Tongaat Hulett and its Strategic Positioning
Tongaat Hulett is an agricultural and agri-processing business which includes integrated components of land management and property development. Through its sugar and starch operations, Tongaat Hulett produces a range of refined carbohydrate products from sugarcane and maize. Renewable energy, in the form of biofuel production and electricity generation, is of increasing importance to the business. The water-food-energy nexus is an evolving dynamic. Tongaat Hulett balances the operational requirement for sugarcane supplies to its cane processing operations with the transition of agricultural land to other uses at the appropriate times. The business is well placed to capitalise on emerging opportunities for expansion and growth in Africa, with unconstrained access to sugar markets, its independent position, established business platform and size.
Successfully managing the socio-economic-political dynamics of agriculture, land, water, agri-processing, food and renewable energy are key to the continued success and value creation of the business for all stakeholders. The growth and development of the company’s operations, in the selected regions in which it operates, have involved establishing credible partnering relationships with farmers, local communities, Governments and employees. Tongaat Hulett’s independent status and local ownership is important to the continuation of these relationships.
Tongaat Hulett, through its operations in six Southern African Development Community (SADC) countries, employs more than 42 000 employees during its peak milling season and conducts its business activities in a manner that seeks to create value on a sustainable basis, contributing meaningfully to the social and physical environment in which it operates.
A fundamental shift has been taking place in the global sugar industry as increasing quantities of sugarcane are directed at producing ethanol as an effective carbon dioxide (CO2) mitigation strategy and an alternative to crude oil based fuels. The fibre in sugarcane is increasingly being used for renewable electricity generation, providing additional revenue streams for producers in countries like Brazil and India. The global demand for sugar continues to grow at an average of 2 percent per annum, which currently equates to 3,2 million tons of sugar. Traditionally, the growing demand for sugar worldwide has been met by Brazil but this position has changed, creating opportunities for other regions. Sub-Saharan Africa, with ample unutilised arable land and using less than 10 percent of its available fresh water, is well positioned to benefit from these developments.
SUGAR OPERATIONS
Tongaat Hulett is in the favourable position of being able to capitalise on the changing global sugar fundamentals, using the business’s SADC based sugar operations and its preferential market access. The company’s leading sugar brands and existing distribution networks will enable Tongaat Hulett to benefit from the growing per capita consumption of sugar in the SADC region.
The business continues to focus on increasing the supply of sugarcane to its operations in Mozambique, South Africa and Zimbabwe as it progresses its strategic objective of producing more than 2 million tons of raw sugar per annum using its existing milling capacity. The acquisition of the Mozambique operations followed the end of two civil wars, and in 2009/10 the company completed a R1,5 billion investment through the expansion of its Xinavane operation. Cane supply to the South African operations had previously, been adversely affected by the less favourable global sugar revenue dynamics that existed. In addition, inadequate investments in root replanting, over an extended period of time, and the severe drought in the 2010/11 season had substantially impacted on the supply of cane to the South African mills. In Zimbabwe, Tongaat Hulett acquired its shareholding in the 320 000 ton per annum, Hippo Valley Estate, in December 2006. The turbulent macro-economic fundamentals in the country up to the end of 2009 had a significant impact on both private farmer and company operations. Tongaat Hulett has made substantial investments in the refurbishment of its Zimbabwean milling and agricultural operations.
Against the background of a more favourable revenue expectation, and the question as to where the world will source more sugar, Tongaat Hulett’s strategy is to expedite an increase in sugarcane supplies in order to increase its existing sugar production of 1,15 million tons in the 2011/12 year, to some 1,73 million tons sugar by the 2014/15 year, and subsequently grow its sugar production to its installed milling capacity of more than 2 million tons sugar per annum. With the high fixed cost element of milling costs and the fact that some 78 percent of farming costs are linked to the number of hectares planted, this growth in sugar production will lead to a substantial reduction in the unit cost of production. Numerous cane supply initiatives that include the development of indigenous sugarcane farmers are underway in all the sugar operations.
Tongaat Hulett’s South African sugar milling, refining and agricultural operations are located on the north coast of KwaZulu-Natal. The sugar mills at Maidstone, Darnall, Amatikulu and Felixton have an installed capacity to produce more than 1 million tons of raw sugar and a central refinery in Durban produces in excess of 600 000 tons of refined sugar per annum. The South African sugar product range o ers a total sweetener solution including a range of high intensity sweeteners. The company’s Huletts® brand has consistently been acknowledged as the leading sugar brand.
Umhlanga Ridge
The company’s animal feeds operation, Voermol Feeds, is located at the Maidstone mill and the business manufactures and markets a range of energy and supplementary feeds to the livestock farming community through its Voermol® brand. Through cost effective production and marketing of high quality products over the past 50 years, combined with the development of long-term relationships with farmers, agricultural companies and suppliers, Voermol Feeds has become the market leader in the molasses based animal feed industry in South Africa.
