Business Case in Focus African sugar industry – a rising star Introduction Sugar is the only commodity that is produced from two very different crops – sugarbeet and sugarcane. Globally, sugar is produced in 119 countries – 7 grow cane and beet, 41 grow beet only and 71 grow cane only. According to the analyst Czarnikow, beet sugar production accounted for 19% of the global sugar production in 2013/14. This is forecast to rise to 20% in 2014/15. As table 1 suggests, bulk of the sugar is produced from cane in countries in the tropics. Asia, which has a structural deficit in sugar, is the largest sugar consumer and key driver for global imports (see table 2). Prices outlook Following a succession of years with global surplus, tide has turned, and the balance sheet for 2014/15 season is likely to show deficit. Industry analysts Cazarnikow and Rabobank indicate deficits of some 0.5 mtrv and 0.9 mtrv next year, respectively. The prospect of deficit is widely acknowledged amongst other senior analysts in the industry. But it is unlikely that the bearish pressure on sugar price will be lifted anytime soon, largely because high stocks/consumption ratio (see table 3). During the past four years of surplus, with prices depressed, there has been huge accumulation of stocks. What appears to be marginal deficit in 2014/15 is unlikely to prompt a revival in sugar price. 1 INTERN Table 1. Source: FO Licht Table 2.

2 INTERN Table 3. The probable drivers on price development in the foreseeable future include the following: Bearish Replenished stocks dampening minor supply shocks Sugar production from new build projects coming online adding to global output Speculators maintaining a large net short position in New York sugar futures. In the week ending August 12, speculators increased their net short position by 15,042 lots, bringing it to 56,432. In a review of impact of speculative trading activities by Commonwealth Bank of Australia in October 2013, the bank found “correlation between speculative trader positions and prices [to be] an exceptionally strong 92%”. EU sugar producers expanding production to wrest a larger market share come the abolition of quotas in 2017 Currency markets have a significant impact on global prices. Bullish Weather is the biggest joker in pack. Drought and floods were responsible for reducing sugar output by some 10 million tonnes in 2009 which subsequently triggered the 30 year high in sugar prices. With precipitation 40% below in Brazil’s main cane growing region Centre South, some analysts have revised down sugar output as cane quality has been adversely affected by drought. 2014/15 campaign may end a month earlier. In India, rainfall deficit since the start of monsoon season is 18% (as of June). Brazilian mills diverting more cane to produce ethanol in preference over sugar Consumption demand in Asia remaining strong, and rising in emerging economies Barring no game-changing incidents in the foreseeable future, it appears that next few years may see stabilization of sugar prices, probably hovering in the cents/lb range. According to a study by the Commonwealth Bank of Australia (CBA), depreciation of the Brazilian Real (BRL) again the US dollar softens the impact of “declining US$ denominated sugar values”. Since 1 st January 2011, the BRL has depreciated 38% against the US$, while the Indian Rupee has depreciated 40%. The correlation between US$ sugar prices and the US$/BRL over the period is negative 78%, according to CBA. With elections looming in Brazil, economy in recession, uncertainty over the weak BRL remains.

Competitiveness of the African Sugar Industry In a recently published study in International Sugar Journal, looking at investment in the global sugar industry reported in the press over the past year, 14 sugar producing countries in Africa have received the lion’s share – greater than investment in all the sugar producing regions combined. These are Sudan, Ghana, Kenya, Nigeria, Tanzania, Ethiopia, Angola, South Africa, Swaziland, Mozambique, Malawi, Zambia, Algeria and Egypt. There are multiple projects in several countries, for example, in Angola, two factories with capacities of over 250,000 tonnes sugar are planned, in Ethiopia, seven new factories are scheduled to come online in 2015.This is a superb vote of confidence by investors convinced of the potential of Africa’s sugar market and the competitiveness of the individual countries sugar industries. As table 1 suggests, Africa currently plays a cameo role in the global sugar sector. But despite this, it boasts some of the lowest cost sugar producers in the world. In a study by LMC International and Overseas Development Institute couple of years ago, the following countries had sugar production costs <US$ 400: Swaziland, Mozambique, Ethiopia, Malawi, Sudan, Tanzania, Zambia and Zimbabwe. Add to this South Africa. Most of the companies operating factories in the low cost countries are owned by large private groups, e.g. Illovo, Tongaat-Hulett, Kenana. Factors informing the competitiveness of these industries include: Suitable climate and fertile soils for growing cane along with availability of water for supplementary irrigation Availability of relatively low cost labour to support agricultural operations A long, dry season facilitates a long campaign lasting up to at least 180 days which supports high throughput in sugar factories and spreads overheads Shift towards large-scale agro-industrial enterprises - factories with capacities well over 100,000 tonnes and attaching these with biorefineries to produce co-products such as ethanol Supportive government policy structure that includes protection of local industries from any dumping of sugar from global market and thereby investing confidence in private sector investors and allaying any fears of risk of their investment. There have been exceptions, where through alleged corruption, smuggled sugar has damaged industries in Tanzania and Kenya An established collaborative structure between millers, growers and researchers to support high productivity and production of quality cane. This is largely true of mostly corporate farming (e.g.Kenana in Sudan) and or plantation agriculture (e.g. Illovo in southern Africa). The challenge remains in those countries where cane to factories is supplied from small scale growers. 3 INTERN