Sugar cane. Picture: BLOOMBERG
Sugar cane. Picture: BLOOMBERG

ILLOVO Sugar is diversifying its earnings by adding more alcohol distilleries to its business, while targeting possible opportunities in the blended fuel and carbon dioxide markets.

The group on Monday reported unchanged operating profit for the year ended March of R1.89bn. Earnings were dented by cheap imports in an oversupplied world market. But MD Gavin Dalgleish said the industry was at the bottom end of its cycle and a "gradual upturn" was expected.

Malawi and Zambia were Illovo’s biggest contributors to profit and earnings growth in the year, with operating profit up 39% and 30% respectively. The countries contributed to 70% of Illovo’s total operating profit.

Mr Dalgleish said the group’s new potable alcohol distillery in Tanzania, commissioned in August 2013, would be used as a "template that we would look to replicate across other parts of our business where we find good potable alcohol markets".

"We think Zambia is probably the next opportunity," he said.

Illovo previously supplied alcohol to markets such as Tanzania from a distillery in South Africa, but is looking to reduce logistics costs by producing in-country.

Mr Dalgleish said Illovo would look for marginal capacity increases at its plants to grow refined sugar production while adding capacity to produce either potable alcohol or fuel. This was in anticipation of any future government regulations for fuel blending, "should those take place".

It could also sell beverage-grade carbon dioxide, while investigating additional furfural production opportunities.

Meanwhile, Mr Dalgleish said difficult trading conditions in the sugar industry were expected to gradually improve, and that "the fourth year of a global production surplus might well be coming to an end".

The Brazilian market could shift from sugar to ethanol production, and an El Niño weather event would affect a number of markets. "There are a few lead indicators of shorter supply this year," he said. As a result, futures prices were edging upwards.

Since the financial year-end, producers including Illovo and Tongaat Hulett have benefited from an increase in the dollar-based reference price for sugar in South Africa, or tariff protection.

"We are already seeing a sharp decline in the quantity of imports," said Mr Dalgleish, but added that tough trading conditions were likely to continue even though "a slightly better crop" was expected.

"It’s really what we can do in terms of maximising our sales mix and driving costs from the business — that’s going to be the key determinant of our performance this year ahead," he said.

Group revenue for the year ended March was up 20% to R13.2bn, but operating profit was flat at R1.89bn due to cheap imports and an adverse fair-value adjustment.