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The sugar mills situated on the North Coast of KwaZulu-Natal continue to experience a shortage of cane supply. Grower viability, the uncertainty created over land ownership and adverse weather conditions in recent years have all contributed to reduced cane supply. Opportunities exist to increase cane production in terms of available land and water supplies. The finalisation of an appropriate legislative regime for biofuels and electricity cogeneration, coupled with the resolution of the land transformation process will result in the expansion and improved viability of the sugar industry in the area.
Adverse growing conditions experienced in 2006 continued into 2007 and, together with a reduction of 2 842 hectares under cane supplying Tongaat Hulett’s mills, resulted in a decrease in sugar production to 604 000 tons in 2007 (2006: 666 000 tons). The small 2006 and 2007 crops resulted in lower export sales volumes in 2007 and an increased cost per ton of sugar produced.
In order to match existing capacity at its South African cane milling operations, land management initiatives to increase cane supply continue. Cane supply initiatives, to increase the area of land under cane and improve yields, have been identified for implementation, in addition to the recently identified large-scale cane projects situated in the Mkuze area on which investigations have commenced.
The dominant features of achieving greater yields per hectare lie in cane receiving the appropriate amount of rainfall at suitable times of the year, together with improved farming practices. Processes designed to encourage and enable growers to apply the correct farming practices are currently underway with the aim of improving yields to above 64 tons per hectare in a good rainfall year.
In order to improve yields and increase the area under cane, Tongaat Hulett continues to pursue the expansion of its cane extension services and the associated transport initiatives to support the establishment of cane on third party land that is fallow or being utilised for alternate crops. This is coupled with initiatives to increase cane supply by acquiring land that is currently not supplying the mills, supports property development and adds value to its existing landholdings. As part of this process, Tongaat Hulett is assisting in the land claims processes within its cane catchment area in a positive and constructive manner that ensures cane supply to its mills is sustained and that it manages cane areas under urbanisation and development pressures.
Tongaat Hulett is able to demonstrate proof of ownership on its landholdings pre-dating 1913. Some 4 200 hectares of Tongaat Hulett owned land, of which only 468 hectares is prime development land, is under gazetted land claims. Tongaat Hulett continues to monitor and assist in the settlement of land claims on land supplying its mills in the most appropriate manner to improve future cane supplies.
Tongaat Hulett’s sugar technology leadership was confirmed during the year with milling performance continuing to exceed industry benchmarks measured in terms of critical sugar recovery. Improvements in efficiencies and capacity at the refinery continued, with refined production increasing to 574 000 tons (2006: 504 000 tons).
Tongaat Hulett continues to optimise the value of the Huletts® brand as the leading sugar brand in South Africa. The brand remains the cornerstone of Tongaat Hulett Sugar’s market positioning and offers a total sweetener solution including a range of high intensity sweeteners. Local market sales of 460 000 tons decreased by 2 percent over the prior year with stockholdings at December 2007 decreasing to 144 000 tons.
An application has been made, with the support of the DTI, to ITAC for an increase in the import tariff reference price from US$330 to US$400 per ton. This will better protect the local market against duty paid imports in times of low world prices.
Lower sugar production and carry in stocks resulted in a reduction in raw sugar export volumes to 245 000 tons (2006: 316 000 tons). These were sold at an effective world sugar price of 11,8 US cents per pound (2006: 12,8 US cents per pound) at an average exchange rate of R7,12/US$ (2006: R6,56/US$). Stock on hand at the end of December 2007 reduced to 62 000 tons (2006: 76 000 tons).
Having pioneered the production of bagasse and molassesbased animal feeds under the Voermol® brand, this operation continues to be a leader with its range of energy and supplementary feeds, amongst others, as the cornerstone of its offerings to the livestock farming community. This operation is integral to the strategy of optimising value from the molasses and bagasse from the sugar mills and showed an increased contribution to earnings with record volumes in 2007.