The Mozambique sugar operations consist of the expanded sugar mills and estates surrounding Xinavane and Mafambisse. There were 24 386 hectares of Tongaat Hulett owned and leased land, under cane, available for harvest as at 31 March 2012. Private farms supply cane from a further 2 127 hectares. Sugar production capacity at the Xinavane mill has increased to more than 230 000 tons in a 32 week crushing season. Together with the existing 92 000 tons of sugar production capacity at the Mafambisse mill, the Mozambique operations have the installed milling capacity to produce in excess of 330 000 tons sugar per annum. The sugar estates are irrigated and are located in areas with ideal growing conditions, resulting in high cane and sucrose yields. These favourable agricultural conditions, combined with the sugar mills’ close proximity to the ports, the technology availability and support from South Africa, ensure that the Mozambique operations are well positioned for strong growth in the future.
Canelands, KwaZulu-Natal North Coast
Located in the lowveld of Zimbabwe, with excellent topography, climate and established water storage and conveyance infrastructures for irrigation, recognised as a globally competitive sugar producer, the sugar operations consist of Triangle and a 50,3 percent stake in Hippo Valley Estates, representing a combined installed sugar milling capacity of more than 640 000 tons. As at 31 March 2012, the Zimbabwe operations comprised 29 125 hectares of sugarcane land with a potential to produce in excess of 3,0 million tons of sugarcane. Private farmers have been allocated 15 880 hectares of land with a potential to produce a further 1,4 million tons of cane per year. The Triangle and Hippo Valley sugar mills have a combined annual milling capacity of about 5,1 million tons of cane. After the refurbishment of the Hippo Valley refining capacity, the two sugar mills will have the ability to refine up to 140 000 tons sugar per annum. The Triangle Estates ethanol plant has an installed capacity of 40 million litres over a 48 week production season.
Tongaat Hulett’s sugarcane estate in Swaziland is situated in the north-east of the country and comprises 3 840 hectares of fully irrigated estates. Tambankulu Estates is an agri-business based on two agricultural estates straddling the Umbuluzi River. The estate has consistently achieved excellent sucrose yields due to the good soils and growing conditions in the region and delivers its cane to the nearby Simunye and Mhlume sugar mills.
In Botswana, Tongaat Hulett has a 60 000 tons per annum packing and distribution operation and markets the leading Blue Crystal® sugar brand while the Namibian operation has the capacity to pack and distribute 80 000 tons per annum using the market leading Marathon® brand.
RENEWABLE ENERGY
The need to create jobs and the challenge in electricity supply in South Africa, together with the carbon mitigation drive, is expected to continue to keep attention focused on the development of renewable energy. The development of renewable electricity continues to gain impetus from the looming power crises which South Africa faces over the next decade if it wishes to grow the economy significantly and generate the potential for job creation on the scale Government is targeting.
In the medium to long term, ethanol is perhaps the largest expansion opportunity which the sugar industry in SADC has and offers Governments of the region an excellent opportunity to create jobs and improve the lives of rural communities. If SADC were to follow the Brazilian model over the next 20 years, with 60 percent of petrol being derived from ethanol and all growth in demand captured by ethanol, it would require the construction of about 120 mills that have the capacity to produce 320 000 tons sugar per annum, create 1,8 million new direct jobs, and at least as many indirect jobs. The associated power generation would be equal to Medupi and Kusile combined, which equates to approximately 9 500 MW. For South Africa, it would provide between 13 and 25 percent of the required carbon footprint reduction needed to meet the target which the country committed to during COP 15 (Copenhagen, 2009). Unlike electricity generation, which can be started from a South African perspective, large scale ethanol production requires a regional ethanol regime. Some 70 percent of the market for ethanol lies in South Africa, with the bulk of the production potential lying within other SADC countries such as Mozambique, Zimbabwe, Zambia and Angola. The ideal starting point would be for the South African sugar industry to develop the necessary framework that would facilitate the industry converting its existing sugar exports on the World Sugar Market to ethanol. Tongaat Hulett is continuing to work with the South African Government to support the development of the South African framework and subsequently a wider SADC approach.
LAND FOOTPRINT
Tongaat Hulett’s land footprint in the region provides the business with an opportunity to interact and partner with Governments and rural communities in the development of successful rural communities. To date, these partnerships have seen the company working with Governments and communities in Mozambique, South Africa and Zimbabwe in developing farming models with sugarcane as the primary crop and staple foods like maize and vegetables as secondary crops. The models include the provision of procurement support for key raw material inputs. As the company continues to work with its stakeholders in this area, further opportunities including the use of technology and improving the level of financial acumen of small-scale private farmers will be explored.
