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Herewith the chairman's statement contained within the Illovo Sugar Limited
Annual Report for 2001 which, for information purposes,is being
simultaneously released with the issuing of the report to shareholders.
The past year has seen the group achieve record sugar and furfural
production. Further progress was made in enhancing the company's position
as a leading global, low-cost sugar producer through its acquisition of
Zambia Sugar and the disposal of its Mauritian sugar interests with effect
from April 2001. Headline earnings for the year declined by 20% to R222.9
million.
The major factors affecting the results were lower than expected production
in Malawi and Swaziland caused by adverse weather conditions in the latter
part of the season, significantly depressed sugar prices and high energy
costs in the United States, the impact of the weaker Euro on preferential
market sales especially in Mauritius, and increased finance costs. Earnings
per share were 67.5 cents which is a reduction of 23% compared to last year.
The contribution to operating profits by sugar manufacture was 59%, cane
growing 23%, and downstream and other operations 18%, whilst the
contributions by country, excluding Tanzania and Mozambique which are
presently treated as investments, were South Africa 39%, Malawi 31%,
Swaziland 19%, Mauritius 8% and the United States 3%.
Zambia Sugar Plc, in which the company has acquired an 89.1% shareholding
for approximately US$20 million, is listed on the Lusaka Stock Exchange and
last year produced 1.2 million tons of cane from its own agricultural
operations and 209 000 tons of sugar. It is the country's major producer
supplying most of the domestic demand of approximately 110 000 tons of sugar
under the Whitespoon label, as well as exporting to regional markets and to
Europe. The company benefited from a Special Preferential Sugar (SPS)
allocation to supply 14 000 tons of sugar into Europe whilst, in terms of
the recently agreed SADC Sugar Protocol, it is expected to supply 10 000
tons of sugar into South Africa.
The acquisition is a strategic fit for the group as Zambia Sugar is one of
the world's lowest-cost sugar producers with excellent agricultural
conditions, access to secure water supplies from the Kafue River for
irrigation, and good factory operations. It further provides the group with
the opportunity of being involved in an operation where it can add
additional value.
The sale by the group of its 80.25% shareholding in Mon Tresor and Mon
Desert Limited involved the disposal of a relatively high cost sugar
producer, with limited expansion potential, which was heavily reliant on
sales at preferential prices into Europe and the United States. In addition
the company was dependant for a significant part of its earnings on its
hotel operations which were non-core to Illovo. The sale proceeds have been
used to reduce the group's long term borrowings and to finance the
acquisition of Zambia Sugar.
The European Union has approved a proposal under which all imports, other
than armaments, are to be allowed into the EU duty free from the world's 48
Least Developed Countries (LDC's). However, in respect of sugar, rice and
bananas it was agreed that there would be delays to full liberalisation. In
the case of sugar, this would only be achieved by July 2009. Until Common
Customs Tariff duties are entirely suspended a global tariff quota would be
introduced. The initial tariff quota for sugar, commencing in July 2001,
will be 74 185 tons thereafter increasing by 15% per annum. For imports
over the tariff quota, duties will be reduced by 20% in July 2006, 50% in
July 2007 and by 80% in July 2008. The basis of allocation of the tariff
quota has yet to be announced. The ACP (African, Caribbean and Pacific) /
EC Sugar Protocol is not expected to be impacted by the tariff quota tonnage
but the SPS allocations could be reduced to provide for the new
dispensation. The company's operations in Malawi, Tanzania, Mozambique and
Zambia are expected to benefit from this new dispensation but Swaziland
could be at risk of a reduction of its relatively small SPS allocation
depending on whether or on what basis export allocations into Europe under
the SPS are adjusted. Current discussions on the extension of the European
Union sugar regime are of importance to the group's African operations. It
is anticipated that the current provisions will be extended for between two
and five years while the European agricultural policies are reviewed.
Another significant development during the year was the signing of the
Southern African Development Community (SADC) Protocol on Trade which
includes a special Sugar Co-operation Agreement. This agreement recognises
that the world sugar market is highly distorted and that the world price for
sugar is a 'dumped' or subsidised price. The protocol states that this
results in the continuing need for most sugar producing countries to impose
tariffs and non-tariff barriers against the free importation of sugar in
order to protect their domestic industries. It further provides that for as
long as the distortion continues "sugar will be a product requiring special
dispensation within the framework of this protocol so that no sugar industry
within the region will suffer". The long term objective of the agreement is
to establish full liberalisation on trade in the sugar sector in the SADC
region after the year 2012. The liberalisation will be on a reciprocal
basis and will also involve the removal of non-tariff barriers. Over this
period, the agreement also seeks to promote production and consumption of
sugar and sugar-containing products according to fair trading conditions and
to provide temporary measures to insulate member states from the
destabilising effects of the distorted world market. Until full
liberalisation occurs and with effect from 1 April 2001, market access on a
non-reciprocal basis into the South African Customs Union (SACU) will be
granted. This will be available to each SADC net surplus producer,
including South Africa and Swaziland, and will be based on actual SACU
market growth which, in the first year, is deemed to be 45 000 tons of
sugar. In addition, duty free access to the SACU sugar market for 20 000
tons of sugar per annum will be available to the non-SACU, SADC surplus
sugar producing member states.
A Federation of SADC Sugar Producers was also established during the past
year and will act to promote the common interests of sugar industries within
SADC, in close co-operation with the Technical Committee on Sugar which was
formed in accordance with the Sugar Co-operation Agreement.
The South African Sugar Act is currently the subject of a review by
Government, and the sugar industry has made a submission to the Department
of Trade and Industry in this regard. The aim of the review is to foster a
more competitive environment in the local market (within the agreed
framework for the optimal development of the sugar sector in both SACU and
SADC) and to establish a positive legal position providing for limited
government intervention rather than supporting an enabling position which
sanctions regulation by the industry itself. The industry submission
presupposes the continued existence of an import tariff to protect the
industry but anticipates more competition in the domestic sugar and molasses
market arrangements. The new Act is expected to come into effect from the
2002/03 season.
Prospects
Normal growing conditions together with the acquisition of Zambia Sugar have
boosted cane production forecasts for the 2001/02 season by 800 000 tons to
approximately 5.4 million tons. This combined with focused maintenance
programmes and improvements in sugar recoveries is expected to increase
sugar production by around 250 000 tons to almost 2.2 million tons.
Downstream production of diacetyl, acetoin, syrup and ethyl alcohol are all
expected to reflect increased levels of output whilst furfural is expected
to be marginally down due to a shorter crushing season at Sezela.
Improved prices for world sugar and downstream products and the weaker Rand,
together with the increased levels of production, are expected to result in
growth in headline earnings of around 40% being achieved in 2002.
R A Williams Durban
Chairman 21 May 2000