Tongaat Sees South Africa Sugar Mills Helping Plug Power Deficit

Tongaat Hulett Ltd. said South Africa may start a power procurement process next year that would pave the way for the country’s biggest sugar company to quadruple electricity output at its mills.

“We’ve been working with the government for a couple of years now on getting to an end point on a procurement process which would lead to a 20-year agreement,” Peter Staude, chief executive officer of the Tongaat, South Africa-based company, said in an interview today. Tongaat has “reasonable confidence” the process should start early next year, he said.

Tongaat could eventually produce 300 megawatts of power, with the first 95 megawatts coming from installing a high-pressure boiler at one of its sugar mills, Staude said.

South Africa plans to buy more electricity from renewable sources and independent producers as a shortfall at state-run Eskom Holdings SOC Ltd., which produces 95 percent of the country’s power, caused blackouts and curbs economic growth. Tongaat and local rival, Illovo Sugar Ltd., can produce electricity from bagasse, a byproduct left after the juice has been extracted from sugar cane.

Tongaat climbed 3.1 percent to 149.5 rand at 10:30 a.m. in Johannesburg trading, beating the 0.7 percent gain in the 165-company FTSE/JSE Africa All-Share Index.

The company reported a 17 percent increase in profit before one-time items in the six months to Sept. 30 to 773 million rand ($69 million) as it cut costs and sold more sugar-related products such as starch and glucose, used to sweeten food and drink, compared with the raw crop.

Sugar Prices

Sugar prices have tumbled 57 percent from a 10-year high in 2011 after growers from Brazil to Australia raised output, leading to a global surplus. That made the sweetener cheaper to import to South Africa, harming local producers. Tongaat has sought to mitigate the effect by producing more sugar-related products and selling land near the eastern coastal city of Durban for residential development.

South Africa raised the dollar-based reference price of sugar in April, meaning importers will have to pay tariffs on shipments for the first time in four years. Staude said he wants this measure to continue to avoid price volatility in the local market.

Tongaat’s sugar production from South Africa will fall to 525,000 metric tons to 595,000 tons this year because of low rainfall in KwaZulu-Natal Province, from 634,000 tons in 2013, the company said. Output is projected to climb by 400,000 tons over the next four years due to agricultural improvement programs, it said. Tongaat is planning “substantial” cost reductions in 2015 to 2016.

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