Investing in the sugar and ethanol industry

With delivered agricultural raw material representing some 70% of ex-works product cost, agricultural economics are fundamental to competitiveness.

Because sugar beet or sugarcane deteriorate rapidly once harvested, factory capacity utilisation is constrained by the duration of the harvest.

Transport, both for feedstock and for finished products, is expensive; generally, it is best to produce in a deficit area so that competitors face logistical barriers.

For structural exporters, productivity, logistical and exchange-rate issues are paramount.

Stand-alone raw sugar refineries are uncompetitive where local sugar beet or sugarcane crops exist;

Concentration in the industry is increasing both regionally and world-wide.

Capital intensity, financial commitment and time-to-market create risk, which is acceptable only if forecasted market prices are safe. Thus, one should not invest primarily to export sugar to the world market. Market prices fundamentally depend upon logistics and implemented trade regulations.

Market prices fundamentally depend upon logistics and implemented trade regulations.

Sugarcane accounts for between 60 and 70% of the ex-mill cost of sugar. It is therefore essential that field productivity be high (above 12 tonnes of sugar per hectare). For this to happen, cane needs:

The longer the campaign length — the time during which sugar cane is ripe — the better the industrial assets are amortized[1]. Harvesting takes place during the dry season; when the rains come, harvesting becomes difficult, if not impossible, and the sugar content of the cane is diluted.

Structurally, successful sugar production depends upon farming (competitiveness) and prices obtained for the finished products (financial security).

Sugar and economic development

Economic development is best measured by the amount of fixed assets per capita — from infrastructure to light bulbs. In this sense, a sugar mill and estate are amongst the most powerful micro-economic development tools that exist.

This is notably true in rural settings in developing countries. In an area where there is precious little, a sugar mill brings roads, electricity, clean water, schools, health dispensaries and long-term jobs. In direct and indirect ways, and over a long period, a mill may offer up to 15,000 people an opportunity to join the market economy.

Further, energy is a key component of economic development and a modern sugar venture will supply electricity to the grid. In addition, depending on local regulations and fuel prices, a mill may provide ethanol for blending in petrol.

Rules of Sub-Saharan Africa

Africa presents specific challenges which favour prudence. Lessons can be learned from the way in which René LeClézio built Lonrho Sugar:

Minimize capital outlay: start small and install second- or third-hand equipment

Use a “managed contract” concept: you want a fee-based Main Contractor

Monitor and manage stakeholder interests; in particular, ensure local population and smallholder support

Aim for high leverage with long-term debt finance

Put your best people on the estates

Call on experienced operational staff to manage projects

As much as feasible, in Africa one should keep solutions inexpensive, simple and robust.

One factor warrants a special mention. In Africa, although securing long-term financing is exceptionally hard and access to land can be problematic, once a sugar project is launched, the true challenge is to ensure competent management and good execution on the ground over time.

A geolocation game

Sugar is a “geographic” business: the above elements need to be adapted to local, country and regional conditions.

With respect to sugar cane, many areas will offer appropriate farming conditions but in most of Africa land “ownership” and occupation is a delicate issue which alone may decide if a sugar operation exists.

In practise, industrial processing efficiency is not affected by the country in which it is located.

The level and behaviour of prices has to be carefully ascertained. It is best that the chosen area and neighbouring regions be net importers so that transportation costs penalise competition. It is also beneficial if consumption is of refined sugar, which costs more to move.

Distribution costs associated with the geography of consumption need to be identified. The interests of economic agents who benefit from the trade currently and may be impacted by a new supplier and, eventually, by improved border protections, should be taken into account.

Import duties and the ability to increase them if necessary[2] must be flagged — likely, this is to be at the Regional Economic Community level, taking into account other multi-lateral trade agreements. In this area, the amount and resilience of “informal” trade is an essential component of how market prices will behave.

Campaign duration determines asset utilisation, which affects economies of scale. The other scale factor is throughput (tonnes of cane processed per hour), but this element is tempered by feedstock and finished product transportation costs (distance from field to mill and from mill to consumer). Doubling campaign length reduces unit cost of sugar by about 30%; doubling daily throughput, by about 15%.

Because sugar is a commodity, price is the main competitive discriminant. Competition from imports may largely depend upon exchange rate fluctuations.