Review of the Vietnam Sugar Sector Report for: Bunge February 2012 Research and analysis to inform your business decisions LMC International Oxford 14-16 George Street, Oxford, OX1 2AF, UK t: +44 1865 791737, f: +44 1865 791739 info@lmc.co.uk New York 1841 Broadway, New York, NY 10023, USA t: +1 (212) 586-2427, f: +1 (212) 397-4756 info@lmc-ny.com Singapore M/S LMC International Ltd Singapore Branch Siglap Post Office, PO Box 272 Singapore 914503 info@lmc-sg.com Kuala Lumpur B-03-19, Empire Soho, Empire Subang, Jalan SS16/1, SS16, 47500 Subang Jaya, Selangor Darul Ehsan, Malaysia t: +603 5611 9337 info@lmc-kl.com www.lmc.co.uk Ssb126 LMC International Develops Unique, Independent Research For over 30 years LMC has delivered in-depth, specialist analysis to leading international companies working in agricultural commodities, biofuels, foods and industrial materials, as well as their end-use markets. Our research covers thirteen major industry sectors: Bio-based Chemicals Feed Ingredients Biofuels & Biomass Coffee Oils & Oilseeds Cocoa Oleochemicals Food Ingredients Grains Rubber Sugar & Sweeteners Tyres Starch & Fermentation Recognised by many of the world’s major companies as experts in research, LMC provides the business world with strategic insights unavailable elsewhere. www.lmc.co.uk © LMC International Ltd, 2012. All rights are reserved in all countries. No material may be reproduced or transmitted, in whole or in part, in any manner, without written consent. While LMC International endeavours to ensure the accuracy of the data, estimates and forecasts contained in this study, any decisions based on them (including those involving investment and planning) are at the client's own risk. LMC International can accept no liability regarding information, analysis and forecasts contained in the study. © LMC International, 2012 The contents of this study must remain confidential within the subscribing organisation Contents Introduction I1 Section 1: Overview of the Vietnam Sugar Sector 1 Key conclusions 1 Industry structure 1 Supply/demand balance 6 Sugar consumption 7 Trade flows 9 Consumption of alternative sweeteners 11 Prices dynamics 11 Cane prices 11 Sugar prices 12 Regional price differentials 14 Retail prices 16 Molasses prices 16 Section 2: Sugar Policy 19 Key conclusions 19 Production policies 19 For sugarcane producers 20 For sugar processing companies 21 Import controls 21 Import duties 21 Import licences 22 ASEAN Economic Community 23 Section 3: The Sugar Value Chain 24 Key conclusions 24 The sugar value chain 24 Profitability at different stages of the value chain 26 Results 26 Evolution of margins 29 Section 4: The Cost of Cane 30 Key conclusions 30 The cost of growing sugarcane 30 Competition from alternative crops 32 North Central and Central Coastal areas 34 Central Highlands 38 Southeast 40 Mekong River Delta 43 Cane supply price projections 45 Table of Contents © LMC International, 2012 The contents of this study must remain confidential within the subscribing organisation Alternative crop price projections 45 Projected cane supply prices 46 Issues for the future 47 The influence of rising labour costs 47 Yield improvements 48 Section 5: Sugar Supply Prices 49 Key conclusions 49 Assumptions 50 Processing costs 50 The outlook for sugar prices 51 Sugar supply prices 52 North Central/Central Coastal 52 Central Highlands 53 Southeast 54 Mekong River Delta 55 Section 6: The Potential for Cogeneration and Ethanol 56 Key conclusions 56 The potential for cogeneration 56 Policy on power 57 The potential for ethanol 58 Fuel ethanol demand 58 Fuel ethanol supply 59 Cassava as a feedstock 59 Molasses-based distilleries 60 Cost comparison of cassava and molasses based ethanol 60 Conclusions for molasses-based ethanol and cane supply prices 62 Section 7: Strategic Conclusions 63 The future structure of the Vietnam sugar market 63 The Industry in the South — rationalisation expected 63 The industry in the Central regions — possible expansion? 65 Will Vietnam be deficit in the future? 66 How can the deficit be supplied? 