In South Africa, the Amatikulu sugar mill represents the most likely opportunity to produce ethanol from the sugar and molasses not required for sale in local markets. The Amatikulu mill currently crushes approximately 1,9 million tons of cane producing 215 000 tons of sugar and 76 000 tons of molasses. The envisaged project could include the construction of an ethanol plant using all of Amatikulu’s molasses and 108 000 tons of export sugar to produce 80 million litres of ethanol as a fuel blend.
The Felixton mill is ideally suited to large-scale cogeneration due to its current boiler capacity, which reduces the level of capital spend required. The cogeneration plant that will export 38MW to the national grid in season and 17MW out of season is subject to the success of the tender submitted to Eskom and the subsequent price negotiations. The plant could become operational 22 months after the project is given the go-ahead. In addition, feasibility studies are underway for cogeneration plants at the Amatikulu and Darnall mills.
Tongaat Hulett's sugar operations in Mozambique consist of the sugar mills and estates surrounding Xinavane and Mafambisse.
Managing the complexities and interruptions associated with expansion projects, the Mozambique operations were able to produce 108 000 tons of sugar in 2007 (2006: 106 000 tons).
The fast tracking of the Mozambican expansions totalling R1,3 billion continued during the year, building on the solid platform established in the country over the past seven years. Land preparation and the planting of cane at Xinavane are well advanced in order to utilise the expanded factory’s crushing capacity and to capitalise on market reforms in the European Union. The expansions at Xinavane and Mafambisse that will increase the current sugar production capacity of 156 000 tons to 286 000 tons per annum are progressing in accordance with the planned project timelines for the April 2009 start up.
The official opening, by the President of Mozambique, of the Muda Dam situated close to the Mafambisse sugar mill, northwest of Beira, took place during the year. This has facilitated the expansion of a further 2 555 hectares of cane under irrigation at Lamego that will supply the mill with sufficient cane for its current annual sugar production capacity of 82 000 tons. Planting activities in these areas are expected to be completed during 2008 allowing the full tonnage to be available to the mill with effect from the commencement of the 2009 crushing season.
Capitalising on the agricultural conditions, the installed capital base and support from the Mozambique government, the possibility of increasing the Mafambisse mill’s capacity by over 40 percent to 116 000 tons of sugar is being investigated.
The above expansions in Mozambique would result in the production of 320 000 tons of sugar by 2010.
Despite delays in the original timetable for the signing of Economic Partnership Agreements (EPA), limited agreements dealing with trade in goods were concluded before the deadline of January 2008. This enables commercial trade arrangements to continue unhindered until September 2009 when the current sugar protocols end and are replaced by the final EPAs that will see an increase in sugar imports to the European Union from 1,6 million tons per annum to 3,5 million tons per annum.
Following the WTO rulings in 2006, the EU will reduce sugar exports into the 40 million ton world sugar market from levels of 5-7 million tons to no more than 1,4 million tons from 2007 onwards. This is coupled with the Everything-but-Arms (EBA) initiative that provides for duty and quota free access to EU markets for Least Developed Countries (LDC) from 2009 and the announced EU sugar market reforms that provide for an institutional reference price of Euro 335,20 per ton until 2015.
Optimisation efforts in attractive markets prior to the implementation of the announced sugar market reforms continued during 2007 with the average export price realisations increasing by 27 percent.
In Mozambique, the duty free access into the EU for LDC and ACP countries is of particular relevance. The primary focus of ethanol production in these operations would be for sale to the EU in terms of Mozambique’s preferential market access. Tongaat Hulett is pursuing opportunities for producing biofuel at Cofomosa (Moamba) in Mozambique as part of the expansion plans at Xinavane.
The Tambankulu sugar cane estate in Swaziland has consistently achieved excellent sucrose yields due to the good soils and growing conditions in the region. These conditions resulted in the production of a record raw sugar equivalent of approximately 58 000 tons during 2007 (2006: 55 000 tons) with world-class sucrose yields of over 18 tons per hectare.
