Further supplementary memorandum submitted
by British Sugar Plc
BRITISH SUGAR RESPONSE TO TATE & LYLE'S
SUPPLEMENTARY EVIDENCE TO THE COMMITTEE
INTRODUCTION
In their supplementary evidence, Tate &
Lyle (T&L) make four main claims:
1. That the reform proposals reduce their
margin by more than beet processors', so they should be given
a refining subsidy to correct this "imbalance".
2. Refiners can compete in a totally deregulated
market whereas beet processors cannot; so they should receive
special treatment.
3. Beet processors have been allocated quotas—refiners
should therefore get guaranteed cane raws supplies.
4. Refiners offer the principal gateway
to the EU for ACP and LDC developing countries, by acting as the
"agent" for their cash transfer from the EU.
We have structured our responses under these
same headings.
FINANCIAL EFFECTS
OF REFORM
PROPOSALS ON
REFINERS AND
BEET PROCESSORS
— T&L's basic claim is that their
gross margin has been cut by 77% compared to only 44% for beet
processors (p 10 of their submission). This comparison is fundamentally
flawed for two reasons.
— First, the comparison has not been
done on a fully costed basis, as it completely excludes all the
operating costs and assets for each sector. This introduces a
major distortion, as the product transformation, including operating
costs and assets used in the beet sector, are typically 2-3 times
those in refining. The reason for this is that all the primary
cane processing is carried out in the country of origin: the refinery
merely "cleans up" the raw sugar already produced (as
explained on pages 8 and 9 of T&L's submission), whereas beet
processors have to carry out the entire operation from crop processing
to white sugar refining and storage in a single continuous process.
To avoid this distortion it is essential to do the comparison
on a fully costed basis using actual figures.
— The second flaw in the comparison
is that the prices assumed for 2004-05 and 2009-10 are not the
same: a relatively high market price has been used in 2004-05,
but the lowest possible support (or "Reference") price
has been used in 2009-10. The effect of this inconsistency has
been to magnify the apparent differences, and distort the figures
even more.
— Removing these two distortions completely
alters the results. Annex 1 of the report[27]
enclosed with our earlier submission, summarises the effects of
reform on net margins and return on assets for both sectors.
— The report demonstrates that for
a wide range of operating costs the financial effects of the reform
proposals (measured as % net margin reduction and return on assets)
are similar for European refiners and beet processors.
— It also demonstrates that higher
cost refiners are more favourably treated by the proposals than
higher cost processors.
— The operating cost figures presented
in Annex 1 of the British Sugar report27 have been taken from
studies carried out by sugar economists LMC International. LMC's
report on the UK refiner is attached with this response.[28]
It concludes that their overall refining costs are $74/tonne (about
60/tonne). If LMC's assessment is accurate, then
the UK refiner will have a net margin reduction of 43%, and will
generate a return on assets of 28% under normal market conditions—considerably
better than even the lowest cost beet processors in the EU.
— Doing the comparison on a fully costed
basis demonstrates that the financial effects of the reform proposal
on European refiners and beet processors are broadly similar—there
is therefore no justification for special treatment for refiners
in the form of a refining subsidy.
— On the contrary, the margins calculated
for beet processors in the above report27 assume beet supplies
can be secured at
25/tonne of beet. In reality this is highly questionable,
even in efficient growing areas like the UK. Any beet price top
up necessary to secure adequate beet supplies would reduce processors'
margins even more than shown.
— On page 3 of their submission T&L
also comment that they have been excluded from participating in
the Restructuring Scheme. This anomaly could be corrected in several
ways, for example by arranging a separate refiners' restructuring
fund.
COMPETING IN
A TOTALLY
DEREGULATED MARKET
— T&L have repeatedly claimed they
could survive in a totally deregulated market. This assertion
has been used to promote the notion that their operations are
somehow more economically "pure" and justifiable in
the context of a European market which is partially regulated.
— The figures behind this claim are
set out on page 6 of their evidence. In this, they have assumed
figures for extra freight (ie shipping) costs of $55/tonne and
for extra unloading/storage of $20/tonne. No sources have been
attached to support these figures.
— We have secured quotations as follows
(full details are available if required) which suggest these figures
are inflated:
| Extra Freight Cost[29]
| $20/tonne |
| Extra Unloading Costs[30]
| $10/tonne |
| |
This indicates that the total refining margin available in
a deregulated market is not $120/tonne as stated on page 6 of
their evidence, but $85/tonne:
| $/Tonne |
| Extra Sugar Cost | 45 |
| Extra Freight Costs | 20 |
| Extra Unloading/Logistics Costs | 10
|
| |
| 85 |
| |
| |
— 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
any business to cover its cost of capital is roughly 10% (this
is half that suggested by T&L in the Select Committee hearings).
For European refiners, this would be equivalent to about $35/tonne.[31]
— This implies, by subtraction, that to be able
to compete in a fully deregulated market then a refiner's operating
costs must be no higher than $50/tonne (
42/tonne).
— If T&L are indeed this efficient, they
would receive much higher returns from the reform proposals than
any European beet processor (see accompanying report27).
— Their returns from the reform proposals would
also be higher than in a totally deregulated market.
