Supplementary memorandum submitted by British
Sugar PLC
EXECUTIVE SUMMARY
Beet/Cane Balance
I attach three short reports on the main issues
raised:
(A) Summary of issues on beet/cane balance.
(B) Financial effects of sugar reform on
European refiners and beet processors.
(C) Competing in a deregulated market.
As you can see, the headline conclusions from
this work are:
— Refiners have repeatedly claimed
that they could compete in a fully deregulated world market.
— In reality, to be able genuinely
to compete in a fully deregulated world market, refiners would
have to be operating with refining costs no higher than
50/tonne.
— If European refiners are sufficiently
low cost to be able to do this, then they will get better financial
returns from the reform proposals than even the lowest cost European
beet processors.
— The financial effects of the reform
proposals are broadly similar for European refiners and beet processors
(in terms of per cent net margin reduction and return on assets)
for a wide range of operating costs for each.
— Refiners have already been offered
substantial concessions in the reform proposals, including:
— Complete protection from permanent quota
cuts.
— Exclusive access to cane raws for the
first three years of reform * against the interests of ACP and
LDC developing countries.
— Preferential access to cane raws for
the whole of the reform period. In contrast, the beet sector is
being forced to cut quotas by 5 million tonnes (¸30%) and
total production by 8 million tonnes (¸40%) with the loss
of over 80,000 jobs. There is no case for offering European refiners
any further concessions in terms of financial subsidies or additional
exclusivity for cane raws after 2008.
European supply/demand balance
(D) Changes in European supply/demand balance
caused by the reform proposals are set out in the attached table.
As can be seen, the EU market moves from a 4
million tonne surplus now, to a 3.3 million tonne deficit by 2010. This
7.3 million tonne swing is caused by a combination of a 7.9 million
tonne cut in European beet sugar production plus a projected 0.6
million tonne fall in EU consumption. The quota surplus in France
post-reform will be greater than the UK's entire consumption.
(A) SUMMARY OF
ISSUES ON
BEET/CANE
BALANCE
1. The Issue
Following announcement of the Commission's proposals
on 22 June, refiners have complained that they are being unfairly
treated, despite being offered some large concessions in the proposals.
Refiners are now claiming that they should be given additional
special concessions in the form of either a refining subsidy,
or exclusive access to cane raws for the whole duration of the
reform period. The effects of these concessions would be to make
their operations more profitable.
2. CONCESSIONS
ALREADY OFFERED
TO REFINERS
IN THE
PROPOSALS
The beet sector is being forced to reduce volume
in the proposals: quota production is to be cut by 5 million tonnes
(30%) and total volume (including non-quota) cut by 8 million
tonnes (40%). Refiners are completely protected from these volume
cuts.
The Commission has made it clear that ACP cane
raws should be made available for everyone, including beet processors,
in the best interests of ACP producers (because this would enable
them to negotiate better terms and prices) and to increase efficiency.
But refiners have been granted exclusive access to cane raws for
the three years 2006, 2007 and 2008, against the interests of
ACP and beet processors.
After 2008-09 LDC imports to the EU will be
unrestricted, so anyone should be able to bid for them. But refiners
have been given preferential access to raw sugar imports until
2015.
These concessions give extremely favourable
treatment for refiners on volume protection, in contrast to the
harsh treatment proposed for the beet sector.
3. Arguments Used by Refiners to Support
Special Treatment
Refiners have argued a number of points to promote
their case. However, on closer inspection these points do not
stand up.
Their main claims have been:
Claim 1: Only stand-alone refiners
can efficiently refine cane raws.
RESPONSE: Beet processors can easily "co-refine"
cane raws as part of their beet processing operations: this is
widespread practise outside the EU. Very few technical adjustments
are needed to do this, and it is a highly efficient process.
Claim 2: Refiners are the main gateway
to Europe for ACP and LDC developing countries.
RESPONSE: It is strongly in the interests of
all developing countries to be able to sell their raw sugar to
as many industries as possible, as this gives them the best terms
and prices. Both ACP and LDC have repeatedly stated this.
Claim 3: Refiners are special because
they can compete in a fully deregulated (ie world) market, whereas
beet processors can't.
