South Africa’s Illovo Sugar to cut costs as low prices bite

South Africa’s Illovo Sugar expects to cut up to 1.2 billion rand ($83 million) of costs over the next two years to cope with low prices, it said on Monday, after reporting a 60 percent drop in first-half profit.

A drought in crucial sugar-producing regions worsened the impact of low prices and volatile currencies on Africa’s biggest producer of sugar. The company has also been affected by weak global prices that sunk to seven-year lows in August, mainly due to oversupply.

“It’s difficult times like this that give you a sense of where your cost base needs to be in order to be competitive into the future,” Managing Director David Dalgleish told Reuters.

The worst drought in southern Africa in decades cut sugar output by 10 percent to 1.16 million tonnes in the six months ended September, with South African production the worst affected.

Headline earnings per share – the main gauge of profit in South Africa that strips out certain one-off items – fell to 71.7 cents during the same period from 171.1 cents a year earlier, Illovo said in a statement.

Shares in the company fell 1.85 percent to 15.90 rand, having lost 40 percent of their value over the last year.

Weaker currencies and interest rate increases in Malawi and Zambia also hit profits, the company said.

The Zambian kwacha has had a rough ride against the dollar in 2015. It was down almost 60 percent as of Nov. 10 as waning demand for commodities from top-consumer China hammered the foreign exchange revenues of Africa’s second-biggest copper producer, but then began rebounding.

“We have had a real perfect storm of coincidental events through this financial year,” Dalgleish said, referring to the combination of low prices, currency fluctuations and drought.

Illovo has forecast full-year headline earnings per share to fall between 25 percent to 45 percent versus a year ago.

Analysts have also predicted a deficit next year that will support prices.

Dalgleish said the company was positioning itself as an African player and gradually moving away from the European Union – a key market for Illovo – due to upcoming reforms that would see the EU becoming a net exporter of sugar.

The dismantling of EU production quotas in late 2017 will force sugar producers in the region to compete freely on the world market, adding to pressure on prices.



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