Jamaica has had one hell of a time trying to get their sugar industry off-loaded onto the private sector, with few wanting to take on old mills in an unfriendly economic climate. They’ve managed to pull it off at last but succeeding on one hand may have brought about some unintended consequences on the other hand.
The key was really to keep the government from sinking any further into debt while making sure the mills kept operating so that a huge chunk of the island’s workforce didn’t suddenly find itself without anything to do. In order to make the five formerly government-owned mills the least bit interesting to private investors, they had to take over the debt. Well, they did that. Then they had to keep paying for the mills to operate until they were sold. They did that too. Together the total came to about J$35 billion (US$405.2 million) that the government is now responsible for.
But at the very least, as of this season that started ahead of schedule in mid-January, the government doesn’t have to keep throwing good money after bad. So there’s a savings to the national coffers, in a sense. Now they just have to pay down what’s left.
The poor state of the mills, the fields and the economy meant that the government wasn’t able to recoup much at all when it came to finally selling them off. Despite their poor condition, the five mills were valued at J$14.84 billion but the government only managed to sell them for a total of J$1.03 billion. That’s a huge write-off for the government on top of the debt it has to shoulder, but as they say, at least the mills are not their problem anymore.
With the start of the new crush, the country’s industry is all smiles. Renovations at the newly privatised mills mean that production efficiency is up significantly, with cane crush up more than 10% and sugar production up by more than a quarter at St. Thomas. Long Pond just started crushing after a year-long hiatus that saw its new owners invest US$10 million in upgrades. And the new Chinese owners of Frome, Monymusk and Bernard Lodge have supposedly put in 50 new pieces of equipment with further upgrades expected to the tune of J$1.1 billion. They’re even going to build a new mill at Monymusk by 2016.
But they’ve also decided to take themselves out of the island-wide marketing pool for sugar, which wasn’t exactly part of the deal.
So despite the fact that the early start to the crush meant that 20,000 metric tonnes of sugar went off to ED&F Man a month early while another 20,000 tonnes is being loaded at the moment, the ability to secure enough sugar to supply future contracts is at jeopardy. This is exactly the kind of worry that the Australian sugar industry had when another Chinese company came in to buy a local sugar company, but COFCO promised that Tully’s sugar would remain in the QSL marketing pool for the foreseeable future.
So here’s COMPLANT, with the season already started and they’ve said that as of the end of the 2011/12 season, they’re pulling their sugar out of the marketing pool. That’s three out of five former government-owned mills suddenly marketing on their own and putting Jamaica Cane Product Sales (JCPS) into a tight spot.
Despite insistence by many an analyst that there’s a sugar surplus, that’s not entirely believable to the trade. They’re out there competing for as much sugar as they can get, especially getting raws to Europe for refining that have become ever so difficult to come by in recent years. In the case of Jamaica, it’s ED&F Man vs. Tate & Lyle, and without COMPLANT’s sugar, reaching those goals are going to be mighty hard.
At the moment, ED&F Man has a deal to buy 80,000 tonnes at US$936.98 per tonne for 2011/12. JCPS is foregoing exports to the US this year in favour of better prices at home, and at the same time will boost its shipments to Europe, presumably under ED&F Man at the set price for 100,000 tonnes.
But there’s this tug of war going on for the future supplies coming from the island too. Tate & Lyle it seems wants their hands on 150,000 tonnes between 2012-2015 at a value of US$224 million. But with the future supply of Frome, Monymusk and Bernard Lodge now out of the picture, it seems only 50,000 tonnes per year can be guaranteed. Considering that the company has supposedly tried to lock in 200,000 tonnes per year for five years since the beginning of last year’s season, a deal that hasn’t yet been stuck, a guaranteed supply of 50,000 tonnes may signal to Europe that Jamaica isn’t quite as serious at it hopes to be.
Those dreams of finally cashing in in Europe are crashing down and it’s all the fault of the Chinese. An easy assumption might be that exiting the pool would leave them free to send all of their production to China, as it was assumed COFCO would do with all of Tully’s sugar. But what if, instead, COMPLANT is just looking for a better deal from Europe than what they think the pooling mechanism can get.
Perhaps they think they can secure a sweeter deal with the UK giants on their own, and that’s something that worries the other producers even more. It’s pure divide and conquer.
Seriously, it’s right there in Chapter 3 of Sun Tzu’s Art of War: “It is the rule in war, if ten times the enemy's strength, surround them; if five times, attack them; if double, be able to divide them; if equal, engage them; if fewer, be able to evade them; if weaker, be able to avoid them.”
With COMPLANT now owning three of the five former government mills, then that’s pretty close to double. So the strategy, according to Sun Tzu, is to divide them. And divide the island’s sugar supply COMPLANT is done. The question now becomes, what will they do now? Strangle the rest of the industry so they can buy it up piece by piece or just be satisfied with having won the day?