Báo cáo đánh gía tổng quát về ngành mía đường của LMC - Review 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.. In this section, we provide a

Review of the Vietnam Sugar Sector

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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

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

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

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 4.15: 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

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

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

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

Section 1: Overview of the Vietnam Sugar Sector

Section 1: Overview of the Vietnam Sugar Sector

Note: Cane and sugar production represent a three-year average of actual production in 2009/10 and

2010/11 and estimated production in 2011/12

 Although there are fewer mills in the North Central and Central Coast regions, these

areas have a greater crushing capacity than in the Mekong River Delta This is due to the presence of a number of very large mills, including the foreign owned NAT&L, VTS and KCP mills NAT&L is owned by Tate & Lyle (although it is in the process of being sold to a local company, while VTS and KCP are owned by Taiwanese and Indian companies,

respectively As a result, these two regions also contribute around a quarter of the

country’s sugar production each

North Midlands

Total capacity (tcd) 7,000 Cane ('000 tonnes) 573 Sugar ('000 tonnes) 59

Southeast

Total capacity (tcd) 19,500 Cane ('000 tonnes) 1,992 Sugar ('000 tonnes) 178

Mekong River Delta

Total capacity (tcd) 25,100

Cane ('000 tonnes) 3,302

Sugar ('000 tonnes) 272

Section 1: Overview of the Vietnam Sugar Sector

Diagram 1.1: Sugar production by region,

'000 tonnes, tel quel

 Although all the regions have expanded sugar production over the last two years, production in the Central Coastal region has increased

to the point that it is the country’s leading sugar producing region (Diagram 1.2)

 Production in the Southeast is dominated by the Bourbon Tay Ninh mill The other mills in this region are smaller in scale and the region contributes around 15% of Vietnam’s sugar output

Table 1.1: Regional break-down of sugar mills in Vietnam

Son Duong 2,800 Lam Son 10,000 An Khe 10,000

Son La 2,200 NAT&L 9,000 Cam Ranh 8,000

Cao Bang 1,000 Song Con 3,000 Binh Dinh 3,500

Nong Cong 2,700 Ninh Hoa 3,400

Gia Lai 3,500 Bourbon Tay Ninh 9,000 Nagajuna Long an 5,000

333 Dac Lac 2,800 RW Tay Ninh (Bien Hoa) 4,000 Vi Thanh 3,900

Dac Nong 2,000 La Nga 2,300 Soc Trang 2,800

Kon Tum 1,700 Tri An (Bien Hoa) 2,000 Tra Vinh 2,800

Phan Rang 1,200 Phung Hiep 2,600 Nuoc Trong 1,000 Hiep Hoa 2,000

Long My Phat 2,000 Thoi Binh/Ca Mau 1,000

 There are also a small number of small-scale mills in the North Midlands and Central

Highlands region While there is potential for production to increase in the Central

Highlands, expansion potential in the North Midlands is very limited due to the

mountainous nature of the region There is also some cane produced in the Red River

Delta region, but there are no sugar mills to crush the cane This cane is used to

produce handicraft sugar

 Diagram 1.2 shows how sugar production has evolved over the last few years The last

Section 1: Overview of the Vietnam Sugar Sector

Diagram 1.2: Evolution of regional sugar production over time

Diagram 1.3: Average milling capacity

do, however, mean that there is some divergence in performance

Section 1: Overview of the Vietnam Sugar Sector

 The wet, tropical climate found in the Mekong River Delta helps the region achieve substantially higher cane yields than elsewhere in the country During the last three seasons, cane yields have been 20-30 tonnes per hectare higher than in other regions However, the wet weather holds back sucrose formation and sugar recovery rates are noticeably lower in the Mekong River Delta than elsewhere (Diagram 1.6

Diagram 1.5: Evolution of regional cane

yields over time

Southeast Mekong River Delta

Diagram 1.6: Cane yields by region,

average 2008/09 to 2010/11

North Central and Central Coastal Central Highlands North Midlands Southeast

Mekong River Delta

tonnes/hectare

 Although the benefits of the very high cane yields in the Mekong River Delta are

tempered by the much lower sugar recovery, the region 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)

Diagram 1.7: TC:TS by region, average

Mekong River Delta

tonnes/hectare

 Sugar yields are lowest in the North Central and Central Coastal regions, where not only

Section 1: Overview of the Vietnam Sugar Sector

Diagrams 1.9 and 1.10 present regional performance indicators at the factory level:

 The Mekong River Delta region has a longer crushing campaign than the rest of the country, which runs from September to April

 However, capacity utilisation (measured in terms of sugar produced per tonne of

crushing capacity) is similar to the Central Highlands and Central Coastal regions This is due to the lower recovery rate achieved in the Mekong River Delta

