Memorandum submitted by Tate & Lyle
Sugars, Europe
EXECUTIVE SUMMARY
1. Tate & Lyle's UK refinery would compete
very effectively in a totally deregulated market. It is imperative
that any arrangements designed to liberalise the European sugar
sector, but at the same time maintain a beet support regime, do
not threaten an economically and commercially sustainable business.
2. As the Commission's proposals stand they
would seriously threaten the viability of Tate & Lyle's UK
refinery in East London. This is particularly perverse as it is
one of the few sugar businesses in Europe which could compete
effectively in a totally deregulated market.
3. The proposals contain a major threat
to the viability of the business. Firstly it yields a margin that
is significantly worse than would be the case if TALSE were operating
in a totally deregulated environment. Secondly the beet processing
margin has been reduced by only 44% while the cane refiners' margin
has been reduced by 77%.
4. The refining margin and raw sugar supply,
both governed by the regime, are inextricably linked. The proposals
are intended to cancel the cross-subsidy arising from the regime's
price support arrangements for beet that would otherwise allow
beet processors to compete inequitably for the limited supply
of imported sugar for refining. Examination of these provisions
and their implementation is underway to ensure that the intention
will be delivered in practice.
5. A corrective arrangement is required
for the cane refining margin to secure the business and enable
it to compete on an equitable basis with EU beet. This is not
special pleading to support an otherwise unsustainable business.
TALSE's concern is that the viability of a business, sustainable
in a deregulated market unlike most if not all of the EU beet
sector, is threatened by the artificial regulatory environment
as currently set out in the proposals.
INTRODUCTION
6. Principally, this note will concentrate
on answering the specific key points raised in the Committee's
call for evidence. In particular, it will concentrate on exploring
the Committee's request for evidence on "the potential impact
of the reforms on UK-based sugar beet processors and cane refiners,
and the long-term consequences for their industries".
7. Tate & Lyle's UK operation gave evidence
in the former Select Committee's enquiry in 2003-04. Included
in that evidence (Ev16 and Ev21) was a background to the business.
A short summary of this has been updated and included in this
evidence as Appendix I. However, it should be highlighted here
that of the original six UK cane refineries, five have been closed
and all production concentrated in the one remaining refinery.
There is no scope for further rationalisation or concentration
of UK refining capacity. The earlier rationalisation was achieved
with no EU financial assistance and thus at considerable cost
to the company. The human cost and sacrifice was considerable.
THE POTENTIAL
IMPACT ON
UK-BASED CANE
REFINERS, AND
THE LONG-TERM
CONSEQUENCES FOR
THE INDUSTRY
8. The proposals as they stand would seriously
threaten the viability of the UK Tate & Lyle refinery operation.
This is in no way due to any inefficiency on TALSE's part. Rather,
it is because the proposals create a commercial environment for
full-time cane refiners that would be significantly worse than
would be the case in a totally deregulated market.
Full-time destination refineries
9. The Tate & Lyle UK refinery is a
full-time destination refinery. This means that it is based on
a model of moving cane sugar for refining in bulk by ship from
the country of production to the region of consumption for final
processing into an extensive range of sugar products for the consumer.
This is the type of business model that is growing around the
world in order to satisfy increasing demand for high quality sugar
products in the most cost efficient way.
10. New full-time destination refineries
have opened in recent years in Algeria, Canada, Dubai, Indonesia
(2), Nigeria, Saudi Arabia and Taiwan. Construction work is ongoing
on new refineries in Egypt, Iran and Indonesia (a further 2).
Feasibility studies are also being undertaken in a number of other
countries. There is no shortage of raw sugar internationally for
these refineries.
11. The reason for the international growth
in destination refining is threefold. Firstly, sugar for refining
is cheaper than white sugar. Secondly, transport costs for sugar
for refining are significantly less than those for finished sugar
products. Thirdly, modern and sophisticated market requirements
are better serviced from a refinery close to market than from
a very long supply chain for refined sugar with the ever present
risks of supply disruption, quality deterioration and dispatch
of product below specification.
12. In a deregulated environment, a full-time
destination refinery would be competing against imported finished
sugar products. The combination of the three factors above would
allow a destination refinery to produce refined product at below
the cost of imported refined product. The resulting refining margin
would allow the refinery to cover the fixed and variable production
costs, as well as allowing for an acceptable return on capital
invested in the plant.
13. A destination refinery in a totally
deregulated market would also benefit from no restriction on the
volume of raw sugar supply available to it. This would allow it
to operate at full capacity, and thus drive down its unit refining
costs.
14. TALSE is not asking for a fully deregulated
regime as this is not currently a policy option. It seeks only
to be given the terms to enable it to compete effectively with
beet in a market where beet continues to be supported. TALSE is
also very sensitive to the requirements of its traditional developing
country and least developed country suppliers.
