Since the reform of the sugar market regime in 2006, fluctuations in the world market price have had a considerable impact on markets in the EU. To cover its supply, the EU is dependent on imports from ACP and LDC countries and world markets. World market prices fell sharply again over the course of the past financial year. With world market prices being lower, there was a greater incentive for ACP countries and LDCs to export their sugar to the EU, and imports therefore picked up. This will ensure that market prices in the EU remain under pressure in future, which could diminish Nordzucker’s profitability considerably. The steps to boost competitiveness described in the section on the sugar market regime are preparing Nordzucker to meet these challenges, too.
As a foodstuff, sugar has repeatedly been presented in the media as unhealthy or even harmful. Individual scientists believe that the rising number of certain diseases can be linked to higher sugar consumption. In its twelfth Nutrition Report published in December 2012, the German Nutrition Society (DGE) found that annual sugar sales in Germany have been constant for years. It is therefore the change towards a less active lifestyle that leads to excess weight and obesity. Public and media debates may affect consumers’ eating habits and thus influence demand for sugar.
The German Sugar Trade Association (WVZ) has launched an information campaign (Forum Zucker; www.mitzucker.de) to present the relationship between sugar and health objectively, in order to provide a counterweight to the negative media reporting and the negative public perception. Nordzucker AG expressly supports these efforts, but at the same time also campaigns for more public information about exercise and healthy eating.
Securing raw materials
For farmers, sugar beet competes with other arable crops. The decision whether to plant sugar beet or other crops depends to a large extent on relative price levels for different crops and on the yield that can be obtained regionally. Attractive conditions for growing other crops also increase the cost pressure for purchases of sugar beet. As competition becomes more intense, particularly after the sugar market regime expires, it is therefore all the more important that high levels of productivity enable farmers to supply beet at prices that are competitive and attractive for them the same time.
The most important long-term element of securing raw materials is the 20 · 20 · 20 yield improvement programme. Nordzucker has set itself the Group-wide target of achieving a sugar yield of 20 tonnes per hectare with 20 per cent of farmers in 2020. This programme is very important for safeguarding the relative attractiveness of sugar beet cultivation compared with other arable crops, especially given the volatility of agricultural markets. To reach this target Nordzucker is working closely with farmers, agricultural associations and other companies in the value chain.
Nordzucker signs supply contracts with the beet farmers well in advance in order to secure volumes in the short and medium term. The company buys some of its industrial beet on one-year contracts and some on multi-year contracts. All contracts offer attractive terms compared with alternative crops.
For the existing multi-year industrial beet contracts the company has agreed on a number of different pricing models. In Germany, farmers can choose between fixed beet prices and a variable price for industrial beet that is indexed to prices for wheat and rapeseed. Similar options for contracts are available in all the Group’s regions, indexing the beet prices to those for wheat or sugar, for example, or to local company performance. These mechanisms ensure that the beet prices paid in each instance are competitive.
The current liquidity of supplies and stable prices on energy markets enabled Nordzucker to reduce the cost of purchasing energy compared with the previous year. New sources of energy in the USA and their sustainable extraction resulted in a healthy market supply. Despite this, the unresolved problems in the Middle East require attention and could have an adverse effect on these developments.
Investments made to date in energy efficiency and the steps taken for energy management certification under DIN ISO 50001 and EMAS are beginning to have an effect and also contribute to reducing expenses.
Variable purchasing contracts for energy also reduce the risk of price developments.
Dependence on individual suppliers
The reduction of sugar production capacities in the course of the sugar market reform in 2006 led to a process of concentration among suppliers. This has often resulted in a monopoly among providers of equipment made especially for the sugar industry, with correspondingly high prices. In some cases, this problem is exacerbated by the fact that Nordzucker deliberately standardises technologies and concentrates its purchases on individual suppliers.
The limited number of suppliers entails the risk of increased dependence, if a supplier should become insolvent for example, and of price increases. To counter this trend, a global sourcing programme has been launched to identify potential alternative suppliers. A marketing campaign also aims to attract new engineering companies to sugar technology.
Nordzucker has been able to largely avoid price increases for the purchase of components by means of long-term framework agreements. The company will also achieve additional savings with its Profitability plus programme, by qualifying European competitors for selected products and by standardising aspects of maintenance and packaging.