 The North Central and the North Midlands have very short net crushing seasons and relatively low capacity utilisation, revealing a shortage of cane in relation to the

installed crushing capacities in these regions

Diagram 1.9: Net operating days by region,

North Central Southeast Central Coastal Central Highlands

Mekong River Delta

tonnes sugar/tcd

Supply/demand balance

Diagram 1.11 presents Vietnam’s supply/demand balance over the last six years Consumption now stands at around 1.4 million tonnes While production had stabilised at around 1.0-1.2 million tonnes over the last few years, in 2011/12, early projections suggest production is expected to reach around 1.4 million tonnes, putting the country close to self-sufficiency once again

Section 1: Overview of the Vietnam Sugar Sector

Diagram 1.11: National supply/demand balance

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 100-150 IU

 Refined sugar known locally as RE sugar RE sugar is generally EC No.2 grade sugar (<45 IU), although the Vietnam Taiwan Sugar Company produces refined sugar with an average IU of less than 45

Section 1: Overview of the Vietnam Sugar Sector

Industrial vs direct consumption

Diagram 1.12: Major producers of RE sugar

Viet Dal 8%

La Nga 5%

Bien Hoa 26%

SBT 17%

It is estimated that industrial end users account for around 800,000 tonnes (57%) of demand The vast majority of this is located

in the south of the country where a large proportion of food processing takes place Around 0.4 million tonnes of RE sugar is consumed in Vietnam each year The major consumers of RE sugar are Vinamilk, Coca-Cola, PepsiCo and Dutch Lady Diagram 1.12 shows the main producers of RE sugar RE sugar generally trades at a small premium of around US$10-20 per tonne over RS sugar

 A large proportion of the country’s food processing takes place in the south

 Incomes are higher in the south, with a larger proportion of the population living in urban areas This has resulted in a greater ‘westernisation’ of tastes and means that the consumption of soft drinks and other processed foods containing sugar is higher, particularly in the region around Ho Chi Minh city The hotter weather in the south is also considered to be a factor

As much as two thirds of consumption (around 940,000 tonnes) is reported to be in the south

of the country While this figure seems extremely high given the distribution of population across the country, trade flows within the country and from external sources seem to support this view (this is discussed in the next section)

Based on this information and population data, Table 1.2 presents our estimates of

consumption by region To arrive at these estimates we have allowed for the fact that

tabletop consumption is higher in the south, while industrial demand is also concentrated in this region, arriving at a figure of 940,000 tonnes for the south This suggests that per capita consumption (including industrial demand) is close to 30 kg per head in this region We have used population as the basis to split consumption between the Mekong River Delta and the Southeast regions This means that sugar consumption in the rest of the country is much lower, at around 8 kg per person Again, we have used this to estimate the likely distribution

of consumption between the regions in the north and central zones While this result seems extreme, it is supported by reported trade flows, which we discuss below

Section 1: Overview of the Vietnam Sugar Sector

Table 1.2: Sugar consumption estimates by region

Population in 2010 Consumption Per capita Consumption

Northern midlands and mountain areas 11.2 90 8.4

Table 1.3: Sugar supply/demand balance by region

Northern midlands and mountain areas 90 51 -39

Trade flows

Section 1: Overview of the Vietnam Sugar Sector

import sugar In 2010/11, this was set at 250,000 tonnes However, in 2012, it is

expected that licences for only 80,000 tonnes will issued because of the larger domestic

crop Further discussion of the licencing system is provided in Section 2

Thailand via Cambodia and Laos without paying import duties (currently set at 5%) In

2011, it is estimated that around 100,000 tonnes entered the south of the country

through Cambodia either by truck or by boat along the Mekong river In addition,

around 50,000 tonnes enters the north of the country via truck through Laos

exported to China In 2011, it is estimated that around 150,000 tonnes was exported

This trade is based on an agreement between the provincial governments in Northern

Vietnam and Yunnan province in China However, this trade only takes place during

China’s off-crop period

Table 1.4 presents the trade balance in each region allowing for this sugar trade It shows that

even when imports and exports are taken into account, the northern and southern regions

remain in deficit These deficits are met by the surplus generated in the Central region Map

1.2 summarises these trade flows

Table 1.4: Supply/demand and trade balance by region, 2010/11 (‘000 tonnes)

Section 1: Overview of the Vietnam Sugar Sector

Map 1.2: Trade flows by region, 2011

Consumption of alternative sweeteners

Sugar dominates the sweetener sector in Vietnam There is no consumption of HFCS, and consumption of non-caloric sweeteners in Vietnam is limited, making up less than 10% of overall sweetener demand Diagram 1.14 and Table 1.5 present consumption over the last decade These figures have been derived from trade data as there is no domestic production

