Examination of Witnesses (Questions 1-19)
MR MARK
WHITE AND
MS PATRICIA
JAMIESON
19 OCTOBER 2005
Q1 Chairman: Good afternoon ladies
and gentlemen. I am glad to see that there is such enormous interest
in the reform of the European Sugar Regime that it is almost standing
room only. Everybody is very welcome to this first public evidence
session of our inquiry into the proposed reforms of the Common
Agricultural Policy Sugar Regime. Our first witnesses come from
Tate & Lyle Sugars, Europe. Some things never change, so I
am delighted to welcome back again Patricia Jamieson before the
Committee, the Director of Raw Sugar Supply and EU Affairs and
Mr Mark White, the company's Chief Executive. You are both very
welcome. I remember some years ago, when I had a ministerial incarnation,
having the pleasure of visiting the Silvertown refinery and learning
for the first time that the sugar you deal with arrives as brown,
then becomes white, then becomes brown again. At least I have
remembered something about the process you are involved in. Cane
sugar is certainly affected by the proposals to change the regime,
but let me ask you at the outset whether you are, generally speaking,
content with the proposals the Commission have come forward with
to reform the sugar regime. If you had the proverbial clean piece
of paper, would you have done it this way?
Mr White: The answer is no, we
would not and we are not content. We do support the need for reform.
This reform is trying to liberalise the market whilst supporting
a beet regime. It has severe influences on the cane refining sector
right across Europe and the cane refining sector is a sector which
could compete effectively in a totally deregulated market. If
you like, on the journey to deregulation this proposal actually
hits the refiners and there are two key issues. The first issue
is on supply. We need a base quantity to keep our refineries going
through the period of the reform. The refineries in Europe currently
operate at about 70% capacity, so we need to ensure that we keep
our current supplies of raw sugar. I think it is the Commission's
intention to do that, but there are beet processors across Europe
effectively trying to take our raw sugar away. We are a high fixed
cost industry and if we lost our supply, then we would soon go
out of business. The second major issue for us is margin. The
cane refining sector is more efficient than the beet processing
sector. We start with a margin which is lower than the beet processors,
but this proposal actually reduces the beet processors' margin
by 44%. The cane refining margin, which is already lower, is reduced
by 77%. What this means is that an efficient beet processor will
have a margin of
180 per tonne: if you are an efficient beet processor
you can cover your costs, make a profit and make an acceptable
return on your assets and that is
180 per tonne. The cane refining margin is moving
to
44.
Q2 Chairman: Could you just explain,
for the benefit of the Committee, how this margin is calculated?
From the other odd things I remember, you get paid for doing your
job in a different way than the beet producers do. Perhaps you
had better just explain to the Committee how you get paid for
what you do.
Mr White: The way
we calculate our margin is the price at which we sell our white
sugar less the institutional price we have to pay for our sugar—in
our case raw cane sugar—and that is the difference. The
44 we are going to be left with does not even cover
our total cost for refining.
Q3 Chairman: So if the cost of your
raw material is coming down, which is one of the central planks
of this proposal, why is your margin not going up?
Mr White: The raw
sugar price is coming down but the white sugar price is coming
down faster. It is the difference between the white and the raw,
which is our margin, which is important for us. We cannot compete
against the beet processor who has a margin of
180 and ours is only
44.
Q4 Chairman: Just tell me in terms
of the structure of the sugar regime why it works out like that
in a market where market access is supposed to be being improved?
Am I not right that one of the things you are looking at is the
possibility of getting more sugar into your refinery? At the outset
it looked as though this might be quite good news for you.
Mr White: Maybe I could explain
in a totally deregulated market where you want to go when you
want totally free competition. A destination refinery, which is
what we are, would expect a margin between
100 and
110 to operate with. We operate refineries in Canada,
in Toronto, a joint venture in Saudi Arabia, we are building one
in Egypt and that is the margin you would expect. When you get
to the most competitive situation, you would expect that sort
of margin. So the proposals at
44 are flawed. The only thing we can think of is
that the cane refining sector was really bolted onto the beet
sugar regime when the UK acceded to the European Union. The sugar
reform is a very complex issue and there is so much attention
to the beet sector that actually cane refining gets left and sometimes
the analysis on the cane refining sector is not as good as it
should be. As far as market access goes, in the first three years
the amount of raw sugar which comes into the market stays exactly
the same as it is now at 1.7 million tonnes. That is going to
the six refineries within Europe. Then, from 2009, there is extra
access from the Least Developed Countries (LDCs). Our argument
is that we need this base quantity of sugar like the sugar processors
have their base quantity, their quota of beet sugar, so we can
really compete with them effectively. We think anybody should
be able to compete for any of the new sugar which then comes in
above the base quantities to produce more white sugar from LDC
origins.
Q5 Chairman: So would that correct
the problem you are facing?
Mr White: What
is happening is that if we have a base quantity, if you look at
the beet processors they have a beet quota, which is their base
quantity, so they can cover all their fixed costs and make a profit.
They have the opportunity to buy an increase in their quota. We
are saying that we need a base quantity and that if we do not
have a base quantity, basically the beet producers can use the
profit they earn from their base quantity as a cross-subsidy to
go and purchase our "raws". Once they are making a large
profit on their beet, they can then go and pay a higher premium
and actually take the "raws" away from us.
