TANZANIA – Illovo Sugar plans to build an alcohol distillery in Zambia, its second biggest market by earnings, as part of its long-term strategy to generate 20% of operating profits from downstream sources.

Company MD Gavin Dalgleish said on Monday that Illovo hoped to have board approval in the first quarter of next year for potable alcohol production in Zambia, which would be part of the expansion of its Nakambala factory.

Illovo recently commissioned a distillery in Tanzania, which was operating at its full capacity of 14-million litres, thanks to strong demand for potable alcohol across east Africa.

Its clients in the region include Tanzania Distilleries, in which SABMiller is the largest shareholder through the firm’s parent company, TBL.

SABMiller CEO Alan Clark said last month that his company would consider growing its presence in Africa’s spirits market.

In the six months through September, about 9.3% of Illovo’s operating profit came from downstream sources such as alcohol and furfural (byproduct used as extractive solvent and to make industrial alcohol) — up from 4% a year before.

Operating profits from downstream businesses more than doubled in the interim period, from R62m to R130m.

This growth in contributions “is probably a vindication of our model to diversify revenue streams”, Mr Dalgleish said.

“Our furfural exports also benefit significantly from rand weakness, as do our ethanol exports out of our Meerbank distillery in Durban, which also had a record production year.”

Illovo’s group-wide operating profit fell 14% to R1.39bn as lower cane and sugar production, and a decline in sugar prices globally affected earnings.

Demand for potable alcohol in east Africa was strong, while supply had been constrained because of an under-pressure sugar industry in Kenya. “So we’ve had a lot of trade enquiries from our Tanzanian distillery and we’re producing at maximum capacity,” Mr Dalgleish said.

Illovo developed a market for its potable alcohol in east Africa by first supplying the region from its distillery in Durban, but built a plant in Tanzania in an effort to capture the margin lost to transport costs.

The company also supplies electricity generated from its plants to the national grids of Swaziland and, to a lesser degree, Mozambique.

Sugar industry competitor Tongaat Hulett, which is diversified through its land development and starch businesses, hopes to supply electricity to SA’s national grid once a procurement process framework is put in place.

But Mr Dalgleish said he believed the existing tariff structure meant co-generation in SA did not yet make sense for Illovo.

December 2, 2014; http://www.bdlive.co.za/business/retail/2014/12/02/illovo-plans-to-boost-diversification-with-zambia-distillery