A sweet crisis

Salma El-Wardani , Thursday 9 Dec 2010

Global price hikes are beginning to hit Egypt hard and some factories say they are forced to shut down production lines

Pastry shops and bakeries raise prices at the risk of loosing clients. (Photo: Bassam Al-Zoghbi)

Chocolates, hard candies, bubble gum and lollipops are nine-year-old Rania's daily delight. At a local kiosk by her school, she mulls over what to buy with her LE1 ($0.17) daily pocket money. In her nine-year lifetime, Rania has seen the price of lollipops increase three times: from LE 0.25 to LE 0.50 to LE 0.75.

With rising sugar prices, a further rise seems likely, despite what some popular confectioners say.

“The crisis has nothing to do with me!” says Khaled Hassan, owner of Al-Sa’ada Factory for Sugar, which manufactures sesame-based candy canes (assaleya). “Since the sugar prices started to increase back in 2003, I began to change the ingredients of my assaleya and shift it more into molasses”.

Every two months Hassan says he orders a small truck of molasses from a factory in Giza for LE 4000, “and if there is liquidity I buy big amounts every winter and stock it for the whole summer.”

Manufacturers such as Hassan insists that by sticking to molasses, they bypass the fluctuating sugar price. Hassan says it has protected him from the relatively price inelastic confectionary industry in Egypt – a market that grows at an average annual rate of 2.7%, according to a 2010 report by Datamonitor.

Since September, however, sugar prices in Egypt have steadily been on the rise, peaking at LE5,000 a ton ($869.6) of late. The fingers or blame have been pointed in various directions: some point to traders and producers, but many factory owners have said it is the government’s fault for failing to take the necessary measures to stabilize prices.

Finally, the rise is beginning to hit an industry that has so far found substitutes. For manufacturers such as Hassan, molasses has sufficed. But Hamdy Swailam, Public Relations Officer at Egyptian Company for Sweet and Savoury Snacks (Marengo), says that the increases, and the government’s inability to stabilize prices, is a “no way” option.

"You can’t change ingredients in Marengo for we produce Fine A-class sweet category. If we substituted sugar for molasses this will affect the color of the products, and if we decreased the amount of sugar, this will affect the taste” he says.

Swailam has many complaints, since what he calls the “devastating sugar crisis” broke out. “We can’t find sugar,” he says. “Distributers are taking advantage of the crisis and sell us sugar at even higher prices. We had no chance but increase the price too, because sugar accounts for a whole 40% of our products.”

Sugar prices hit $740 per ton on December 3, compared to $709 just one month earlier: a 4% increase in one month, according to a recent weekly report by the Chamber of Food Industries.

Even for the largest local manufacturers of a range of products including juices and dairy, the sugar price is beginning to hit home. “Halawa is the most affected product as far as poor are concerned,” said Safwan Sabet, Chairman of Juhayna. Halawa, a sesame and sugar confection, which is 40% sugar, “serves as a standard breakfast component for poor,” he said.

"Sugar hits the poor and middle class hard. Harder than the rich,” Sabet said, explaining that it is main source of daily energy supplement for the needy.

But while manufacturers and even consumers are talking about the “crisis” official bodies insist that it’s not that, and is tied to a much larger global trend.

On December 1, world food prices climbed for a fifth consecutive month, rising to the highest level in more than two years in November on higher costs for cereals, sugar and cooking oil, the United Nations’ Food and Agriculture Organization (FAO) said. The FAO’s index of 55 food commodities jumped to 205.4 points, the highest level since July 2008, the Rome-based agency said in a monthly report on its website on Tuesday. The indicator rose from 198.1 points in October.

Accordingly, the sugar advanced to 374.7 points from 349.3.

The global confectionery market is one of the fastest growing segments in the packaged food industry. Globally, chocolate confectionery is the largest sector in terms of value, accounting for almost 60 per cent of total sales.

In contrast to EU and North America, developing markets had grown twice the world average with Asia Pacific topping the chart at 27.8 per cent, between 2002 and 2007, in terms of market tonnage growth, according to International Confectionery Association (ICA) figures.

In Egypt, the trend is no different.

The relative inelasticity of short-term supply with low price elasticity of demand in importing countries cause alternating short periods of booms and long periods of abundant supply with low world market prices, the FAO explains.

“Sugar prices may not go up drastically,” Ahmed al-Wakil , president of the Chambers of Commerce Federation said, “but they won’t go down to the last price of LE4 per kilo.”

“Sugar quantities on global markets are small and we may not find enough for our local needs,” he added, attributed the scarcity in global sugar supply to reductions in the Brazilian crop, the world’s largest sugar exporter, followed by Thailand and India.

Sugar production in Egypt is estimated at 1.8 million tons in 2007, nearly covering 67.5% of domestic consumption.

Given this low local production, Egypt, which is among the most important importing countries for sugar with an estimated ratio of 2.69% of total world sugar imports, is bound to global fluctuations and changes.

Al-Wakil insists that what is happening in the market is indeed a crisis, saying even a slight price increase means the mass consumer – class C – won’t survive.

And for some manufacturers, the increases have already hit so hard, shut-downs are necessary. The popular confectionary factory Covertina announced it will close 5 production lines – those most dependant on sugar.

“There was a sharp decline in profitability from 1.5% by end of October to 0.5% by mid-November, and then we recorded a loss of 1.5% by 25 November 2010," says Bakr Essawy, Chief Financial Officer of Covertina (Eastern Company for Manufacturing Sweet and Chocolate) who said he has made a complaint to the Food Industries Chamber demanding an allotment of a quota of 70% of the factory needs at the old prices from the government’s stock piles. He also requested a customs exemption leniency or an exemption on workers insurance benefits should the company need to end their contracts.

"We put a deadline for two months after which we lay off workers in some departments with a very low profitability. We can’t afford it anymore,” said Essawy. "If the prices keep going up, we will have to terminate contracts with these workers."

As Christmas creeps up, the fate of “sweets” is yet to be seen. Will customers cut back on purchases and will further hikes begin to affect price? Will the New Year, many ask, cut the options for young girls like Rania, whose LE1 can still give her a choice of treats?

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