Under the current socio-economic environment, Tongaat Hulett’s immediate strategy in respect of Triangle Sugar and its 50,35 percent stake in Hippo Valley Estates is to manage these operations on a basis that ensures that the infrastructure and skills base is maintained. Programmes are being developed to ensure sugar production is rehabilitated from the 2007 level of 349 000 tons to fully utilise annual installed capacity of 600 000 tons. Particular emphasis is on working with and increasing cane supplies from outgrowers. Ethanol has been produced at the sugar operations in Zimbabwe since 1980, with Zimbabwe as an ACP country enjoying similar preferential market access to attractive European markets, as do Tongaat Hulett’s Mozambique operations.
In 2007, under extremely difficult circumstances, sugar production totalled 349 000 tons (including 156 000 tons from Hippo Valley). Triangle produced 240 000 tons in 2006. The business is presently contending, inter alia, with the extreme effects of hyperinflation, exchange rate devaluation, foreign currency shortages and price controls in Zimbabwe. In 2007, local market sales were at selling prices significantly below world and regional levels. Efforts continue to improve the overall market realisation for sugar produced at Triangle and Hippo Valley, given the effects on domestic market prices within a hyperinflationary economic environment. Current initiatives include:
Dividends of R53 million were received from Triangle Sugar (2006: R61 million).
The Indigenisation Bill passed by the Zimbabwe Parliament has yet to be enacted by the president. The bill represents an intention to indigenise the economy but does not empower the responsible minister to force corporations to indigenise within any time period. In its current form, the bill is applicable only to entities that undertake a corporate restructuring through merger, unbundling or divestment.
The integration of Triangle with Hippo Valley Estates and the realisation of rationalisation and synergistic benefits in order to improve sustainability and to prepare the entities for the normalisation phase remains an area of focus. Progress to date includes the alignment of policies, procurement and strategic stockholdings, sugar marketing and branding, integration of medical schemes, and sharing of skills and resources through joint management services.
During 2007, production at the sugar mills of Triangle and Hippo Valley fell to 349 000 tons from the previous 440 000 tons due to delays in the timing of land preparation, harvesting and haulage operations. Plans are in place in 2008 to minimise the effect of these issues on agricultural operations and cane production.
The Zimbabwe land reform programme was undertaken without provision for equipment, working capital, finance and training for the newly settled farmers to grow and harvest the established sugar cane crop. This has lead to yield reductions of 72 percent on outgrower farms, with the crops perishing on 38 percent of these farms. In addition, shortages of agro-chemicals, spares and foreign currency have detrimentally affected all agricultural operations. Current efforts to restore the sugar cane yields are focused on lands recently settled by beneficiaries of the land reform programme and will contribute to production rising to the current installed capacity of 600 000 tons.
The Triangle and Hippo Valley operations provide extension services and support programmes to all qualifying outgrowers of sugar cane, at full cost recovery, through technical training, sourcing of key inputs and finance, and access to surplus farming assets at Mkwasine. A Canelands Trust has been established and low cost finance from the Reserve Bank of Zimbabwe and access to adaptation aid from the EU are being sought to finance a three-year replanting programme on the 11 750 hectares under sugar cane.
Discussions with government are underway to create joint ventures on the surrounding 4 511 hectares of outgrower land that has perished and was deemed to be non-viable under present allocations. The land would be farmed either as a joint venture with government or as a company estate with the beneficiary being employed for the period, to gain the expertise required. The investment in this respect will be recouped via the harvest of cane. Linked to this process is the resolution of the impasse over the estate at Mkwasine, the security of the other Triangle and Hippo Valley estates from compulsory acquisition and interference and the need for regular reviews of sugar prices as key success factors for the rehabilitation of the raw sugar industry and the future success of land reform.
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