Sugar giants head for bitter future

Date: 17/06/1999

By Renée Cordes
After getting a helping hand from the EU for more than three decades, Europe's sugar-makers are going on a diet.

Knowing full well that it could be just a couple of years before the Union cuts back the subsidies it currently gives producers or reduces production quotas, they are shedding jobs and factories, merging with or buying other companies, and investing to expand the production of other products such as corn starch or saccharin.

The shake-up reflects the fact that the EU is under increasing pressure to reform its sugar regime and reduce the subsidies it has traditionally paid to protect a precious industry. This could happen as early as 2001, when the current regime is due to expire.

Currently, each member state is required to purchase raw or white sugar at a certain price to stop domestic prices falling below that threshold.

This practice has transformed the EU from a net sugar importer into one of the world's largest exporters, generating more than €10 billion a year in revenues and employing more than 50,000 people.

But the industry's success is both a blessing and a curse, since it is dominated by one or two large players in each country: Südzucker in Germany, Tate & Lyle and British Sugar in the UK and Danisco in Denmark.

While European Commission agriculture officials contemplate the options for reforming the sugar regime, their competition counterparts are keeping a close eye on the way these companies set prices - and the industry has reason to be nervous.

"We do not have to look over our shoulders," insists Clive Rutherford, managing director of Tate & Lyle's European sugar operations. But the company nevertheless has its own worries as it awaits the outcome of its appeal against a €7-million fine imposed on it by the Commission last year amid allegations that it colluded on prices with British Sugar and two other UK suppliers. Tate & Lyle argues that the level of its fine is "excessive".

While the companies await a decision from the European Court of Justice this autumn, their competitors also face scrutiny by anti-trust regulators, and experts and industry sources fear that there are more investigations to come.

Earlier this month, the Commission raided Danish sugar firm Danisco A/S following press reports that the company may have abused its dominant position to raise the price of sugar in Denmark and Sweden.

It is conducting a similar investigation into Agrana, the Austrian unit of Germany's Südzucker, which officials raided in April 1998. In 1997, it fined Irish Sugar €8.8 million for allegedly abusing its dominant position in the Irish market by, for example, offering rebates to major food wholesalers.

The chocolate and soft drink industries and other industrial users of sugar have long complained that sugar prices are too high and do not in any way reflect real costs.

"We want the price to reflect the real market price," says Alain Beaumont, secretary-general of the industrial sugar- users group CIUS, whose members account for nearly three-quarters of annual EU sugar consumption.

The group completed a study showing that industrial users are paying 17.5% more for sugar than is necessary. "If you have a market where there are shortages this is normal, but now when we have overproduction, it is obsolete," says Beaumont.

The group presented its findings in a report to EU officials late last year and asked for an independent audited report on the way the Union sets prices and quotas. It argues that a price reduction for refined sugar is justified based on information from processors showing lower labour and energy usage costs over the past few years.

Although they are still waiting for a response, CIUS officials are holding their tongues in the meantime in the hope that the problem will be addressed when the EU's current sugar regime expires in 2001.

However, Beaumont applauds efforts by the Commission to turn the heat up on the industry, even if it just means putting the companies in the public eye.

Sugar-processors have repeatedly denied allegations of price fixing. But executives acknowledge that because there is such a small, concentrated number of producers, this does in fact encourage them to discuss prices to protect their national markets.

But the big players bracing themselves for booming competition are cutting costs and pumping most of their resources into expanding production of other kinds of sweeteners such as corn starch. "This is not an industry doing nothing; we have had to constantly cut costs," says Tate & Lyle's Rutherford.

In the past few years, the company has slimmed down from six refineries to one, cut its workforce from 6,000 to 1,000, and invested €230 million into streamlining its business and diversifying into areas such as starch products, which now account for about half of its business. "That absolutely has to continue if we want to remain competitive," insists Rutherford.

Other European sugar firms are also preparing for the future. Some, such as Béghin-Say and SCM, have expanded through acquisitions, while others, like Ebro and Agricolas, have opted for mergers.

No matter what the EU decides to do in the next few years, analysts say it is vital for the industry to act now and move away from sugar before being forced to do so.

"The sugar industry in Europe is going to have to reorganise itself," says Nicholas Child, a Brussels-based consultant who spent several years working in the European sugar industry. "But I cannot see this really starting to happen until the next two to five years."

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