ZAMBIA SUGAR SITE VISIT. October 2015

Transcription

1 ZAMBIA SUGAR SITE VISIT October 2015

2 AGENDA 1. Introduction 2. Market overview 3. Strategic response 2

3 MARKET OVERVIEW Sources The following market information has been compiled using data from the following sources: AB Sugar; Czarnikow; World Bank; LMC; FO Licht; Business Monitor International; GapMinder; World Bank; Index of African Governance; Food and Agricultural Organization of the United Nations; International Sugar Organisation; EU Commission; as well as internally generated information.

4 WORLD SUGAR MARKETS World sugar price reached seven year lows during August 2015 Major risk to pricing is the uncertainty of Brazil s economic recovery - Brazilian Real impacted as international capital flows out of emerging markets into safe havens - Downgrade in Brazil s credit rating, and the related political unrest, saw the Real hit all-time record lows against US$ Brazil s central bank is using US$ reserves to strengthen currency which, combined with speculation on next season s production, accounts for the recent increase in prices Favourable tax regime changes will favour ethanol production, supporting higher world sugar prices World raw sugar prices (No. 11 US c/lb) No. 11 World Price BRL:USD US c/lb BRL:USD FX Rate

5 WORLD SUGAR MARKETS Economic fundamentals support an increase in the world price over medium- to long-term Continued demand growth of 2% per annum Various mill closures occurring and expected due to high debt levels (Brazil and India); while construction of new capacity is not viable at current prices without significant subsidies World sugar is expected to be more in balance during 15/16 due to: - Brazil s preference for ethanol production to meet strong demand and generate quick cash flow - Drought has affected yields in many key producers (e.g. China, India and South Africa) Substantial global stocks remain after 5 years of surpluses; history suggests a positive price response is triggered when stock-to-use ratio approaches 40% (currently 47%) Global production less consumption (m tons) Change in global sugar stocks Global Stocks (m tons) Stock-to-Use Ratio (%) 12c/lb 18c/lb 22c/lb 27c/lb 22c/lb 17c/lb 16c/lb 14c/lb 55% 50% 45% 40% 35% 30% -13 5

6 EUROPEAN SUGAR MARKETS EU prices remain at import parity but value is further reduced in US$ terms Increased competition as major European producers reposition ahead of quota reform in September 2017 Significant weakening of Euro from $1.38 to $1.12 further reduces the value derived from EU exports Temporary price increase expected immediately before reform due to lower production and stock levels Post-reform, Europe will move to a net exporter and sugar prices are expected to drop to export parity Imports into Europe expected to continue but benefits from the concessions made to least developed countries will reduce Reported EU prices USD:EUR exchange rate EU Gate Refined ( /ton) Import Parity ( /ton) Export Parity ( /ton) EU Gate Refined ($/ton) USD:EUR

7 AFRICAN SUGAR MARKETS Sustained growth in sugar consumption of 3.2% p.a. driven by both population and economic growth Sub-Saharan Africa expected to continue recent trends with high levels of population growth, urbanisation and improvements in life expectancy GDP per capita growth forecast to accelerate with a rapidly expanding middle class Sugar consumption and growth rates by country Sugar consumption per capita Country / region Sugar per capita (kg) Forecast growth in total sugar consumption per annum from based on population growth & GDP per capita growth Congo (DRC) Egypt Ethiopia Kenya Malawi Mozambique Nigeria South Africa Sudan Swaziland Tanzania Uganda Zambia Zimbabwe Sub-Saharan Africa Total Africa Europe

8 AFRICAN SUGAR MARKETS Regional prices under pressure with competition from low cost imports and regional producers Regional markets remain a valuable alternative to the EU market with pricing above world market levels High logistics costs across Africa provide ongoing advantage to local producers versus world supply Supplying quality packaged product will be necessary to secure & grow market share Preferential access within Customs Areas and Trade Blocs provide benefit where trade protection is effective Bilateral between Zambia and DRC agreed with implementation expected in April 2016 Regional markets with preferential access Country with Illovo production Countries which share at least one Customs Area or Trade Bloc with Illovo s production countries Customs Area & Trade Blocs included: COMESA (Common Market for Eastern and Southern Africa) EAC (East African Community) SADC (Southern African Development Community) SACU (Southern African Customs Union) Proportional pricing of markets $800 $600 US$ / ton (ex-mill) $400 $200 $0 Mar 2014 Mar 2015 Sep 2015 (YTD) Regional & Domestic EU Bulk Raw 8

9 AFRICAN SUGAR MARKETS Industrial sugar growth expected to outpace growth in direct consumer purchases of sugar As GDP per capita rises, demand for high-sugar processed foods continues rapid growth long after the demand for direct consumption sugar has levelled off Based on forecast GDP and population growth in Sub-Saharan Africa, this is expected to equate to 5% growth p.a. over the next decade (which aligns with specific forecasts for carbonated soft drinks) Industrial production expected to grow faster than consumption of processed foods, as local manufacture displaces imports Household expenditure in developing countries Carbonated soft drink consumption Expenditure per Capita $100 $80 $60 $40 $20 $0 $0 $2,000 $4,000 $6,000 $8,000 $10,000 Zambia = $891 Sub-Saharan Africa 2013 average $1,150 Sub-Saharan Africa forecast for 2021 average $1,380 GDP per Capita High-sugar processed foods * Sugar (direct consumption) Consumption in 10 countries^ comprising 46% of Africa s population: m litres 12, % 10,000 8, % 6,000 4,000 2, * Combination of the following food categories: Confectionery, Chocolate and Ice Cream; Soft Drinks, Mineral Waters & Juices; and Other Bakery Products ^ Only 10 countries for which data was available: Algeria, Botswana, Cameroon, Egypt, Ghana, Morocco, Mozambique, Nigeria, South Africa and Tanzania 9

