Annex 1
FINANCIAL EFFECTS OF REFORM ON EUROPEAN REFINERS
AND PROCESSORS EUROPEAN CANE REFINERS
Notes
1. Support prices as per Commission's proposals,
ie sugar €385/t, beet €25/t, cane raws €319/t.
2. Refining allowance and processor gross
margin calculated as per worksheet in Annex 2.
3. Average EU market price of €725/t
used, taken from Commission's Background Note No 2, September
2004.
4. Range of refining and processing costs
taken from LMC studies.
5. Fixed assets per tonne of sugar taken
from UK refiner and processor Annual Reports.
(C) COMPETING
IN A
FULLY DEREGULATED
WORLD MARKET
1. What Determines Whether a Refiner can
Compete in a Deregulated Market?
A refiner can only compete in a fully deregulated
market if its refining costs are low enough to make an adequate
return from the differences ("differentials") between
the cost of buying raw sugar on the world market, compared to
the cost of world market white sugar delivered to the EU in merchantable
quality.
The relevant differentials for this assessment
are the raw/white world sugar prices and the differences in cost
of shipping and unloading white sugar compared to raw sugar.
2. Raw/White Sugar World Price Differential
The historic price differential on the world
market between raw and white sugar is set out in Annex 1. This
data has been taken from fob quotations on the New York Board
of Trade (NYBOT) raw sugar market, and the London International
Financial Futures Exchange (LIFFE) white sugar market. This trend
shows that the difference in price between raw and white sugar
on the world market (the "whites premium") has averaged
just under $65/tonne for the last 10 years.
As these prices are quoted at the originating
port ("fob"), the additional transportation and unloading
costs of white sugar over raw sugar must also be taken into account
to arrive at the total "refining margin" available to
compete in a fully deregulated market. In addition, the prevailing
market discount must also be included, to allow for the difference
in originating port between the white and raw sugar markets.
3. Shipping Costs Differential
In a fully deregulated market the most likely
source of both raw and white sugar is Brazil. No significant volumes
of raw or white sugar come from Brazil to the EU at the moment,
so the best comparative shipping rates are actual movements of
raw sugar into Black Sea ports and white sugar cargoes into the
East Mediterranean.
The normal, and cheapest, way of shipping white
sugar is to use 50kg bags transported in 14,000 tonne cargo vessels
(using containers is considerably more expensive). Raw sugar is
usually shipped in bulk, with a typical cargo size being 25,000
tonnes.
Under these market assumptions, How Robinson
Shipping has calculated that the differential between the transportation
costs of white sugar compared to raw sugar have averaged $20/tonne
over the last five years (Annex 2).
4. Freight Discount
Shipping movements of white sugar from Brazil
attract a freight differential (normally a discount). This is
because the origination point for the world white sugar market
is North Europe, not Brazil. For the purpose of this analysis,
Santos has been taken as the Brazilian source port.
For the last six years, freight from Santos
has attracted a discount which has averaged $13/tonne (Annex 3).
5. Unloading Costs Differential
Raw and white sugar prices quoted on the world
market are fob, which includes handling and loading costs onto
the vessel at the originating port.
However, the unloading costs are excluded. Typical
quotations for these are as follows:
| |
| $/tonne |
| Raw Sugar, Immingham (GP Shipping, Port Agency Services)
| 7 |
| White Sugar, Immingham (JPL Stevedoring Contractors)
| 17 |
This indicates that the raw/white differential for unloading
50kg bags is about $10/tonne (although highly automated unloading
facilities would reduce this figure).
6. Merchantable Quality for Customers
Sugar supplies to UK industrial customers are normally transported
by road, either in bulk or as 50kg bags. For those preferring
50kg bags (small and medium sized customers) there would be no
additional cost.
However for those preferring bulk supplies (typically larger
customers) a small additional cost should be allowed for the cost
of converting bags into bulk. A maximum figure for this additional
cost would be $10/tonne.
7. Total Refining Margin Available in a Deregulated Market
The total margin available for a refiner to be able to compete
in a fully deregulated market is therefore represented by the
addition of each of the above raw/white differential costs:
| |
| $/tonne |
| Raw/White Sugar World Price Differential |
65 |
| Less Freight Discount (Santos Freight Differential)
| (13) |
| Shipping Costs Differential | 20
|
| Unloading Costs Differential | 10
|
| [Option to Convert from 50kg to Bulk Deliveries
| 10] |
| |
| Total Available Refining Margin | 82-92
|
| |
8. Refining Efficiency Necessary to be Able to Compete
in a Deregulated Market
This total available refining margin must cover both the
refiner's costs and a reasonable return for the business.
The lowest acceptable level of return on total net assets
to enable a business to cover its cost of capital, is likely to
be 10% (this is half that suggested by Tate & Lyle in the
Select Committee hearings). For European refiners, this would
be equivalent to about $35/tonne of sugar.[23]
[24]
This would imply, by subtraction, that refining costs must
be no higher than $47-$57/tonne (€40-€50/tonne) for
a refiner to be able to compete in a fully deregulated market.
If a higher return on capital than 10% is used (in their evidence
Tate & Lyle said they expected 20%), then the maximum refining
cost able to compete in a deregulated market becomes even smaller
than this.
Any refiner this efficient would be expected to get net margins
of at least €80/tonne post-reform (see accompanying report).
This would provide returns post reform much higher than any European
beet processors would expect to get.