Tongaat Hulett’s operational land footprint within the SADC region amounts to approximately 570 000 hectares. This footprint consists of some 281 000 hectares of land managed by Tongaat Hulett. Some 122 000 hectares of private grower land supplies cane to the four South African sugar mills, 15 880 hectares have been allocated to private farmers who supply the two Zimbabwe mills and 2 127 hectares to the two Mozambique mills. Approximately 150 000 hectares of private land under maize supply the four starch operations.
LAND CONVERSION
In South Africa, some 8 600 developable hectares (13 607 gross hectares) have been identified for conversion to other uses when conditions are appropriate. This conversion process takes place over a number of years, and the land remains under sugarcane until the transition to development takes place.
Durban/eThekwini, South Africa’s third largest city, with a current population of between 3,5 and 4 million people, continues to expand into Tongaat Hulett’s land holdings to the north and west of the city. Current estimates indicate that over the next twenty years the population in the Durban/eThekwini metro will increase to between 6 and 7 million people. The King Shaka International Airport, with its ability to attract direct international flights and the development of the surrounding Dube Trade Port and Aerotropolis are providing further impetus for this growth. Over the past 13 years Tongaat Hulett’s development operation has converted some 2 600 gross hectares (2 000 developable hectares) to property development.
The company is a proactive partner with Governments and communities in this conversion process. Key mechanisms to create optimal value are large scale strategic planning with regulatory authorities to position the landholdings correctly, including a socio-economic development plan, increasing the number of hectares of land that are moving to becoming active developments, facilitating the requisite investment in bulk infrastructure and then converting the landholdings. This ongoing partnership is contributing to the growth and development of the region.
STARCH OPERATIONS
Tongaat Hulett’s wet-milling operation is the major producer of starch and glucose on the African continent. Established in 1919, the starch operation has grown to be an important supplier to a diverse range of South African and African industries. Operating four wet-milling plants, located in Kliprivier, Germiston and Meyerton in Gauteng and Bellville in the Western Cape, Tongaat Hulett converts more than 600 000 tons of maize per annum into starch and starch-based products. It also operates a dedicated Sorbitol facility which is located in Chloorkop in Gauteng and has distribution networks and facilities in Zimbabwe, Australasia and the Far East. It manufactures a wide range of products, from unmodified maize starch to highly refined glucose products, which are key ingredients for manufacturers of foodstu s, beverages and a variety of industrial products. The expansion of the economically active population in South Africa is positive for the volume growth of these products and with the ability to increase production from installed milling capacity, the company is well placed to benefit from increased demand.
The world is continuing to evolve in terms of the selection of a feedstock for the production of sweeteners, with both maize and sugarcane being suitable alternatives. Tongaat Hulett’s significant investments in the production of sweeteners using both feedstocks will ensure that the business is well positioned to benefit from global developments in this area.
STAKEHOLDER VALUE CREATION
Over the past century, Tongaat Hulett has established itself as a leading large scale agricultural and agri-processing business which has its base firmly established in Southern Africa.
With a significant number of the business operations being located in rural communities including Mozambique, Zimbabwe and the north coast of KwaZulu-Natal, there is a strong focus on facilitating the development of successful indigenous private farmers. In keeping with this objective, the company has already seen the benefit of partnering with private farmer communities and BancABC in developing indigenous sugarcane farmers through its Successful Rural Sugar Cane Farming Community Project in Zimbabwe. Ensuring the viability and success of private farmers remains a critical success factor for the sugar mills. The provision of support to farmers includes ensuring; that suitable funding is in place, the supply of high quality seed cane varieties, planting of sugarcane and extension services for training and development to improve farming practices and the establishment of the necessary logistics and cane harvesting services to ensure that the cane is delivered to the mill.
Landile Giyama taking a sample of in-process starch
Tongaat Hulett values the relationships that it has been able to establish with its shareholder base over the years. The business will continue to seek opportunities that will enable it to keep the investment community informed of its progress in delivering on its strategic objectives.
The company follows a philosophy of creating value for stakeholders and continues to make good progress in entrenching and enhancing the various programmes and initiatives it has in place in the areas of safety, health, environment, community and Government relationships. This, together with the commitment to sound corporate governance, is consistent with the principles of the King III corporate governance framework, including ensuring that sustainability matters are an integral component of the company’s strategy.
The safety and the welfare of all employees remains a key priority as the business strives towards establishing an organisational culture with a zero harm approach. Tongaat Hulett subscribes to principles of sustainable development, which encompass safety, health and environment. The company’s participation in various sustainability reporting initiatives, including the Carbon Disclosure Project (CDP), the CDP Water Disclosure Project and its listing on the JSE’s Social Responsibility Investment index for the eighth consecutive year are testimony to Tongaat Hulett’s approach to sustainability and stakeholder value creation.