10 STRATEGIC RESPONSE

11 STRATEGIC IMPERATIVE #1 MARKET FOCUS Market focus: Reduce bulk exports to EU Need to protect and grow domestic markets increased penetration and driving up consumption is vital Wider region provides valuable alternatives Target higher margin segments Supply chain alignment Branding Refined sales focus Advocacy Market focus Efficiency Improvement Purpose Values Diversify profits Position for change Quality of product, packaging and supply distinguishes Illovo from the competition Packaging Warehousing Core capabilities Governance 11

12 DEVELOPMENT OF KEY MARKETS Illovo continues its focus of altering its sales mix away from bulk raw exports Switching to greater domestic and regional sales requires a shift in people and plant capability Initiatives to develop capability regarding customer focus, high product quality and delivery underway Opportunity to capture price differential between EU bulk and domestic / regional pricing (US$ /ton) Focus areas to transition away from bulk raw exports Warehousing/ supply chain Refined industrial sales Direct consumption sales Branding Advocacy Value enhancement Packing Bulk export sales 2015/16 Sales Mix Improvement 2020/21 3% 21% 18% 58% Local Regional EU/USA specials Bulk exports 25% 3% 10% 62% 12

13 DIRECT CONSUMPTION SALES INITIATIVES Initiatives underway to strengthen and protect domestic market positions Substantial progress in Tanzania pre-packet market development, brand awareness & route to market optimisation Comprehensive market insight into our customers & consumers buying considerations Supply Chain Alignment project establish customer centric key performance indicators Development of Malawi domestic growth strategy to address affordability issues, route to market inefficiencies and illegal imports Market protection in South Africa & Tanzania proving to be effective; successful lobbying for a revised tariff in Mozambique Domestic market share in countries of operation Tanzania Illovo Other local producers World imports Regional imports Malawi Zambia Mozambique Swaziland Detailed market analysis work performed in Tanzania in 2014 supported the need for a suitably sized prepack market opportunity. South Africa 13

14 REFINED INDUSTRIAL SALES INITIATIVES Refined sugar shortfall in the region will attract world sugar imports Refinery expansion in Zambia and fully utilise existing refined capacity in Malawi Maximise local production s short supply chain and national desires to limit product inflows Build strategic partnerships beyond sugar with key industrial players Opportunity to transfer refined sugar quality capabilities from South Africa to other operations Regional Refined Deficit Market Penetration 000 tons Illovo refined share - 13% Illovo refined share - 26% 15/16 Illovo Mvt Competitor Mvt 20/21 Industrial demand current & forecast demand & supply ( 000t) Illovo Competitors South Africa 15/16 Zambia 10% 33% GLA 20% 15/16 20/21Supply 20/21 Zimbabwe Supply 0 15/16 20/21Supply 13% Malawi Tanzania 15/16 20/21Supply 16% Kenya 11% 0 15/16 20/21Supply 0 15/16 20/21Supply 31% 15/16 20/21Supply Mozambique 75% 15/16 20/21Supply Refined capacity under construction 14

15 STRATEGIC IMPERATIVE #2 EFFICIENCY IMPROVEMENT Efficiency improvement: Cost focus across entire breadth of business Cost reduction Purpose Ensure global cost competitiveness Values Ingraining a do more with less culture across the business Expanding the CI methodology beyond operational focus areas (factory and cane supply) Skilled, well trained workforce focus Manpower review Lost opportunity analysis Continuous Improvement Market focus Efficiency Improvement Diversify profits Core capabilities Governance Position for change Procurement 15

16 STRATEGIC IMPERATIVE #3 DIVERSIFY PROFITS Diversify profits: Diversification through downstream expansion Furfural Purpose Introduction of non-crystal revenue improves robustness of returns Growing downstream to 20% of operating profit Meeting more of our customers needs via a wider product range increases customer loyalty (e.g. refined sugar, potable alcohol, CO 2 ) Nakambala distillery Alternate crops Molasses marketing Co-generation Market focus Values Efficiency Improvement Diversify profits Core capabilities Governance Position for change 16

17 STRATEGIC IMPERATIVE #4 POSITION FOR CHANGE Position for change: Preparation for long-term expansion of sugar production Regional growth will continue ahead of global averages Ensuring mills are operating at their optimal is vital Narrow our focus on where we would like a brownfield operation Mill capacity utilisation Acquire existing assets Assess asset portfolio Greenfield opportunities Market focus Purpose Values Efficiency Improvement Diversify profits Core capabilities Position for change Cognisant of balance sheet strength Transformation opportunities Governance 17