Full-time destination refining in the EU sugar
regime
15. Full-time destination refining has always
been a small part of the EU sugar sector. It currently accounts
for less than 10% of production and consumption. It has never
sat easily in a regime designed to support the beet growing and
processing sector. UK Cane refining was, in effect, bolted on
to the beet driven regime established five years before UK entry
to the EU. The guiding principle which has consistently been used
by successive UK Governments in policy formulation is to ensure
the regime permits equitable terms of competition between the
beet and cane sectors.
The Commission proposal—margin
16. The proposals reduce the cane refining
margin by significantly more than the beet processors' margin.
Further, the cane refining margin is reduced to considerably less
than it would be in a deregulated market. The processing margin
for both the cane and beet sectors is a function of the institutional
guaranteed raw material purchase and sale prices, as well as other
elements, which the sugar regime establishes.
17. From 2009-10 onwards the cane margin
is reduced by 77% whilst the beet margin is reduced by 44% (see
table 1). This is disproportionate and discriminatory and seriously
threaten the viability of TALSE's business.
Table 1
REDUCTION IN MARGIN ENVISAGED IN THE COMMISSION'S
PROPOSALS
| 2006-07
|
2007-08
| 2008-09
| 2009-10
onwards |
| Reduction in cane refining margin* | -49%
| -72% | -74% | -77%
|
| Reduction in beet processing margin* | -24%
| -44% | -44% | -44%
|
| *compared to current situation |
| | | |
| |
| | |
The Commission proposals—raw sugar supply
18. The underlying intention is to cancel the inequitable
competition of supply between beet processors and cane refiners
for the restricted supply of imported sugar for refining available
in the EU. The support measures provided by the beet driven regime
to beet processors essentially enable fixed costs to be covered
by processing the beet crop. Technical adaptation and a small
investment can enable concurrent or off-crop refining of imported
sugar in a beet processing plant, therefore permitting a cross-subsidy
from the beet regime to be enjoyed.
19. Tate & Lyle welcome the proposal's intention
to cancel inequitable terms of competition for sugar for refining
for the base businesses of both operations—processing beet
quota in the case of the beet sector and refining imported sugar
in the case of the refining sector. For volume above the base
businesses the beet processor and cane refiner would compete on
equitable terms for sugar for refining. It is essential for the
authorities to thoroughly examine and, where necessary, improve
the draft to deliver equity of competition for sugar for refining.
This work is in hand.
20. Refining, by nature, is a business with a very high
proportion of fixed costs. Already, the regime forces the UK refinery
to operate at only 85% of capacity by the limitation of the supplies
available for refining. It would take only a small reduction in
supply, even at an economic refining margin, to seriously threaten
the viability of the refinery.
21. The refinery currently operates at only 85% (1.13
million tonnes) of current capacity (1.3 million tonnes) because
of the restricted sugar supplies for refining available under
the EU sugar regime. With modest adjustments to the plant it could
be run at 1.5 million tonnes per annum and unit costs reduced
significantly. Margin and volume are, as highlighted earlier,
inextricably linked in determining the unit costs and cost efficiency
of the operation.
THE EXTENT
AND TIMESCALE
OF THE
PROPOSED PRICE
REDUCTIONS
22. TALSE's partners, the developing and least developed
country suppliers, have strongly and loudly criticised the size
of the proposed price cut and the short period for the full application
of the cut. They have rightly projected the implications of these
cuts for their economies and social cohesion. The Commission has
in turn drawn attention to the EU's need to reduce beet production
significantly and very quickly in order to comply with its WTO
obligations while at the same time ensuring that the remaining
EU beet production is cost efficient and sustainable in the long
term.
23. It is essential that EU assistance to the Sugar Protocol
countries adversely affected by the outcome of the negotiations
is wholly adequate, properly targeted, and efficiently delivered
in a timely way to address and counter the country by country
implications of the proposed price cuts.
CONCLUSION
24. The Tate & Lyle UK refinery operation is a business
that could compete effectively in a deregulated market. In order
to ensure the business is not threatened by partial liberalisation,
but with continuing support for beet production and processing,
it is essential for the proposals to be tested to ensure that
the refining margin and linked raw sugar supply arrangements permit
refined sugar produced from imported sugar to compete on equitable
terms with refined sugar produced from EU supported beet.
25. The Tate & Lyle UK refining operation is not
a business which needs artificial support to correct an inefficiency
or sustain a business that would otherwise be uneconomic. Efforts
must be intensified to identify the means to ensure that the business
is not threatened by partial liberalisation and that it is has
the regulatory and market environment to enable it to compete
and invest for a long-term future.
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