Further supplementary memorandum submitted
by Tate & Lyle Sugars, Europe
EXECUTIVE SUMMARY
1. This supplementary evidence is in response
to the Committee's disclosure of supplementary evidence from British
Sugar on refining issues. TALSE is grateful to the Committee for
the access afforded to the British Sugar supplementary evidence.
However, TALSE is very disappointed that British Sugar's submission—which
seeks to undermine the sugar refining sector—is based on
detailed data and calculations which are not published for reasons
of "confidentiality". This makes it virtually impossible
to provide the full and robust response which the paper requires
particularly as it would appear that incorrect figures may have
been used, the methodology may be flawed and figures extracted
out of context (eg £250 million on capital employed in the
UK refining operation for taking sugar from raw to bulk).
2. The British Sugar evidence explicitly
suggests that TALSE is seeking concessions and special treatment.
TALSE is not seeking special treatment. We are only asking that
a company that could compete effectively in a totally deregulated
market should be treated equitably in a regime that continues
to be based on the desire to artificially support the beet sector.
This equity extends to margin and supply of sugar for refining.
Indeed, in delivering equity, we are simply asking for the Commission
to deliver on its previous assurances to the refining sector that
"the Community refining sector can maintain its competitiveness
under fair conditions".
3. CONCURRENT/OFF
CROP REFINING
The supplementary evidence provided by British
Sugar fails to disclose the cross subsidy available from processing
of the beet quota itself. The beet processors' fixed costs are
already covered by the artificial support provided by the beet
regime. A simple comparison of the respective efficiency of refining
imported sugar in a beet factory or a cane refinery can only be
done if all variable and fixed costs are brought into the picture.
Comparison must take into account the cross subsidy.
4. MARGIN
There can be no denying the fact that the cane
refiners' margin has been reduced to
44. This is significantly below the operating costs
of TALSE and was covered in greater detail in the earlier written
and oral evidence.
5. COMPETING
IN A
DEREGULATED MARKET
The comparison between the cost of importing
sugar for refining in the country of consumption and the alternative
of importing a range of refined products for consumption in that
same market contains many elements, some of which would be unique
to the operation in question. eg Shipping routes used, the type
of ships used, bagging, and handling of refined product at import
destination. The detailed figures are not straightforward and
would always be the subject of careful scrutiny and evaluation
by the professional project team working on the feasibility study
or final detailed project. The figures may vary from project to
project but the expansion of destination refineries in countries
of consumption and the acceptance of this international business
model is proven by the number of projects which have recently
been developed, enlarged, being built currently or the subject
of feasibility subsidies. Fuller details of the expansion of this
business model was given in the LMC evidence attached to TALSE's
earlier supplementary evidence.
6. REFINERY COSTS
IN OTHER
WORLD REFINERIES
The data provided by British Sugar is not backed
up by spreadsheets or even the raw cost data for the refineries
used in the comparison. This makes it very difficult to provide
informed comment. TALSE can only conclude from the general nature
of the figures that perhaps like for like comparisons have not
consistently been made. For example TALSE is familiar with the
costs of the Jeddah refinery in which it has a 10% shareholding;
it was designed by Tate & Lyle and the project management
was undertaken by a 50/50 joint venture company, Booker Tate.
In the limited time available TALSE asked LMC International, the
leading independent provider of economic analysis and advice to
the sugar and sweetener sector, to use its own knowledge of Jeddah
refining costs and adjust these to take account of the circumstances
under which the UK refinery operates ie like for like benchmarking
eg EU's statutory import arrangements prevent the use of VHP (Very
High Polling) sugar for refining which if available would significantly
reduce the cost of capital, labour and energy at Thames; Jeddah
has high levels of capacity utilisation because access to raw
sugar is unconstrained; it operates in a relatively low wage economy;
and it has access to extremely cheap oil. When brought to a like
for like basis the Jeddah costs of just below $50 (
42) rise to a UK cost equivalent of somewhere in
the region of $120 (
102). It is the latter figure which is important
in the context of the EU Sugar Regime and in international cost
comparisons. The full report is attached as Appendix I.[35]
7. COMPETITION
BETWEEN BEET
PROCESSORS AND
CANE REFINERS
FOR SUGAR
FOR REFINING.
