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Beet woes prompt ABF to shut two more China sugar plants, 16.01.15

Associated British Foods revealed it is to close two further Chinese sugar plants, and restated a warning of a "further large reduction in profit" from the sweetener, as it lowered its forecast for full-year earnings.

The tea-to-grain trading group said it was to take a £128m hit from shutting its Yi'an and BoCheng sugar beet processing operations in Heilongjiang province in north eastern China, after crop setbacks and low sugar prices left the plants "uneconomic" to run.

The closures follow the group's decision two years ago to mothball plants in Wangkui, also in Heilongjiang, and Baolongshan.

"Heilongjiang province has proven to be the most challenging in terms of achieving beet yields that are sufficient to provide our factories at Yi'an and BoCheng with an adequate supply of raw material at a competitive cost," ABF said on Thursday.

"When combined with continuing poor market prices we have now concluded that these factories will remain uneconomic for the foreseeable future."

Last year, the group blamed flooding for a "much lower sugar production", of 116,000 tonnes, in the north of China.

'Large reduction in profit'

The decision to close the plants follows a drive to boost the performance of its Chinese sugar division, which including the closed sites comprises four beet factories and five cane plants.

ABF has cut costs in China by more than 20% amid a three-year project which has been expected to raise divisional profitability by about £40m a year.

And they group underlined the headwinds faced by its European Union sugar operations too, where the prospect of the removal in 2017 of production quotas has accelerated a decline in prices already under pressure from weak global sugar values.

"With the fall in EU sugar prices and weakness in the world sugar price, we expect a further large reduction in profit from AB Sugar," its sugar division, the company said, days after German peer Suedzucker also cautioned over Europe's market reforms.

Profits downgrade

Associated British Foods added that the worst now appeared to be over in EU sugar, saying that this year's downturn "will put much of the effect of the structural changes in EU prices, seen over the last three years, behind us".

And it raised hopes for its Chinese operations too, following the decision to exit from Heilongjiang.

"Importantly, following this action, we expect all of our remaining sugar factories in China to be cash generative, even at the current low sugar prices."

Nonetheless, ABF, which last month noted a "limited opportunity to grow adjusted earnings per share" in its current financial year, said it was now expecting a "marginal decline".

The group also cited a setback from strength in the pound against many of the currencies in which it trades, so undermining the value, in sterling terms, of foreign earnings.

Market reaction

ABF shares stood 0.9% higher at 3062p in morning deals in London.

Credit Suisse analysts stood by a rating of "outperform" on the shares, and a target price of 3,250p, despite trimming its estimate for ABF's earnings per share this year - thanks to the sugar downturn.

However, the sugar division is "somewhere near the bottom now", the bank said, adding that the decision to close the Chinese sugar plants "should remove £10m-15m of losses from next year".

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