provide a stable and orderly market and which take into account the interests of its traditional preferential developing country suppliers and the least developed country suppliers (LDCs).

Tate and Lyle's refinery, at Silvertown in East London, is the largest in the world, it represents 2/3 of EU port refining capacity and imports and refines from developing African Caribbean and Pacific (ACP) countries and the LDCs, 1.13 million tonnes of sugar per year. The raw sugar supply restrictions arising from the current regime require the refinery to operate at only 85% capacity.

The T&L operation could compete effectively in a deregulated market. However the EU Commission has ruled out deregulation as a viable option for the future of the EU sugar arrangements. It is thought that the majority of EU Member States share this view.

Under either a regime with supply managed by quota, or one with supply managed by price, it is essential that the arrangements provide:

— An adequate and secure supply of raw sugar.

— Institutional margin arrangements which permit cane to compete equitably with beet.

In order to ensure that the UK refining is not threatened during any regime arrangements, prior to any deregulated regime in the future, then it is essential for all reform options be tested against the two principles above.

The eventual regime will be structured around beet and, at this stage, T&L cannot be prescriptive about the precise arrangements necessary to safeguard cane refining on an equitable basis with beet.

The role of the UK Government in ensuring an equitable balance between beet and cane will be a key one.

1. TATE & LYLE PLC

A short note outlining the Group is attached at Appendix I.

2. CANE PRODUCTION INTERNATIONALLY

2.1 It is Tate & Lyle's view that cane production, including cane refining, will continue to increase internationally. For example, as far as cane refining is concerned, the Redpath refinery in Canada has increased throughput from 350,000 tonnes to 650,000 tonnes in the last 10 years. In the last six years the United Sugar Company, in Saudi Arabia, has increased from 500,000 tonnes to 930,000 tonnes with ongoing plans to increase throughput to over one million tonnes, whilst the Al Khaleej refinery in Dubai has increased production from 700,000 tonnes to 800,000 tonnes in the last three years. New refineries are now in production in Brazil, Algeria, Sudan, Nigeria and Indonesia, and others are planned in Egypt, Syria and elsewhere. There is no shortage of raw sugar internationally for these refineries.

3. TLECS: UK OPERATION

3.1 As a result of UK entry to the EU, and the consequent reduction in raw sugar supplies available to the UK refineries, TLECS has been forced to close five of its six refineries. The one remaining refinery is at Silvertown in the East of London. It is the world's largest refinery with a capacity of 1.3 million tonnes. The refinery is located in the borough of Newham, which is one of the three most deprived boroughs in the UK.

3.2 The refinery operates at only 85% (1.13 million tonnes) of capacity because of the restricted raw supplies available under the EU sugar regime. The refinery is situated directly on the River Thames and has its own private jetties for importing and exporting. Raw sugar is imported from African, Caribbean and Pacific (ACP), Developing and Least Developed Countries which are signatory to the Sugar Protocol of the Cotonou Agreement, and from the world's Least Developed Countries (LDCs) under the EU's "Everything But Arms" (EBA) initiative.

3.3 The range of countries from which these supplies are drawn is given in Appendix 2. TLECS therefore provides the principal bridge into the EU to enable these suppliers to reach the EU market.

3.4 The refinery operates 24 hours per day, 364 days per year. Approx 70% of the output is bulk sugar, either crystal or liquid. The balance, 30%, is speciality sugars eg Lyle's Golden Syrup. It is the largest private sector employer in Newham with 650 direct employees and 300 on-site contractors. Only 14 persons are on process and utilities per shift. Over 300,000 are directly employed in the cane supplying industries with a great additional number in indirect employment.

3.5 In the last 10 years, the UK refinery objective has been "To safely, sustainably and efficiently meet customer needs at lowest cost". In relation to lowest cost, it has been the aim to lower costs to the point where the business could compete in the EU and internationally in a liberalised market. This has been achieved. Further cost efficiencies are sought. These efforts could be negated, and the business threatened, if the EU regime does not yield:

— An adequate and secure supply of raw sugar.

— A refining margin which enables sugar refined from cane to be marketed in equitable competition with sugar produced from EU beet.

4. SUPPLIERS OF RAW SUGAR

4.1 The suppliers to TLECS receive a price for their sugar in line with the EU price due to the terms of the preferential import arrangements applicable. Any reduction in the EU price would reduce the earnings TLECS suppliers realise from access to the EU market.

4.2 As these suppliers will doubtless testify themselves, their sugar industries play a highly significant role in either their national economies or local/regional economies. Sugar provides important rural employment, both direct and indirect, and the mills provide professional opportunities for a range of skills. Unlike many other industries in the developing world, sugar provides a high level of net foreign exchange earnings as opposed to gross foreign exchange. In some countries the sugar industries provide the education and health facilities for families linked to the sugar industry.

