SOUTH AFRICA – Tongaat Hulett can increase its annual sugar production by 400,000 tonnes over the next four years without having to invest in new mills, largely on expected improvements in yields and extraction rates, CEO Peter Staude said on Monday.

This would reduce unit cost production, given that most of the cost base was fixed, he said after Tongaat Hulett reported a 16.6% rise in headline earnings for the six months through September to R773m.

About two-thirds of the expected increase in production would be from improved yields and extraction rates, while the rest would be driven by additional hectares under plantation. Despite concerns around health issues such as diabetes in developed markets, long-term global demand for sugar is expected to continue growing, fuelled by emerging markets where consumption per capita remains low.

Mr Staude said if per capita sugar consumption across sub-Saharan Africa rose to match the levels of SA and some of its neighbouring countries, the region would need new supply of 6.8-million tonnes a year — equal to three times the capacity of SA’s entire sugar industry.

Operating profit from Tongaat’s various sugar operations grew 26% to R864m, as the division benefited from cost reductions last year while lower cane valuations in the prior interim period were not repeated.

While sugar prices had been depressed in an oversupplied world market, Mr Staude said this could change quickly as there were no major investments in new mills, and as major supplier Brazil recently announced an ethanol price hike.

Tongaat’s starch operation, which supplies to various markets including to makers of coffees and creamers and to paper manufacturers, grew operating profit 13.8% to R264m.

The company’s land conversion and development unit, which focuses on KwaZulu-Natal’s north coast and which has been a huge contributor to the group’s earnings growth in the recent period, reported a 15% reduced operating profit of R435m, as a major deal in the previous year was not repeated.

Meanwhile, Mr Staude said Tongaat had made “very encouraging progress” on its ambitions to supply electricity generated from sugar cane processing to the national grid. The launch of a procurement process framework for the sector is said to be planned for early next year.

Kagiso Asset Management head of research Abdul Davids said that Tongaat had reported “very good results amid tough macro-economic conditions — with a depressed world sugar price and low rainfall in KwaZulu-Natal affecting the group’s reported earnings”.

“Tongaat’s ability to control costs and its diversified earnings base that include its starch and property divisions offset the decline in revenues experienced in its South African sugar operations.”

Tongaat’s share price surged to a high of R152.68 on Monday before closing 4.55% up at R151.60.

November 14, 2014;