Dubai: At the world’s largest sugar refinery, senior manager Cyrus Raja stirs his mint tea and reminisces about the height of the Middle East’s sugar rush, when the trailblazing plant would be operating at full steam.
But things have changed at the Al Khaleej Sugar Co. facility.
A bloated global sugar surplus and subdued refining premiums, allied with stiffer competition, mean Al Khaleej is facing a squeeze.
“A decade ago, nobody thought a huge sugar refinery would appear in the Middle East, a region without the correct weather to produce its own sugar,” said Kona Haque, commodities analyst at Macquarie Bank.
“But Al Khaleej showed what a success it could be and it made a lot of people in the region think about opportunities there. We could soon get to the point where we are saturated by refineries in North Africa and Middle East,” Raja said.
In Bahrain, the $150 million (Dh551 million), 600,000 metric-tonnes-a-year Arabian Sugar Co. refinery is slated to come online later this year; Etihad Sugar Co. has started building a 900,000-tonne refinery in Iraq that is due to come online at the end of 2015; and Sudan’s Kenana is also expected to open in 2014 a stand-alone sugar refinery in Port Sudan with an estimated annual capacity of 450,000 tonnes.
Taken together these three will match Al Khaleej’s current output of around 1.8 million tonnes a year, although the refinery — which sprawls across an industrial part of Dubai just a short drive, but a world away, from the showy restaurants and hotels of the city — has a total annual production capacity of around 2.5 million tonnes.
These new projects have been years in the planning. When the World Trade Organisation in 2006 capped exports from the European Union, formerly the largest exporter of white sugar, it left a huge gap in the market. The shortage was felt hard in the Middle East and North Africa, a region that has an inherent deficiency in sugar production and regular need for white sugar imports, particularly around Ramadan.
Refiners especially wanted to tap into the sweet-toothed Jordanian and Lebanese markets as well as sugar-needy Iraq, making it attractive to set up shop in the region. Al Khaleej was the first, and Macquarie Bank’s Haque believes a lot of these new projects have taken inspiration from it.
But there has been a striking change in conditions since the new projects were approved. A supply glut and weak refining premiums recently pushed raw sugar futures to a 3 1/2 -year low.
Although unfavourable weather conditions have provided some relief-in its first official estimate for the coming 2014-2015 season Kingsman, a Swiss-based commodity price-information provider owned by McGraw Hill Financial Inc., said it expects the global sugar market surplus to nearly halve to 2 million tonnes-the surplus is still very large. This balance means the whites-over-rats sugar premium, a measure of refining profitability, is around $90 a tonne, according to Al Khaleej. That is about $30 a tonne below the break-even level for toll refining — when raw sugar is imported, refined and then re-exported as white sugar or in sugar-containing products.
Still, Raja remains confident about Al Khaleej’s ability to defend its position against the upstart refineries.
“One must bear in mind that we are established in this sector and operate on a large scale, which brings certain cost benefits,” he said.