EU sugar regime bites away at ABF profits

By Lindsey Partos

- Last updated on GMT

Related tags: Sugar regime, European union

Oversupply of sugar in the EU and higher energy costs combine to
knock profits for the year at British Sugar, its owner Associated
British Foods warned today.

The UK food group estimated that proposals from Brussels to sharpen the region's sugar regime could slice £10 million from operating profit in 2006/7, and some £40 million per year thereafter.

"However, profit benefited from firmer prices in China and better operational performance in both Poland and China,"​ added ABF in a statement today.

An overhaul of the oft criticised European sugar regime that trades sugar at three times the world price is imminent. In June the European Commission proposed a host of initiatives, with plans to cut sugar prices by 39 per cent next year.

The proposals are now subject to EU working party consideration: confirmation of their final form is expected in mid-November.

The ABF warning comes as little surprise. For months, firms and analysts have been aware the impact the new regime would have on the bottom line.

And ABF is not alone, or perhaps the worst hit. Profits at UK sweetener firm Tate & Lyle and Danish ingredients firm Danisco are expected to be hit hard by the proposed reform.

Although analysts had predicted that Associated British Foods appears less vulnerable.

"We believe ABF is well placed to offset any potential decline in sugar profits: the group has been consistently reducing its dependency on sugar profits, and is well placed to expand through acquisitions,"​says Goldman Sachs.

They forecast a 30 per cent fall in sugar profits for ABF and Danisco, and over 40 per cent for Tate & Lyle in 2006/09.

The analysts add that sugar reforms could have a knock on effect on Tate & Lyle's European isoglucose (otherwise known as High Fructose Corn Syrup), currently under quotas in the EU and representing 5 per cent of Tate & Lyle's group business.

At ABF's yeast business, AB Mauri, the firm warned that yeast pricing "remained weak in North America and Turkey."​ Although gains have been made on a strong performance in Eastern Asia, notably China. The firm adds that in India market conditions have improved markedly, helped by efforts made to reduce the unit's cost base.

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