68 © LMC International, 2012 The contents of this study must remain confidential within the subscribing organisation List of Tables Table 1.1: Regional break-down of sugar mills in Vietnam 3 Table 1.2: Sugar consumption estimates by region 8 Table 1.3: Sugar supply/demand balance by region 9 Table 1.4: Supply/demand and trade balance by region 10 Table 1.5: Consumption of alternative sweeteners in Vietnam 12 Table 1.6: Cane prices by region 12 Table 1.7: Import parity calculation for official and illegal imports 14 Table 1.8: Estimated regional differentials in major producing regions vs. HCM City 17 Table 2.1: Production targets vs. actual 20 Table 2.2: Major importers and import volumes in 2010 22 Table 3.1: Distribution of the profit in the value chain 26 Table 4.1: The cost of growing sugarcane by region 31 Table 4.2: Cane supply prices in the North Central and Central Coastal region 37 Table 4.3: Cane supply prices in the Central Highlands 39 Table 4.4: Cane supply prices in the Southeast 42 Table 4.5: Cane supply prices in the Mekong River Delta 44 Table 5.1: Processing costs 50 Table 5.2: Import parity calculation 52 Table 5.3: Sugar supply prices — North Central/Central Coastal 52 Table 5.4: Sugar supply prices — Central Highlands 53 Table 5.5: Sugar supply prices — Southeast 54 Table 5.6: Sugar supply prices — Mekong River Delta 55 Table 6.1: Electricity prices received by selected sugar industries 57 Table 6.2: Fuel ethanol distilleries in Vietnam 59 Table 6.3: Impact of fuel ethanol production on cassava supply/demand balance 60 Table 6.4: Ethanol distilleries that use molasses as a feedstock 60 Table 6.5: Cassava based ethanol production cost 61 Table 6.6: Molasses based ethanol production cost 61 Table 6.7: Projected ethanol production cost 61 Table 6.8: Ethanol import parity calculation from Thailand 62 Table 6.9: Theoretical cassava price that could be offered by ethanol producers 62 Table 7.1: Mill ownership in the Southeast and Mekong Delta 63 Table 7.2: Mills in the Mekong River Delta and Southeast categorised by size and capacity utilisation 64 Table 7.3: Possible future structure of the industry in the South 65 Table 7.4: Mills in the North Midlands, North Central, Central Coastal and Central Highlands categorised by size and capacity utilisation 66 Table 7.5: Increase in production required in the Central region to achieve self sufficiency in 2015 67 © LMC International, 2012 The contents of this study must remain confidential within the subscribing organisation List of Diagrams Diagram 1.1: Sugar production by region 3 Diagram 1.2: Evolution of regional sugar production over time 4 Diagram 1.3: Average milling capacity 4 Diagram 1.4: Number of mills in operation 4 Diagram 1.5: Evolution of regional cane yields over time 5 Diagram 1.6: Cane yields by region 5 Diagram 1.7: TC:TS by region 5 Diagram 1.8: Sugar yields by region 5 Diagram 1.9: Net operating days by region 6 Diagram 1.10: Capacity utilization 6 Diagram 1.11: National supply/demand balance 7 Diagram 1.12: Major producers of RE sugar 7 Diagram 1.13: Supply/demand balance by region 9 Diagram 1.14: Consumption of major non-caloric sweeteners in Vietnam 11 Diagram 1.15: Cane prices 12 Diagram 1.16: Ex-factory prices vs. import parity and the cost of illegal imports 13 Diagram 1.17: Price premium in HCM vs. Hanoi 14 Diagram 1.18: Relative prices in Vietnam and China 15 Diagram 1.19: Ex factory prices vs. retail prices 16 Diagram 1.20: Molasses price estimates in Vietnam vs. Thai export prices 17 Diagram 2.1: Evolution of import duties for raw and refined sugar 22 Diagram 3.1: Sugar value chain 24 Diagram 3.2: Sugar consumption by sector 25 Diagram 3.3: Direct consumption by sector 25 Diagram 3.4: Sugar value chain, average 2009-2011 — North Central/Central Coast 27 Diagram 3.5: Sugar value chain, average 2009-2011 — Central Highlands 27 Diagram 3.6: Sugar value chain, average 2009-2011 — Southeast 28 Diagram 3.7: Sugar value chain, average 2009-2011 — Mekong River Delta 28 Diagram 3.8: Grower and Miller margins — North Central/Central Coastal 29 Diagram 3.9: Grower and Miller margins — Central Highlands 29 Diagram 3.10: Grower and Miller margins — Southeast 29 Diagram 3.11: Grower and Miller margins — Mekong River Delta 29 Diagram 4.1: Field wages by region 31 Diagram 4.2: Cane prices vs. cane costs at the farm gate 32 Diagram 4.3: Rice and cassava prices at the farm gate 34 Diagram 4.4: Rubber and coffee prices at the farm gate 34 Diagram 4.5: Area of major crops grown in the North Central and Central Coastal areas 35 Diagram 4.6: Sugarcane yields vs. national average 36 Diagram 4.7: Cassava yields vs. national average 36 Diagram 4.8: Rice yields vs. National average 36 Diagram 4.9: Rubber yields vs. national average 36 Diagram 4.10: Profit-equalising cane price vs. actual cane price paid (North Central and Central Coastal areas) 37 Diagram 4.11: Major crops grown in the Central Highlands 38 Diagram 4.12: Yields of major crops vs. national average (Central Highlands) 39 Diagram 4.13: Profit-equalising cane price vs. actual cane price (Central Highlands) 39 Diagram 4.14: Area planted to major crops in the Southeast 41 © LMC International, 2012 The contents of this study must remain confidential within the subscribing organisation Diagram 4.15: Yields of major crops vs. national average (Southeast) 41 Diagram 4.16: Profit-equalising cane prices vs. actual cane price (Southeast) 42 Diagram 4.17: Area planted to major crops in the Mekong River Delta 43 Diagram 4.18: Cane yields vs. national average 44 Diagram 4.19: Rice yields vs. national average 44 Diagram 4.20: Profit-equalising cane price vs. actual cane price (Mekong River Delta) 45 Diagram 4.21: Projected long term cane supply prices in North Central/Central Coast 46 Diagram 4.22: Projected long term cane supply prices in Central Highlands 47 Diagram 4.23: Projected long term cane supply prices in the Southeast/Mekong Delta 47 Diagram 4.24: Labour costs as a proportion of total costs 48 Diagram 4.25: Historical growth in yields 48 Diagram 5.1: Sugar supply prices by region vs. import parity 49 Diagram 5.2: Tonnes Cane: tonnes sugar ratio 51 Diagram 5.3: Sugar supply prices — North Central/Central Coastal 53 Diagram 5.4: Sugar supply prices — Central Highlands 53 Diagram 5.5: Sugar supply prices— Southeast 54 Diagram 5.6: Sugar supply prices — Mekong River Delta 55 Diagram 6.1: Sources of electricity generation in Vietnam 57 Diagram 6.2: Projected ethanol demand in Vietnam 59 Diagram 7.1: Historical and required area growth in the Central region 68 © LMC International, 2012 The contents of this study must remain confidential within the subscribing organisation List of Maps Map 1.1: Regional breakdown of Vietnam’s sugar industry 2 Map 1.2: Trade flows by region 10 Map 4.1: Major alternative crops to sugarcane by region 33 Introduction © LMC International, 2012 I1 The contents of this study must remain confidential within the subscribing organisation This report provides a detailed review of the Vietnam sugar sector. The report is presented in seven sections: Section 1: An Overview of the Vietnam Sugar Sector. The report begins by providing an overview of the Vietnam sugar sector focusing on sugar production, consumption and prices in each region of the country. Section 2: Sugar Policy. In this section, we provide an overview of sugar policy in Vietnam and the implications of increased economic integration within the AEC. Section 3: The Sugar Value Chain. In this section, assess the level of value addition at each stage of the sugar value chain. This is designed to identify which market participants are able to capture the value generated from sugar production. Section 4: The Cost of Cane. Cane is grown throughput Vietnam. As a result, the cost of cane differs between regions depending on the competition from other crops as well as competition between mills for cane. In this section, we analyse the competitive environment facing cane in each region and discuss the implications for cane production by region over the next 5-10 years. Section 5: Sugar Supply Prices. Based on our projections of the cost of cane in each region, in this section, we assess the price at which each region will be able to supply sugar going forward. This will allow us to identify the milling groups that are in the strongest position to compete in the future. Section 6: The Potential for Cogeneration and Ethanol. One way of improving the competitive position of sugar producers is to move into value adding activities such as electricity and ethanol production. In this section, we consider the opportunities for sugar producers in these sectors. Section 7: Strategic Conclusions. In this final section, we draw together our analysis to answer a number of key questions including the prospect for Vietnam to become a significant importer in the future, and identify which milling groups within Vietnam are best placed to compete in a more liberalised market environment. There are also three annexes: Annex 1: Detailed mill Performance Data Annex 2: Crop Cost Breakdown Annex 3: The Outlook for Alternative Crop Prices Introduction Section 1: Overview of the Vietnam Sugar Sector © LMC International, 2012 1 The contents of this study must remain confidential within the subscribing organisation Vietnam is expected to be more or less self-sufficient in sugar in 2011/12. This is the result of a massive expansion of the formal sugar sector in the second half of the 1990s and the first few years of the 2000s, during which over 30 cane mills were built. Although cane is grown throughout the country, field and factory performance is mixed. As a result, the industry has been rationalising to improve its competitiveness in the face of greater competition from regional sugar imports as Vietnam integrates within the ASEAN economic area. At the same time, domestic demand is growing rapidly on the back of strong economic growth. In this section, we provide an overview of the Vietnam sugar sector focusing on sugar production and consumption in each region, as well as price dynamics for both sugar and molasses. Key conclusions  The Vietnam sugar sector is characterised by a large number of mainly small scale mills, which are principally located in four main producing regions: North/Central, Central Coastal, Central Highlands, Southeast and the Mekong River Delta.  