4.3 The energy for the mills is provided by bagasse, the cane fibre by-product of the milling process. In almost all cases only a small quantity of energy need be purchased in order to start the mills at the beginning of crop. Increasingly, bagasse is being used in co-generation plants to provide electricity for the national grids.

4.4 The ACP suppliers are fighting to retain the value of the existing arrangement. The LDC's were given quota free and duty free access to the EU market with full effect from 2009. This was a unilateral trade concession granted by the EU. The LDC suppliers' Governments and industries have responded by asking the EU to delay full implementation of the access until 2019. In the meantime they have asked that their exports to the EU should be controlled by quota rising from 578,860 tonnes in 2005 to 1,622,941 tonnes in 2016. They view this as the way in which value can be gained from EU access. Otherwise a market managed by price reduction would render the EU's access gesture an empty one.

5. REFINING IN THE EU

5.1 The UK Refinery represents about 2/3 of EU refining capacity and the EU refining activity itself represents about 13% of EU consumption. There are two small refiners in each of France and Portugal and another very small one in Finland. TLECS owns the refinery in Lisbon, Portugal. Only the UK and Portuguese refineries are owned by companies with no beet interests in the existing EU.

6. THE INTERNATIONAL SUGAR MARKET IN PERSPECTIVE

6.1 World consumption and production is approx 140 million tonnes and the market is growing by about 2% per annum. However only about 35 million tonnes is traded freely internationally. Most countries have a sugar regime of some sort.

6.2 The world market is dominated by Brazilian exports; there has been a ten-fold increase in these exports over the last 10 years. They currently account for about 13 million tonnes of the market of 35 million tonnes. Further expansion of sugar production is planned. Brazil has been able to expand production because of repeated massive devaluations, a genuinely efficient industry and the "support" provided by the Government inspired ethanol programme. The average cost of production is around 4-6 cents per lb; in contrast the ACP average cost of production is probably in the region of 16 cents per lb.

6.3 After Brazil and India, the EU is the world's largest sugar producer. Its exports are static to declining as they have to comply with the EU's Uruguay Round export reduction commitments.

6.4 After Brazil and the EU, the two largest exporters to the world market are Australia and Thailand. The EU is the world's second largest importer; Brazil, Australia and Thailand do not import sugar.

6.5 A straight comparison of world and EU prices is an unsound one. Most sugar is consumed in the countries in which it is produced. The world price bears no semblance whatsoever to average costs of production, whether beet or cane. If some comparison of sugar prices must be attempted, there is a measure of international support for this being done on the basis of purchasing power ie the wage which has to be earned or hours worked to purchase a unit of sugar. The EU intervention price of approx 26 cents per lb would show EU sugar to be remarkably cheap.

7. EU OPTIONS FOR REFORM

7.1 The initial four options considered were:

— Status Quo.

— Supply Management by Quota.

— Supply Management by Price.

— Deregulation.

7.2 The EU Commission considered that deregulation was unrealistic. It felt that supply management by quota was also unrealistic given the EU's offer of duty free and quota free access to the LDCs and the Balkans. This latter offer has resulted in some fraudulent imports into the EU. This arrangement is currently suspended in the case of Serbia and the region continues to be the focus of OLAF scrutiny (EU's fraud investigation unit).

7.3 Also status quo was considered unrealistic because of the advent of uncontrolled imports and the implementation of changes arising from the outcome of any successful conclusion to the Doha Development Round negotiations.

7.4 The Commission has not specifically promoted management by price in its latest consultation document as its chosen option. Nevertheless there is a feeling among all those discussing the document that this is the preferred route, albeit after a transition period where quotas would be retained.

8. EFFECT OF MANAGEMENT BY PRICE ON ACP, LDC AND T&L

8.1 The EU Commission's current estimate of a supply equilibrium price to bring supply from domestic beet sugar and isoglucose (nutritive sweetener from EU wheat) production and imports, into balance with demand is below the costs of production of most of T&L's current suppliers. Some suppliers already have cost problems at the current level of the EU price. Only a very few ACP and LDC suppliers would have costs at around the EU's idea of an equilibrium price. Many developing countries would find the EU market uneconomic.

8.2 There are claims that if the EU were to reduce its production and exports the world price would rise. Thus, it is said, countries which no longer found the EU an economic market, could sell on the world market. T&L, among others, believe that it is wrong to assume the world price would rise. Any world market share given up by the EU would quickly be taken up by the large volume, low cost world producers—producers with costs below the ACP and LDC.