Q6 Chairman: Can I assume from what
you have said that unless this thing is fixed Silvertown has no
future?
Mr White: This is a very public
hearing and we are quoted on the stock market. I am not allowed
to answer that question.
Q7 Chairman: There is a large number
of members of the public here and they are all listening very
carefully to what you are going to tell us. We need to know, if
we are talking about the future, whether you are saying to us
either that you have a refinery, a big piece of fixed capital,
and you do not have enough sugar in prospect to push through it
to make it work, or the numbers do not add up. You are in a competitive
business and either it is going to have a future or it is not
in terms of whether you are going to carry on doing it. You have
made a case out to the Committee that the margin you need is not
big enough, so that can only be fixed, as far as I can see from
what you have said, either by some way of pushing up the price
of sugar, which is not going to happen, or you having more sugar
to get better overheads and reduce the cost that way and increase
your margin. Unless there is something I am missing.
Mr White: No; we do need the base
raw sugar quantity, we do need the margin improving; you are absolutely
correct, that needs fixing.
Q8 Chairman: Without that it puts
a question-mark against Silvertown, does it not? You have just
told us that if you are not getting the right returns then you
are not in a profitable business.
Mr White: It does put a question-mark
against Silvertown.
Q9 Patrick Hall: As Mr White says,
this is complex, okay, but one thing to me is not complex and
is clear and that is that there is a base line market, there is
demand and you can predict that. Surely, because there are people
ready to buy, it is worth refining and selling to those people.
Mr White: I agree, as long as
we can get supply to meet the demand and nobody else has bought
it, because in the first three years there is a limited quantity
coming into the marketplace, and as long as while supplying that
demand we are making the correct margin.
Q10 Patrick Hall: If there is any
proven demand, most people in business make their way.
Mr White: Yes, but we have a sugar
regime which is setting the price at which we sell it and the
price at which we buy it. If the gap is not big enough between
the two, then we have a problem.
Q11 Chairman: Looking at the written
submission which you have made, you have teased out some of the
arguments, but I wonder whether I could persuade you to provide
us with a layman's guide to the pricing structure for sugar and
perhaps a little bit of commentary on what you have just said
to us about what needs to be fixed compared with where we are
now and what is proposed, if you are to have what in your judgment
is a fair and profitable business and a future for Silvertown.
It would be very helpful for us to have that in writing.
Mr White: Okay, Chairman.[1]
Q12 Mr Vara: If Silvertown refinery is
closed, how many jobs are at stake?
Mr White: Newham is one of the
poorest boroughs in the East End of London and we directly employ
1,000 people.
Q13 Mr Vara: You say "directly".
What about others?
Mr White: There is then a multiplier
effect obviously with the outsourcing.
Q14 Mr Vara: Can you give us a rough
idea of how many others?
Mr White: I would think another
2,500.
Q15 Mr Vara: So it is a total of
3,500 jobs which are threatened.
Mr White: It is one of the poorest
boroughs in the East End of London and we also do a lot of community
work. We do things like supporting the community food enterprise
which delivers fresh food. I do not know whether people know that
Newham is the tuberculosis capital of Europe and we actually do
a lot of work with a lot of very poor people.
Q16 Lynne Jones: You say that you
would be better off in a deregulated market.
Mr White: Yes.
Q17 Lynne Jones: Is that because
you could just buy sugar on the open market at a lower price?
Mr White: May I explain that?
If there were a totally deregulated market, there would not be
much beet production in Europe at all; maybe in the UK and maybe
a little bit in northern France. The competition is Brazilian
white sugar. There is something called the white/raw differential.
We would actually go to the world market and buy world "raws"
and that typically is about $65 less than the price for white
sugar traded on the market. Then you put 35,000 tonnes of raw
sugar in a big ship, take it up to the Thames, down the Thames
and offload it. If you are making white sugar in Brazil you put
it into 22-tonne food grade containers which are very expensive.
That would typically cost $90 to Thames, whereas the big bulk
ships cost $35. So there is a $55 difference there. When you are
loading the food grade containers and actually offloading them
at the port it costs another $20. In a world market we would get
a margin of about $140 or
100 to
110, depending on the exchange rate. In a totally
deregulated market that is the margin you expect. Another way
of doing it would be if we had the same drop in margin as the
beet processors, if our margin were cut by 44% as well, then our
margin would be
106. Whichever way you do it, we would make acceptable
returns on our invested capital with that sort of margin.
Lynne Jones: I shall read what you have
said and try to digest it.
Q18 Chairman: That is why I requested
a further note from you: just to help us understand the mechanics.
That would be very much appreciated.
Mr White: Yes, we will do that.
Q19 Patrick Hall: Looking at the
evidence you have sent to this Committee, and thank you for doing
that, you say in the conclusions that the business is one which
". . . could compete effectively in a deregulated market".[2]
You go on to say "The Tate & Lyle UK refining operation
is not a business which needs artificial support to correct an
inefficiency" et cetera. Would I conclude correctly therefore
that your business would support the phasing out of the export
subsidies through the World Trade Organisation (WTO) negotiations?
Mr White: Yes, we would.
1 Ev 13 Back
2
Ev 3 Back
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