Annex 1
WORLD MARKET RAW/WHITE SUGAR PRICE DIFFERENTIALS 1995-2005
Annex 2
| Date | Raw |
White | Premium |
| | |
|
| Aug-00 | 26.5 | 38.0
| 11.5 |
| Sep-00 | 29.0 | 38.0
| 9.0 |
| Oct-00 | 28.0 | 39.0
| 11.0 |
| Nov-00 | 27.0 | 39.0
| 12.0 |
| Dec-00 | 26.8 | 37.0
| 10.3 |
| Jan-01 | 24.3 | 37.0
| 12.8 |
| Feb-01 | 23.0 | 37.0
| 14.0 |
| Mar-01 | 22.3 | 37.0
| 14.8 |
| Apr-01 | 25.0 | 37.0
| 12.0 |
| May-01 | 28.0 | 36.0
| 8.0 |
| Jun-01 | 25.8 | 37.0
| 11.3 |
| Jul-01 | 23.5 | 37.0
| 13.5 |
| Aug-01 | 23.0 | 38.0
| 15.0 |
| Sep-01 | 22.0 | 38.0
| 16.0 |
| Oct-01 | 22.0 | 38.0
| 16.0 |
| Nov-01 | 19.8 | 36.0
| 16.3 |
| Dec-01 | 19.0 | 36.0
| 17.0 |
| Jan-02 | 19.0 | 34.0
| 15.0 |
| Feb-02 | 19.0 | 34.0
| 15.0 |
| Mar-02 | 21.0 | 34.0
| 13.0 |
| Apr-02 | 22.0 | 37.0
| 15.0 |
| May-02 | 23.0 | 35.0
| 12.0 |
| Jun-02 | 23.0 | 36.0
| 13.0 |
| Jul-02 | 23.0 | 38.0
| 15.0 |
| Aug-02 | 23.0 | 38.0
| 15.0 |
| Sep-02 | 24.3 | 38.0
| 13.8 |
| Oct-02 | 26.0 | 40.0
| 14.0 |
| Nov-02 | 25.3 | 40.0
| 14.8 |
| Dec-02 | 24.0 | 40.0
| 16.0 |
| Jan-03 | 25.0 | 38.0
| 13.0 |
| Feb-03 | 23.5 | 36.0
| 12.5 |
| Mar-03 | 26.3 | 36.0
| 9.8 |
| Apr-03 | 28.0 | 41.0
| 13.0 |
| May-03 | 31.0 | 46.0
| 15.0 |
| Jun-03 | 29.5 | 49.0
| 19.5 |
| Jul-03 | 28.5 | 49.0
| 20.5 |
| Aug-03 | 29.5 | 49.0
| 19.5 |
| Sep-03 | 29.8 | 48.0
| 18.3 |
| Oct-03 | 33.0 | 52.0
| 19.0 |
| Nov-03 | 36.0 | 54.0
| 18.0 |
| Dec-03 | 40.5 | 61.0
| 20.5 |
| Jan-04 | 52.8 | 77.0
| 24.3 |
| Feb-04 | 62.0 | 87.0
| 25.0 |
| Mar-04 | 61.3 | 87.0
| 25.8 |
| Apr-04 | 56.0 | 87.0
| 31.0 |
| May-04 | 44.8 | 79.0
| 34.3 |
| Jun-04 | 37.0 | 77.0
| 40.0 |
| Jul-04 | 37.8 | 76.0
| 38.3 |
| Aug-04 | 40.5 | 76.0
| 35.5 |
| Sep-04 | 40.0 | 78.0
| 38.0 |
| Oct-04 | 46.8 | 83.0
| 36.3 |
| Nov-04 | 53.0 | 83.0
| 30.0 |
| Dec-04 | 54.0 | 83.0
| 29.0 |
| Jan-05 | 50.0 | 78.0
| 28.0 |
| Feb-05 | 47.0 | 78.0
| 31.0 |
| Mar-05 | 50.5 | 76.0
| 25.5 |
| Apr-05 | 53.5 | 74.0
| 20.5 |
| May-05 | 47.8 | 74.0
| 26.3 |
| Jul-05 | 36.0 | 70.0
| 34.0 |
| 5 Yr Avg | $32.7 | $52.3
| $19.6 |
Source: How Robinson Shipping
Raw Shipping in bulk. 25,000 t Cargo ($/tonne Brazil to Black
Sea)
White Shipping in 50kg bags. 14,000 t Cargo ($/tonne Brazil to
Eastern Mediterranean)
Annex 3
BRAZILIAN FREIGHT DISCOUNT TREND 1999-2005
(D) EUROPEAN SUPPLY/DEMAND
BALANCE
| Now | 2012-13
|
| EU Production | |
|
| Quota | 17.4 | 12.4
|
| Non-quota | 2.9 | Nil
|
| Imports | 1.9 | 3.9
|
| Exports | (5.9) | (0.6)
|
| Total Supplies | 16.3 | 15.7
|
| EU Consumption | (16.3) |
(15.7) |
| EU Surplus/(Deficit) | 4.0 |
(3.3) |
| (Exports-Imports) | |
|
Note: French surplus = 2.3 million tonnes
UK consumption = 2.0 million tonnes
Source: European Commission 2005
British Sugar
November 2005
23
Tate & Lyle total net assets taken as £250 million for
their UK refining operation, from their 2004 Annual Report (£190
million fixed costs plus £60 million net operating assets). Back
24
Tate & Lyle Thames refinery capacity assumed to be 1.2 million
tonnes per year. Back
| 