— In addition, if T&L can genuinely compete
in a totally deregulated market as they claim, then they would
be able to "toll refine[32]"
world market raw sugar, by taking advantage of the differential
in price between raw and white sugar on the world market. There
are no regulatory restrictions preventing this happening, so their
refinery would always be able to top up their normal ACP/LDC supplies,
and need never have to operate under-capacity (page 9 of
their submission suggests their Thames refinery is only operating
at 85% capacity).
— Finally, pages 18 and 19 of their submission lists
12 refineries worldwide which have been built or expanded in the
last decade, suggesting that competing in a totally deregulated
market is straightforward for stand-alone refineries, and relatively
commonplace. However, this is not the case. Of the 12 refineries
quoted, 11 are protected by import tariffs and are therefore not
operating in a deregulated market at all.
GUARANTEED CANE
SUPPLIES FOR
REFINERS
— T&L assert (on page 2 of their submission)
that refiners should be granted guaranteed "base supplies"
to cover their fixed costs, similar to the beet sector's production
quotas.
— One of the European Commission's main reform principles
is to bring the EU market into supply/demand balance. It proposes
to do this by eliminating 5 million tonnes (30%) of Europe's beet
quota production. Refiners are completely protected from these
permanent quota cuts. If refiners want "quotas"
similar to the beet sector, then they must be prepared to shoulder
their part of the burden, and accept that their supplies should
be reduced in line with everyone else's. This could easily be
done without jeopardising the ACP commitment, by sharing raws
supplies with beet processors.
— This claim also implies that beet quotas offer
a guaranteed volume and supply for beet processors. This is not
the case. On the contrary, the European Commission has deliberately
set the beet price so low (
25/tonne) that many beet industries will shrink or collapse: hence
the cut in beet quota production of 5 million tonnes. Even in
efficient countries like the UK, beet supplies are not assured—as
concluded in DEFRA's impact assessment. European beet quotas
are therefore a ceiling, not a guarantee.
— In addition to being totally protected from permanent
quota cuts, refiners have also been offered two further concessions
on supplies: complete exclusivity for the first three years
of the reform, and preferential access for 2008 to 2015.
— These concessions offer refiners considerably
more security of supply than beet processors—there is certainly
no case for increasing this imbalance by offering refiners
even greater supply guarantees.
EUROPEAN GATEWAY
FOR ACP
— T&L have often suggested that stand-alone
refiners are a necessary gateway into Europe for ACP (and LDC)
developing countries. They comment on it again in their supplementary
evidence (page 1).
— However, the attached letters from two principal
ACP suppliers, Swaziland and Fiji, to DEFRA tell a very different
story.
— Points made in their letters include:
— Restricting cane raws supplies to full-time refiners,
as proposed in Article 29(2) of the Commission's proposals, is
against the interests of ACP countries, and contravenes the terms
of the ACP Protocol.
— Freedom to supply cane raws to a variety of buyers,
including beet processors, would improve the terms, conditions
and prices available for ACP countries, so giving greater value
to their EU market access.
— ACP strongly oppose any form of supply exclusivity
for refiners in the new reform period 2006-15.
— Port handling facilities at T&L's Thames Refinery
are sub-optimal, for example because vessels sizes are restricted,
which increases ACP countries' costs.
— ACP returns have recently been adversely affected
by operational and commercial constraints imposed by refiners
on their contracts by refiners.
— In reality, "co-refining" cane raws
in beet factories is a highly efficient process, which is common
practice outside the EU.
CONCLUSIONS
The Commission's sugar reform proposals are radical and hard-hitting.
They have been specifically designed to restructure the whole
of the European sugar sector, to eliminate the surpluses and to
drive efficiency.
As such, they will have severe effects on everyone. The European
beet industry, for example, is expected to have to close over
50 factories with between 80,000[33]
and 150,000[34] jobs
lost.
In this "brave new world" there can be no guarantees.
Even for the UK beet industry, regarded by the Commission as one
of Europe's most efficient, beet supplies are not assured and
the forfeit of UK quota into the Restructuring Scheme cannot be
ruled out.
Like the rest of the European industry, refiners are worried
about the effects on them of the coming reforms. This is understandable—we
all are. But refiners have already been offered valuable concession
in the proposals. Apart from their possible inclusion in the Restructuring
Scheme, any further concessions are wholly unjustified and would
move the beet/cane balance even more in their favour. The reforms
will have tough consequences for everyone, including refiners.
This is true, but does not justify exclusive handouts to prop
up one sector which are denied everyone else.
British Sugar
November 2005
27
"Financial effects of sugar reform proposals on European
refiners and beet processors", 2005. British Sugar evidence
to EFRA Select Committee, 2005. (Please see Annex 1 on Ev 76). Back
28
Report on UK refiner, LMC International, 2004. Back
29
How Robinson Shipping Ltd. Back
30
GP Shipping, Port Agency Services; JPL Stevedoring Contractors. Back
31
"Competing in a fully deregulated world market", 2005.
British Sugar evidence to EFRA Select Committee, 2005. Back
32
Toll refining is a process where world market raw sugar is temporarily
imported, refined and the refined white sugar re-exported outside
the EU. No tariff is paid on these imports. Back
33
Evidence given by Lars Hoelgaard of the European Commission to
the House of Lords Inquiry on sugar reform, October 2005. Back
34
European Economic and Social Committee, October 2005. Back
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