Al Khaleej Sugar Company, the Dubai refining giant, has more than $450m worth of the raw commodity on hand and plans to boost production capacity by 40 per cent this year to capitalise on record prices.
Shortage of sugar is sweet for Al Khaleej
Al Khaleej Sugar Company, the Dubai refining giant, has more than US$450 million (Dh1.65bn) worth of the raw commodity on hand and plans to boost production capacity by 40 per cent this year to capitalise on record prices. The company has about 600,000 tonnes in storage, worth a small fortune as prices are still inflated, having doubled last year due to a global shortage.
"It is good to have this sugar in the warehouse; it's good for the company," said Cyrus Raja, the general manager of the refinery in Jebel Ali. "It will be profitable." It also had 30,000 to 40,000 tonnes of white sugar on hand, said Jamal al Ghurair, the refinery chairman. "This is only four days delivery," he said. "It's just people paying money and waiting for them to lift it." Although the present holdings are an average stockpile - Al Khaleej facility's warehouse can keep as much as 1.2 million tonnes - as prices rise, the raw sugar stocks have become a money spinner, worth $451m at yesterday's prices.
The London March futures price was $751.80 a tonne yesterday, after hitting a peak of $759 on January 21. Mr Raja said the plant normally stored between 150,000 tonnes and 1 million tonnes of sugar. The company aims to increase its production capacity from 5,000 tonnes to 7,000 tonnes daily by the end of the year to meet rising demand, said Mr al Ghurair. Al Khaleej expects to produce 1.5 million tonnes of refined sugar this year, up from roughly 1.3 million tonnes last year.
Sugar prices more than doubled last year due to a worldwide shortage for the second year in a row, triggered by poor weather in the two biggest producing countries, India and Brazil. A poor monsoon in India has cut its supply and turned the South East Asian country from a major exporter to a major importer of sugar. Alternatively, too much rain in Brazil has reduced the sugar yield from each cane stalk, said Jonathan Kingsman, the managing director of the sugar brokerage and analyst Kingsman.
"You had the El Nino weather effect, which has affected crops everywhere," he said on the sidelines of a conference. This was compounded by new EU regulations on sugar, which cut exports by about 5 million tonnes, and the difficulties faced by farmers in securing financing for fertilisers, leading to the biggest shortage in sugar history, he said. "It certainly has been the biggest, most difficult, shortage."
The Kingsman group predicts that demand will outstrip supply by 11.92 million tonnes for the 2009-2010 crop season. After climbing to the highest level in 29 years, the price of sugar eased this year due to hedge funds selling off commodities to adjust their positions against a high dollar, Mr Kingsman said. "Sugar had gone a little bit ahead of itself in terms of price. Speculative interest took prices up a little bit too high, and too early."
The price drop was welcome news for local makers of juice, soda, chocolate and other products that require sugar, as their bottom lines have been squeezed by the high prices. Rami Benjamin, the business development manager for Masafi, which makes fruit juices, said it had been exploring sugar substitutes to reduce costs and avoid raising prices. For the time being, Masafi will continue using sugar, Mr Benjamin said.
"There is a taste change, so this might not be accepted by the consumers," he said. "So we have to take careful steps for now. We will try as much as we can not to raise any prices." The Czarnikow Group, one of the largest and oldest traders and brokers of sugar, has predicted that prices could hit $1,000 a tonne before the Brazil crop reaches the market in May and the Indian crop comes online in November.
Mr Kingsman could not predict how far the sugar price would rise, or when, but he said it was inevitable. Consumers could see some price increases in industrially produced goods, he said. "The fundamental situation of supply and demand hasn't yet been resolved. So the import demand is still greater than the export availability, so you would expect prices to rise further as importers bid against each other for limited supplies."