The base business of the beet processors is
to process their beet quotas and cover their fixed costs. The
base business of the cane refiner is to refine a quantity of sugar
for refining (the refiners do not have an equivalent to a quota)
and cover their fixed costs. Thereafter the two businesses should
be able to compete with each other for supplies of sugar for refining
on a variable cost basis. The above five factors (paragraphs 3
to 7) are dealt with in more detail below.
SECTION I
Supply of sugar for refining
8. Refining is a high fixed costs business.
The Thames Refinery is currently generally recognised to have
a capacity of about 1.3 million tonnes. However, it actually has
a capacity of 1.5 million tonnes and could run at this level permanently
with only minor technical adjustments and expenditure. The main
expenditure would be on packaging equipment, not basic refining
equipment. Therefore the refinery is essentially forced to run
at 75% of capacity. The British Government and European Commission
have always been sensitive to the capacity utilisation issues
because of their effect on unit costs and margin requirement.
Equally the authorities, since the UK joined the EU and the Sugar
Protocol was established, have always been conscious of the inbuilt
subsidy provided by the regime to any beet processor, taking sugar
for refining in a beet factory, from the restricted supply of
imported sugar. In recognition of this a scheme was run for many
years by the EU to cancel out the acknowledged subsidy.
9. Without the benefit of the cross subsidy
it is doubtful that any concurrent/off crop refining would take
place at the level of the proposed EU reference price. Also the
thrust of the reform proposal is to eliminate a target quantity
of beet production, close beet factories and reduce exports to
a maximum of 1.3 million tonnes, or eliminate them altogether.
Beet factories entering concurrent/off crop refining would counter
EU policy by stretching artificially the life of a beet factory
by the use of the cross subsidy.
SECTION II
EU supply/demand balance: beet volume versus import
volume
10. The refiners do not enjoy complete protection
from supply cuts; indeed they have never had anything equivalent
to a quota in the first place. TALSE has already closed five of
its original six refineries at no financial cost to the EU or
the consumer. TALSE and its employees have already made very significant
sacrifices in financial and human terms during the period when
beet has expanded since the regime was first established in 1968.
A further reduction in sugar for refining arbitrarily imposed
by the EU would simply result in TALSE being an unprofitable business
in spite of being an industry able to compete effectively in a
deregulated market. Also, TALSE may have to compete for restricted
raw sugar supplies against other companies which under a new EU
definition may be classed as full time refiners only for the purposes
of the regime. On the other hand, British Sugar will not have
competition from other companies for its future beet supplies.
This will enable it to keep premia to the minimum possible level
required to attract farmers to supply beet rather than go into
alternative crops. The refiners will have even greater competition
than at present for raw supplies.
11. Also, British Sugar is not suffering
a quota cut as such. It will have a choice of two commercial alternatives
if its raw material supply should be insufficient. As a result
of its negotiations with beet growers it can either go to the
restructuring fund and close a plant or pay an increased price
for beet which is sufficiently attractive compared to the price
achievable by farmers for alternative crops. Neither of these
choices is open to the refiner. Also British Sugar will have the
possibility of purchasing extra quota. The options available to
beet processors compared to full time refiners are summarised
in Appendix II.
12. If the supply of imported sugar to the
refiners were to be reduced this would, in certain cases, involve
the EU being in breach of international import obligations while
in other cases result in the reduction in the financial expectations
of ACP and LDC suppliers currently benefiting from additional
import opportunities given to them by the EU on a concessionary
basis.
13. In a three year period to 2009 the arrangements
differ from those that will apply from after 2009 when duty free
and quota free access for LDC sugar comes into effect. It is essential
to look at the development of the EU market for refining over
the full nine year span of the new regime. The LDCs claim that
at the current proposed price only 300,000 tonnes of additional
sugar will become available. On the other hand the Commission
regularly points to 2.2 million tonnes of additional sugar being
available in 20011-12. British Sugar puts the figure at 2 to 4
million tonnes per year. This range of figures underlines the
market uncertainties and political posturing. In addition British
Sugar has aligned itself with the European Beet Lobby which is
lobbying hard for severe restrictions to be placed on these LDC
imports. This continuing doubt and controversy over the ultimate
level of sugar available for refining runs counter to the declared
wish of the Commission to provide the whole EU sugar industry
with a long-term financial perspective with known conditions and
where sound investment and strategic decisions can be made. It
is against this background that the Commission is attempting to
provide some sort of supply assurance or stability for refining
after 2009.
