The Standard & Poor's Ratings Services study, entitled "Sweet 'N Slow: Gradual Liberalisation Of EU Sugar Regime Preserves Credit Quality", provides respite to companies such as Suedzucker and Tate & Lyle, who are facing up to tough new market conditions.
"We consider that the gradual nature of the reform provides a fairly protected environment for European manufacturers over the next four years, and we continue to believe that full deregulation in the EU market for sugar production and processing is remote," said Standard & Poor's credit analyst Olaf Toelke.
For this reason, Standard & Poor's today affirmed its ratings on the two largest European sugar, starches, and sweeteners manufacturers, Germany-based Suedzucker AG (A-/Stable/A-2), and UK-based Tate & Lyle (BBB/Stable/A-2).
The EC itself is also confident that the sugar reforms will give producers a long-term competitive future. The final deal certainly featured a number of concessions - first there was the climb-down from the original proposed 39 per cent price cut to a figure of 36 per cent, and most significantly for sugar producers, there was agreement the sector would be compensated for, on average, 64.2 per cent of this price cut.
This price cut has also been coupled with a generous four year restructuring fund. This scheme for EU sugar factories, and isoglucose and inulin syrup producers, consists of a payment to encourage factory closure to encourage less competitive producers to leave the sector.
Such concessions have frustrated sugar users, who point out that European sugar is still twice as expensive as world prices. But following the EU agricultural council's recent approval of the European Commission's proposals, the final implementation of the reform, scheduled for 1 July 2006, is but a formality.
Standard & Poor's believes that over the initial four years of the reform process, transition measures, such as the use of protected reference prices and the reliance on a voluntary incentive scheme for farmers and processors to relinquish their quotas, should ensure that the reform's objectives are achieved smoothly.
In other words, it will reduce EU sugar production by about one-third by encouraging the exit of the less efficient manufacturers.
"Although all companies will be affected by the changes in price and production levels of sugar beet, sugar, or associated by-products, Tate & Lyle will face the largest direct impact, although its diversification will allow it to fully offset the effects," said Standard & Poor's credit analyst Michael Seewald.
"Suedzucker will face gradually deteriorating market protection, but the transition measures guarantee profitability and a likely increase in market share."
Further details of the rationale behind the ratings on these two companies can be obtained from research updates entitled "Suedzucker AG 'A-/A-2' Ratings Affirmed After Assessment Of EU Sugar Reform; Outlook Stable" and "Tate & Lyle 'BBB/A-2' Ratings Affirmed Following Assessment Of EU Sugar Reform", published this week on RatingsDirect, Standard & Poor's web-based credit analysis system.
Standard & Poor's is one of the world's foremost providers of independent credit ratings, indices and risk evaluations. It employs 6,300 employees located in 20 countries.