Russian sugar faces big challenges

- Last updated on GMT

Related tags: Sugar, Food, Supply and demand

The Russian sugar industry has suffered under the weight of poor
logistics, erratic raw supplies and a lack of financing. We spoke
to a leading industry analysts to find out how the industry is
facing up to these challenges and what lies in store.

The market for sugar in Russia has witnessed phenomenal growth in recent years, in direct correlation with the growth in snack, confectionery and processed foods in general. However, the supply of sugar has not always proved to be reliable, as Svetlana Nikolaeva, a senior analyst with the Internationl Sugar Company (Russia), pointed out.

"The demands for sugar from the food processing industry were high in 2003 and to feed this there was a significant surge in auction purchases which in fact exceeded supply requirements.This meant that sugar processing factories worked not on demand, but 'for immediate processing' requirements. This problem was exacerbated by the fact that the sugar companies have limited opportunities for raw sugar warehousing and storage."

The result was that the excess sugar ordered by the companies could not be stored. In turn it is estimated that sugar companies have suffered heavy losses - for each ton of sugar they bought, a significant percentage was spoiled through lack of storage capacity. Now the industry is having to make up for this losses by trying to improve its business prospects and logistics in the year ahead.

Although the market has opened up in recent years, allowing big western sugar companies to enter the fray, Russian players still play an important role. However, the operations of domestic players have frequently suffered through lack of investment and overall the market still remains largely fragmented.

"In Russia, there are basically two leading western companies - Sucden and Cargill,"​ said Nikolaeva. "Other companies are either owned or supervised by Russian holdings or independent domestic owners. To say that western companies dominate the Russian sugar market is not entirely true, as there few leading players. On the contrary, there are many domestic importing companies, as well as a host of domestic newcomers that have recently appeared on the market."

There has been one positive development in recent years and that is the fact that Russian raw sugar importers are now becoming increasingly active in the processing stage as well, streamlining the entire process, reducing costs and ensuring better supplies, according to Nikolaeva.

Quotas have also been a big issue for the industry in the past year, with the government trying to step in to reduce uncertainties in the supply of sugar.

"Since the beginning of 2004, all quotas on sugar have been cancelled,"​ said Nikolaeva. "Now a system of monthly duties defined according to the current global supply situation on sugar exchanges has been brought into force. The cancellation of quotas is the best solution for solving the problem of glut on the market.

"This means that now there is an opportunity to trade according to the volumes of import of sugar that are available on the market, whereas before it was necessary to conduct trade according to the established quotas."

High consumption, low commodity supply​The Russian sugar market is distinguished by a lack of raw sugar and huge consumption levels. As a result, large volumes of raw sugar beet are imported from Belarus and Kazakhstan, and this sugar is very competitively priced compared to domestically produced beet. However, these imports help to feed demand for the Russian market at a competitive price, Nikolaeva points out.

Following years of rising demand for sugar, the situation has now stabilised, as consumer demands for finished food items starts to level off. Some of this can also be attributed to a number of alternative sugar products hitting the market. Otherwise, Nikolaeva stresses, the supply of raw material for further processing is now much improved, with manufacturers well placed to meet demands.

Financing continues to be an issue

But the next phase of development will be harder to manage. "The sugar industry is now at a critical stage.Most sugar companies want to secure financing, but banks are notwilling to invest in the sector,"​ said Nikolaeva.

"In the period 2000 to 2002 Russian sugar manufacturers secured significant investments,which in turn allowed the industry to invest in upgrading processing equipment. Now, because of recession in the financing sector, the continuedrenewal of equipment has not been maintained, which means that the need for continued investment is steadily increasing again.

"Sugar companies in Russia have suffered great losses in 2003, not because of cheap sugar,but due to the huge volumes of sugar that had to be imported."

Although the Russian sugar market has undergone a year of upheaval, companies are hoping that the coming 12 months prove more successful as the market tunes into the global sugar supply. However, continued investment will soon be necessary if the industry is to remain efficient and keep pace with continued demands.

The interview for this article was bought about through the kind co-operation of Moscow-based market analysis company Market Advice​.

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