SECTION III
Refining margin
14. British Sugar feels that the institutional
margin of
44 should enable TALSE to cover its fixed and variable
costs and make an acceptable return on capital. This is simply
not the case. In fact, the
44 margin in the proposals is significantly below
the operating costs of TALSE whilst the
180 afforded to beet processors would allow an efficient
processor to cover fixed and variable costs as well as make an
acceptable return on capital employed in the business.
15. It is extremely difficult to try to
reconcile the many figures quoted by British Sugar in regard to
margin. Without full access to the spreadsheets and the Confidential
Appendices one can only assume that there could be some sort of
miscalculation of the figures used or that the analysis of the
net margins can only have been based on an expectation of a significant
market premium over the reference price. The latter is not thought
to be the case given the assurances which seem to have been given
to the sugar using industries in regard to how the market price
will relate to the reference price in the reformed regime. In
particular Note 2 of Annex I refers to worksheets. If any of those
should be some of the Commission's working documents then it must
be noted that these themselves are the subject of ongoing questioning
by several parties.
SECTION IV
Competing in a fully deregulated market
16. The figures here would benefit from
a greater transparency. The white/raw differential used has not
been reduced to account for a conversion factor of raw sugar to
white sugar equivalent. This conversion process was explained
in the earlier evidence given to the Committee by TALSE (it is
not clear how this has been taken into account in other parts
of the exercise where this adjustment is essential in examining
and comparing refining margins). The analysis has chosen to assume
Brazilian white sugar. However, no account has been taken of the
premium that would be payable to secure white sugar of EU quality
from Brazil. This is because the LIFFE futures contracts represents
sugar of lower quality than that from the EU. The premium over
the LIFFE price of sugar of EU quality has typically been $20
(
17) per tonne over the last five years. This would
raise the differential to the full time destination refiner by
the equivalent amount. The shipping differential is based on the
comparison of 50kg bags with bulk raw sugar. However, no EU customer
of TALSE accepts delivery of 50kg bags. This form of packing is
generally only acceptable in developing country markets such as
Africa and the former Soviet Union. EU customers require many
sophisticated product, packaging and delivery service permutations.
These usually can only be serviced by shipping in containers or
having expensive storage and repacking operations at the port
of import which have capital and variable costs far in excess
of the $10 assumption in the paper.
17. As set out in the executive summary
these figures have to be looked at on a project by project basis
by the professionals involved in the feasibility study. These
figures must be specific to the project in hand and subject to
sensitivity analysis. It is therefore not out of order for
100 to
110 per tonne to be regarded as the sort of margin
level which would be available to a destination refiner in a totally
deregulated market—see Appendix III.
SECTION V
World market refinery costs
18. There are a number of references to
world market refining costs taken from LMC studies throughout
the document but once again TALSE has no option but to accept
that these are unchallengeable and have been made so by being
included in a confidential Annex.
19. When attempting refining cost comparisons
it is essential to compare like with like. In paragraph 6 TALSE
drew attention to work done by LMC to benchmark the Jeddah refinery
with the Thames operation. These demonstrate British Sugar's flawed
methodology and it is almost certain that analysis of other refineries
would give conclusions/comparisons similar to the Jeddah exercise.
20. It is also claimed that TALSE could
use its spare capacity for toll refining. This is the process
of importing world market priced raw sugar, refining it, and re-exporting
the white sugar to importing countries. This is in fact done on
a very limited scale at the moment if market conditions permit
it. However, this can rarely be the case because the process involves
the freight charge of importing raws as well as the freight charge
for exporting the resulting refined sugar for direct consumption.
35 Not printed. Back
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