Nigeria: Dangote Sugar faces margin pressure from Russia-Ukraine oil shock

By David Whitehouse

Posted on Monday, 7 March 2022 15:51, updated on Thursday, 23 June 2022 12:26
Sugarcane field in development stage is seen at a farm in Jacarezinho
A sugarcane field in Jacarezinho, Brazil January 1, 2019. Higher oil prices pull sugar prices with them by creating more demand for the cane. REUTERS/Marcelo Texeira

Dangote Sugar’s profitability is set to come under pressure as the war in Ukraine drives oil prices to their highest since 2008.

“If war continues for a long period, there will be an impact on margins,” CEO Ravindra Singhvi said at a briefing on 3 March. Singhvi hopes to be able to pass on higher input costs to customers, but says there are limits as to how far the company can go. “We will take the appropriate measures.”

Higher oil prices create competition for the raw materials used in sugar. The juice from crushing sugarcane can also be fermented into alcohol. The surge in oil increases the demand to use the cane to make very high purity alcohol, ethanol, which is then blended with petrol.

The company forecasts a global sugar market supply deficit of 3.8m tonnes in 2021-2022, with production failing to match consumption of 174.m tonnes. Dangote Sugar’s refinery at Apapa Wharf refines raw sugar imported from Brazil. It predicts that Brazilian 2021-2022 sugar production will drop from 38m tonnes to 32m tonnes, citing factors that include unfavourably dry weather and fires in cultivating fields.

  • The company already raised some of its prices in the week of 28 February, and in the “short term there is an impact on volumes”, Singhvi said.
  • The fourth quarter of 2021, when Dangote Sugar faced increased foreign exchange pressures and higher import prices, suggests that the company has limited ability to pass on higher costs.
  • “We couldn’t pass on the full burden of higher raw sugar prices,” Singhvi said.

Even before the Russian invasion, Dangote Sugar and Flour Mills of Nigeria were forced to rebut claims by rival BUA Foods that they had suspended sugar sales in a bid to engineer scarcity and drive up the price. BUA said it had been “inundated” with calls from customers wanting to know if it would follow Dangote Sugar and Flour Mills in halting sales.

Backward integration

Dangote Sugar, BUA and Flour Mills’s Golden Sugar are the only companies allowed to import sugar into Nigeria following the central bank’s conclusion last year that they have made “reasonable progress” in achieving the backward integration programme, which is designed to encourage local sugar production.

Last month, BUA claimed that Flour Mills halted sales as a result of the government’s decision to decline their 2022 raw sugar allocation. However, Flour Mills rejects that claim. In February, the government said there had been no reduction in production, and that there was no prospect of scarcity.

Full-year 2021 profit for Dangote Sugar fell 26% to 22bn naira ($53m), even as sales increased by 29%. Bottom line performance was “hugely” affected by the increase in costs of raw materials and gas, the company said in its earning presentation.

Dangote Sugar, which is two-thirds owned by Dangote Industries, is pressing ahead with the 10-year backward integration plan to produce 1.5m tonnes of sugar a year from locally grown sugarcane.

  • The plan aims to create 75,000 jobs, though the company says it anticipates an increase in the cost to completion in naira terms.
  • Aliko Dangote said Nigeria’s sugar master plan can save the country up to $700m annually in foreign exchange.
  • Bankers have “shown interest” in funding for backward integration, and fundraising proposals will be in the market soon, Singhvi said.

Bottom line

Aggressive competition from BUA Foods will limit Dangote’s ability to pass on higher sugar costs.

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