Cane yields are relatively poor by international standards, but have been improving. Cane yields are highest in the Mekong Delta in the far south. However, cane quality in this area is poor compared to the rest of the country.  Sugar consumption is concentrated in the south of the country, where around 950,000 tonnes (67%) is consumed. This is due to the higher level of incomes, urbanisation and strong demand from industrial end users in this part of the country. Both the north and the south of the country are sugar deficit regions, where demand is met by imports (both official and smuggled) and with sugar transported from the central region.  In general, domestic prices have tended to follow the cost of imports. However, prices have not always reflected the full value of the import tariff (particularly when the tariff has set at a higher level) because of the prevalence of smuggled sugar, particularly in the south of the country.  Price dynamics with the country are complicated. While prices in the South have tended to trade at a premium to the North, this has not always been the case. Assuming that domestic prices reflect the cost of smuggled sugar, and that exports to China continue, it is reasonable to assume that prices will be slightly higher in the North than the South in the future.  The retail market is fragmented, with only around 15% of direct consumption sugar being branded. The vast majority is sold unbranded in convenience stores. The majority of consumers are considered to be highly price sensitive and unwilling to pay a premium for brands. Industry structure The sugar industry in Vietnam consists of 38 mills that are spread throughout the country. Map 1.1 shows the geographical location of the industry, along with indicators of capacity and production levels, while Table 1.1 gives details of the sugar mills in each region. Detailed mill by mill production data is provided in Annex 1.  The Mekong River Delta in the South of the country is home to ten of the country’s 38 mills and accounts for about around a quarter of national sugar production. Section 1: Overview of the Vietnam Sugar Sector [...]... 1,400 0 Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11 Margin RS Sugar Ex-Factory, excl VAT US$/tonne Actual Retail, incl VAT Molasses prices Despite being a net importer, molasses prices in Vietnam have tended to reflect export parity This has been due to poor marketing and the cost of transportation to the south of the country... within the subscribing organisation 13 Section 1: Overview of the Vietnam Sugar Sector Diagram 1.16: Ex-factory prices vs import parity and the cost of illegal imports 1,100 1,000 900 US$/tonne 800 700 600 500 400 300 200 Apr-07 Oct-07 Apr-08 Oct-08 Import Parity Price Apr-09 Actual price Oct-09 Apr-10 Illegal Imports Oct-10 Table 1.7 presents an example of the cost of importing sugar into Vietnam. .. still achieves the highest overall sugar yields in the country  Sugar yields in the North Midlands, Southeast and Central Highlands are broadly similar and fall in the range of 5-6 tonnes per hectare The sucrose content of the cane grown in the North Midlands and Central Highlands is supported by the greater diurnal swing in temperature resulting in a lower tonnes -of- cane to tonnes -of- sugar ratio (TCTS)... generally in the region of 1 0-1 5%  The rate of value added tax that is applied to sugar is 10% © LMC International, 2012 The contents of this study must remain confidential within the subscribing organisation 25 Section 3: The Sugar Value Chain Profitability at different stages of the value chain Below, we have assessed the profitability of sugar production in Vietnam and identified where in the value... There are two types of sugar produced in Vietnam:  Direct mill white sugar (known locally as RS sugar) This sugar generally has a colour of 10 0-1 50 IU  Refined sugar known locally as RE sugar RE sugar is generally EC No.2 grade sugar ( . quarter of national sugar production. Section 1: Overview of the Vietnam Sugar Sector Section 1: Overview of the Vietnam Sugar Sector © LMC International, 2012 2 The contents of this study. less self-sufficient in sugar in 2011/12. This is the result of a massive expansion of the formal sugar sector in the second half of the 1990s and the first few years of the 2000s, during which. within the subscribing organisation This report provides a detailed review of the Vietnam sugar sector. The report is presented in seven sections: Section 1: An Overview of the Vietnam Sugar Sector.