RESPONSE: If any refiner has low enough costs
to be able to compete in a fully deregulated market, then it will
get better financial returns from the proposals than all European
beet processors, including the most efficient ones. It would also
be able to use any surplus refining capacity to toll refine world
market sugar, and should therefore never have to operate under-capacity.
Claim 4: Refiners are hit harder
financially by the reforms, so should be given a special refining
subsidy.
RESPONSE: The reforms are radical and hard-hitting,
and will have harsh consequences for everyone. A special refining
subsidy is not justified because the financial "hit"
on refiners from the proposals is broadly similar as for beet
processors. If they are efficient they will still be competitive
(albeit at a lower margin). If they are high cost, they will either
have to restructure or close down. But this is no different from
beet processors.
Claim 5: Beet processors have been
guaranteed volume supplies by being allocated quotas, why shouldn't
refiners be guaranteed exclusivity to cane raws supplies until
the end of the reform period?
RESPONSE: Quotas allocated to beet processors
are a ceiling, not a guarantee. On the contrary, many European
beet processors will not be able to get adequate beet supplies
at the proposed prices and will have to close down. From 2009
onwards LDC imports will be unrestricted, and the Commission consequently
expects EU imports to double from 2 to 4 million tonnes. There
is no reason why processors should not be able to bid for these
cane raws imports, which would also be in the interests of ACP
and LDC developing countries.
4. Summary
Refiners have already been offered large concessions
in the reform proposals, which place them at a competitive advantage
over the beet sector.
Any refiner which can genuinely compete in a
fully deregulated market will get better financial returns from
the reform proposals than even the most efficient European beet
processors.
There is NO justification for refiners to receive
a financial subsidy. The financial effects on them of the reform
proposals are broadly the same as for beet processors for a wide
range of operating efficiencies. No such subsidies are being offered
for high cost beet processors.
Restricting cane raws access only to refiners
is against the interests of ACP and LDC developing countries.
There is NO case for refiners being granted
exclusive access to cane raws after 2008-09: they have already
been offered guaranteed access for the first three years and preferential
access from 2008-09 to 2014-15. In addition, LDC imports become
completely unrestricted after 2008-09.
Any further special concessions for the refiners
would tilt the "beet/cane balance" even more in the
refiners' favour, and would therefore be inequitable.
Granting them any more special concessions would
put at risk even more jobs in the European beet sector.
(B) FINANCIAL
EFFECTS OF
SUGAR REFORM
ON EUROPEAN
REFINERS AND
BEET PROCESSORS
1. Introduction and Methodology
The effects of the sugar reform proposals on
European refiners and beet processors have been compared in the
following two annexes.
To do this, financial calculations have been
done for a selection of refining and beet processing costs, ranging
from "low cost" to "high cost". In each case,
the effects of the proposals on net margin, net margin% reduction
(compared to today) and return on fixed assets, have been calculated.
It is important to do the comparison on a net
margin (or full costed) basis, as the fixed assets used in the
beet sector are 2-3 times those in refining. The reason for this
is that all the primary cane processing is carried out at the
country of origin: the refinery merely "cleans up" the
raw sugar already produced, whereas beet processors have to carry
out the entire operation from crop processing to white sugar refining
and storage in a single continuous process. Doing the comparison
on a gross margin basis (which excludes fixed costs) is therefore
misleading.
2. Results of the Comparison
The results of the comparison are summarised
in Annex 1, with detailed supporting calculations shown in Annex
2[22].
For refiners to be able to compete in a fully
deregulated world market, their refining costs must be no higher
than is €40-€50/tonne (see report: "Competing in a Deregulated
Market"). Any refiner able to achieve this level of efficiency
will have more favourable financial returns from the reform proposals
than any European beet processor.
For European refiners, the effect of the reform
proposal is to reduce their net margins in a range from –43%
(low cost refiners) to –83% (high cost refiners), with equivalent
returns on assets ranging from 28% to 5%.
For European beet processors, the effect of
the reform proposal is to reduce their net margins in a range
from –41% (low cost processors) to –192% (high cost
processors), with equivalent returns on assets ranging from 18%
to –;6%.
3. Conclusion
This comparison demonstrates that, providing
they are reasonably efficient, then European refiners will have
returns at least as good as those for low cost processors.
It also demonstrates that high cost processors
are hit even harder by the reforms than high cost refiners.
Overall, the financial effects of the reform
proposals on European refiners and beet processors are broadly
similar.
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