Political and legal risks
Sugar market regime
In June 2013, the member states of the EU, the European Parliament and the European Commission decided to extend the sugar market regime in its current form until the end of the sugar marketing year 2016/2017 on 30 September 2017. Up to this point, the sugar market regime remains the operating framework for the EU sugar industry. At the same time, the European Council, Parliament and Commission voted to let the sugar market regime in its current form expire thereafter. The quotas for sugar and isoglucose as well as the minimum price for sugar beet will therefore be abolished at the beginning of the sugar marketing year 2017/2018. The end of the quota system also means the end of the WTO export limit, presently set at 1.37 million tonnes. Finland is still allowed to pay its beet farmers a national subsidy of EUR 350 per hectare.
The abolition of quotas for sugar and isoglucose will have a considerable impact on the EU sugar market. It is to be expected that, without a quota system, the production of isoglucose in the EU will increase, resulting in sugar being crowded out. The European Commission and other market observers anticipate that between two and three million tonnes of isoglucose could be marketed in the EU in future, compared with around 700,000 tonnes today. Some sugar producers have also already announced their intention to expand production. Increased supplies of sugar will heighten competition even further.
In order to prepare for the changing environment as well as possible, Nordzucker is working continuously to improve its competitiveness. One important area is to increase the efficiency of sugar beet cultivation compared with alternative crops. Nordzucker is pooling all of its activities to boost farmers’ productivity in the 20 · 20 · 20 project. The Profitability plus efficiency programme was completed successfully in 2013/2014, and other steps are to follow. In future, the activities will continue to focus on increasing energy efficiency. All areas of the company and all functions are preparing intensively for the end of the sugar market regime in 2017.
The Doha round of WTO negotiations resulted in the first resolutions at the conference of ministers held in December 2013 in Bali. These resolutions have no effect on the EU sugar sector, however. They mainly relate to the administration of tariff quotas and stockpiling in developing countries. It was also agreed to abolish all export subsidies for agricultural products “in the foreseeable future”. This also plays no role for the EU, because export subsidies have already been phased out.
By contrast, there was no discussion and no decision in Bali on a possible reduction of import duties in the agricultural sector. The intention is nonetheless to try and establish a timetable for discussing this matter in the course of 2014. No resolutions are generally expected before 2016, however.
Reducing protection against imports without taking the special interests of the sugar industry into account would make competition in the EU even more intense than is already the case following the abolition of the sugar market regime. Import duties protect the European sugar industry from imports from big sugar-exporting countries in excess of those volumes that enter the European market at reduced rates or duty-free via preferential agreements with least developed countries (LDC) or bilateral trade agreements. Without these safeguards, the imports to the EU would only be determined by global market prices. This global market price is often affected by sales of surplus produce and state programmes, making it a price influenced by state aid. At the same time, reducing import duties would make prices in the EU even more volatile. Nordzucker and its European competitors are campaigning for these external safeguards to be maintained in their current form. In parallel, the company is also using the measures described in the section above to prepare for the possibility that import duties are reduced even further.
EU free trade agreements
Free trade agreements continue to become more and more important for the European Union. In 2013, the free trade agreements with Columbia, Peru and Central American states came into force. These allow the countries to export around 250,000 tonnes of sugar per year to the EU free of customs duties. Agreements have also been signed with Ukraine, Singapore, Armenia, Georgia and Moldova, but these have not yet come into effect. Additional regulations for existing trade agreements are also under discussion, with, for example, the Mediterranean countries or the Republic of South Africa.
Negotiations are taking place with 20 other states. This group includes sugar exporters such as Brazil, together with the other MERCOSUR states, the USA, Canada, India, Malaysia, Thailand and Vietnam as well as the Gulf states. The most important for the EU sugar market are the negotiations with the MERCOSUR states of the South American economic area, which are still not advancing. As one of the largest sugar exporters, Brazil, in particular, is pressing for an import quota for sugar and ethanol.
Additional costs of CO2 certificates
As a company that emits carbon dioxide (CO2) from generating its own electricity and heat, Nordzucker requires corresponding certificates for its emissions. The company is allotted some of its certificates free of charge.
The third phase of the CO2 emissions trading scheme that has been in place in the EU since 2005 began in 2013. All companies subject to emissions trading have to buy all the certificates needed for power generation at auction. Nordzucker receives certificates for heat generation based on natural gas, less a cross-sector discount, free of charge until 2015, as the European Commission has listed the entire industry as being at risk of carbon leakage. For the industries on this list, the assumption is that the additional costs of CO2 certificates could result in production being outsourced to non-EU countries.
Rising prices for CO2 certificates could increase the already high costs of environmental protection even further, since as the drying facilities and other equipment not previously taken into account are also subject to emissions trading as of 2013. To a certain extent, a further price increase is politically motivated, although the sugar industry has already had considerable success in reducing its CO2 emissions. The carbon leakage list is to be reviewed in 2015, and Nordzucker currently anticipates that the sugar industry will stay on the list. Nordzucker is also working hard to cut its CO2 emissions even further by means of investments to reduce its energy consumption. This is an important step to increase the sustainability of our business.
In February 2014, the German competition authority concluded its investigation into alleged breaches of competition law and the ongoing antitrust proceedings against Nordzucker and other sugar producers. Nordzucker AG accepted a fine of EUR 8.5 million. The risk of third-party claims for damages cannot be ruled out. However, Nordzucker AG is currently assuming that any such claims would only have a very slight chance of success.
The companies in the Nordzucker Group are also subject to various statutory regulations, which can give rise to liability risks. They include, in particular, the sugar market regime in connection with the relevant provisions of customs and licensing law as well as food and animal feed law. Further risks can also arise from tax regulations in the various countries in which the Nordzucker Group operates.