8.3 For Tate & Lyle, already operating at only 85% of capacity, and given its high percentage of fixed costs, the result would be a further damaging loss of raw supply at a time when there is no shortage of raw sugar on the world market. T&L has no choice but to argue against the Commission's current thinking on supply management by price and which does not contain a proposal for a quota on raw sugar supply entitlement for the EU refining sector.

9. COMPARATIVE BEET PROCESSING AND CANE REFINING MARGINS

9.1 When the UK joined the EU, most UK negotiating currency was concentrated on securing the Sugar Protocol of the Lome convention and, thus, a level of continued access to the UK for traditional Commonwealth sugar and a raw sugar supply, albeit seriously diminished, for the UK refining sector. The EU sugar regime was established in 1968. It was naturally beet driven. No real efforts were made to integrate cane refining into that regime; rather it was bolted on to the side of the beet regime.

9.2 It was acknowledged at accession by the authorities that there was a problem in the EU regime and price structure which disadvantaged the cane refiner. Over the years a number of ad hoc measures taken by the UK and/or EU, combined with some currency factors which marked the problem, enabled T&L to remain in business. In 1986, under UK Government pressure, the EU overtly accepted the problem and chose, as its way of resolving it, a system of margin aid payments to the refiners based on refined output.

9.3 At the 2001 regime review there was a thorough re-examination of the margin aid system, including the scrutiny of the outcome of a report by independent consultants. It was decided to retain the system. With the regime itself, this margin aid will come to an end in 2006. T&L has no choice but to seek the extension of this arrangement, or an alternative system having equivalent effect. Only in this way, could the current competitive disadvantage, under which cane operates in relation to beet, at least be maintained, not increased further. The current level of margin aid is

29.2 per tonne. This aid in no way whatsoever reflects any cost inefficiency in refining.

10. UNDERLYING DIFFERENCE BETWEEN BEET AND CANE MARGINS

10.1 Beet is a through process—beets in, white sugar out. In cane, on the other hand, cane is produced and crushed in the country of origin to produce raw sugar crystals. These are not designed for direct consumption; they are shipped in bulk and refined in the UK. Therefore, beet processing requires a greater capital employed per tonne of output than refining. However, the size of the existing gap between the beet processing margin and the cane refining margin puts sugar produced from beet at a competitive advantage, in the market, to sugar refined from cane. The current institutional beet margin is 2.3 times the cane margin.

10.2 In the UK market place this has the effect of enabling almost all quota beet to be marketed within the UK and Continental Europe. To the extent which T&L cannot compete, as a result of the margin disadvantage, such sugar must be exported to the world market with restitution.

11. TATE & LYLE AND DEREGULATION

11.1 After having consistently addressed its critical survival issues T&L studies indicate that, under liberalisation, T&L refining:

— Would be competitive with white sugar imports.

— Would be competitive with what would be left of the EU beet sector.

— Would have an adequate and secure supply of raw material from the world market.

Further, T&L has the benefit of long experience of, and the skills in, international sugar trading. It has one of the world's largest sugar trading operations.

12. IMPORTANCE OF ROLE OF UK GOVERNMENT

There are only four Member States with port cane refineries. Of these, the UK represents 2/3 of the existing capacity utilisation. The UK Government has traditionally sought to maintain a balance between beet and cane and T&L values this greatly. There is no reason to suspect that, on this occasion, UK Government policy will waver from this. However delivering a balance from the forthcoming EU negotiations will be a much greater challenge than in the past when regime changes and the stakes have been smaller.

12.1 At the moment the UK is the leading Member State out of the four Member States with refining interests which, themselves, are in a minority in the EU of 15. On 1 May they will be only four Member States out of 25. T&L, as always, will do everything it can to support British Government efforts. However, at the end of the day, T&L has no direct place at the negotiating table.

5 April 2004

APPENDIX 1

TATE & LYLE PLC

Tate & Lyle is a world leader in carbohydrate ingredients. It has 50 plants in 24 countries. These concentrate on wheat and sugar processing. Its EU wheat processing operations use 2-3% of the EU's wheat production.

The European Cane Sugar Business comprises of:

— Tate & Lyle Sugars (UK Sugar Refining).

— Tate & Lyle International (Global Sugar Trading).

— Alcantara (Portuguese Sugar Refining).

— United Molasses (Global Molasses Trading).

— United Storage (Global Liquid Storage).

Tate & Lyle does not own sugar producing interests in its supplying countries or ships for the transport of sugar from these countries to the EU.

APPENDIX 2

SUPPLYING NATIONS TO THE EUROPEAN UNION

Bangladesh

Barbados

Belize