Sugar, oh honey honey...

And the sweet fact is:

Domestic consumption of sugar has been growing steadily at 4.1% per annum and reached 1.4 million metric tonnes in 2010. The increase in sugar consumption can variously be attributed to higher sales of soft drinks and sweet beverages, biscuits and cookies, bread, chocolate and other confectionary products. A lack of substitutes and the Malaysian sweet tooth, no matter how much they want their drinks or their food to be ’kurang manis’, will probably ensure the long term growth  of the business.

It was therefore not surprising for Felda Global Ventures Holdings Sdn Bhd (FGVH) to venture into the sugar refinery business. In early 2010, it took over Malayan Sugar Manufacturing Co Sdn Bhd (MSM) and other sugar related assets and following that, took a 20% stake in Tradewinds (M) Berhad, making it effectively  a major player in the sugar refining business in Malaysia.  Jointly, MSM and Tradewinds hold  a monopoly on the sugar refining business in Malaysia. The import of refined sugar in Malaysia is only allowed for industrial consumers with approved permits.

Around the same time, world sugar prices started climbing upwards, resulting in four price increases pushing the retail price of sugar from RM1.45 per kilo in December 2009 to RM2.30 per kilo in May 2011. 

As sugar is a controlled item in Malaysia, several mechanisms are in place to check any price hike in what is seen as an essential item and which could potentially put the lower income group in the population in a difficult position. One of the mechanisms in place is the subsidy that the government pays to the sugar refiners. Today, for each kilo of sugar that is bought, the government pays 54 sen in subsidies or a total of RM567 million a year an increase from 20 sen or RM262.4 million the previous year. Because of this subsidy prices of sugar have remained at RM2.30 per kilo since May 11, 2011 almost a year ago.

The control in the price of sugar means two things for FGVH’s foray into the sugar business. Firstly, because the price ceiling is in place,  there will not be price fluctuations that could affect the demand for sugar. The consumption of sugar is therefore expected to grow at a healthy CAGR of 4.3% from 1.5 million tons in 2011 to 1.8 million tons in 2015.

Secondly, it need not worry about fluctuating raw sugar prices. The Ministry of International Trade and Industry together with local refined sugar producers in Malaysia have secured long-term contracts  with international exporters to cap the buying price of raw sugar at US$0.26 per pound for the next three years. MSM obtains 99% of  its raw sugar  from suppliers in Australia, Brazil and Thailand. Less and less sugar cane  is being planted on its land in Chuping, Kedah as a result of a shift to higher value crops namely oil palm and rubber. 

As a result, FGVH’s sugar business accounted for 31% or RM2.3 billion out of its total business for 2011. It has a 57% market share of the sugar market based on its production volume of 958,277 metric tones in 2011.

By all accounts, FGVH’s sugar refinery business is in a good position  for the next three years as it appears to have all its bases covered. Moving forward FGVH, plans to expand its raw sugar refining capacity and diversify to external markets through strategic acquisitions or investments overseas. It also plans to focus  on its core sugar refinery business by unwinding its operations in sugar plantations and will convert the use of this land to plant rubber..

As a growth strategy, FGVH can consider increasing its current refinery capacity which it inherited and perhaps look into buying  raw sugar production at its source.  It could take a leaf from the previous owners of MSM, who now own Sydney-based CSR Ltd’s sugar and renewable energy business, Sucrogen. The companies supply raw sugar and operate approximately 200,000 ha of sugar cane plantations in Indonesia respectively.