 Total consumption of non-caloric sweeteners in recent years has been in the range of 100,000 to 150,000 tonnes white sugar equivalent

 Among the non-caloric sweeteners consumed, saccharin has been by far the most widely used and, during the middle of the last decade, accounted for over 70% of demand (on a white sugar equivalent basis) However, consumption has fallen sharply since then (Diagram 1.14), most likely because of negative perceptions about its health effects

~250,000 tonnes

Domestic sugar from Central Highlands/Coast

~240,000 tonnes

Section 1: Overview of the Vietnam Sugar Sector

Diagram 1.14: Consumption of major

non-caloric sweeteners in Vietnam

Aspartame Cyclamate Saccharin

 Although consumption of saccharin has fallen, it is still the most widely used non-caloric sweetener, with present consumption estimated at just under 50,000 tonnes white sugar equivalent

 Although historic data on the use of stevia is not available, in 2009 and

2010, its consumption was around 40,000 tonne white sugar

equivalent, not far behind that of saccharin

Table 1.5: Consumption of alternative sweeteners in Vietnam (‘000 tonnes, white sugar

equivalent)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Aspartame 4 5 6 6 7 7 8 8 9 9 9 Cyclamate 7 14 20 23 26 27 29 26 26 27 29

Cane prices tend to be higher in areas where there is a lot of competition from other mills, or when cane is in short supply due to poor weather or attractive returns from alternative crops Table 1.6 presents cane prices over the last few years, while Diagram 1.15 shows average

prices received over the last three years to show the relativities between the regions

Table 1.6: Cane prices by region (basis 10 CCS)

Section 1: Overview of the Vietnam Sugar Sector

Diagram 1.15: Cane prices, average 2009-2011

 Prices are lower further north where wages, and therefore costs of production, are lower, and cane does not face such strong competition from high value alternative crops

Sugar prices

Historically, domestic prices in Vietnam have been very volatile depending on the country’s supply/demand balance However, in general, the domestic market price has linked to the cost of importing sugar from the world market This is demonstrated by Diagram 1.16, which compares the domestic price with:

 The tariff inclusive cost of importing sugar from Thailand by sea This allows for the fact that the tariff applied to imports from Thailand was 30% in 2007, falling gradually each year to 5% in 2010, its current level

 The cost of smuggling sugar over land from Thailand The cost of smuggling sugar (either in truck through Laos or Cambodia, or very small boats on the Mekong river) is estimated to be around US$70-80/tonne This is based on a per km cost of 8

cents/km/tonne for trucking cost Allowing for a margin of US$20/tonne, this means the premium over the world price required to make smuggling attractive is around US$100 per tonne

The diagram shows that, while domestic prices have moved in line with world prices, they have tended to trade below the cost of making imports for much of the last few years In fact, domestic prices are very closely aligned to the cost at which smuggled sugar can enter the market Since the tariff has been reduced to 5%, the cost of imports is similar to the cost of smuggled sugar entering overland via Cambodia

Section 1: Overview of the Vietnam Sugar Sector

Diagram 1.16: Ex-factory prices vs import parity and the cost of illegal imports

Import Parity Price Actual price Illegal Imports

Table 1.7 presents an example of the cost of importing sugar into Vietnam through official

channels for 2011

Table 1.7: Import parity calculation for official and illegal imports, 2011

Regional price differentials

Price differentials within Vietnam are complicated and are influenced by a number of factors:

 On average, prices in the south of the country have generally traded at a premium to

prices in the north (Diagram 1.17) This is because the surplus generated in the north

has historically been transported to the south where demand is stronger

Section 1: Overview of the Vietnam Sugar Sector

Diagram 1.17: Price premium in HCM vs

by smuggled sugar coming across the Mekong river from Thailand (via Cambodia) This has acted to put a cap on prices in the south at certain times This is illustrated by Diagram 1.1.17, which shows the average price premium in Ho Chi Minh relative to Hanoi

To make the situation more complicated, in 2011, surplus sugar produced in the north of the country has flowed into China, supporting prices in the north when this trade was taking place This trade depends critically on the price differential between domestic prices in China and Vietnam

Diagram 1.18 compares domestic prices in Vietnam with those in China and f.o.b values for white sugar in Thailand It shows that there have been periods over the last few years when domestic prices in China have been above price in Vietnam, creating an opportunity for sugar to flow in this direction However, this trade depends heavily on an agreement

between the governments of bordering provinces in Vietnam and China For example, while the provincial government in China has been happy to allow Vietnamese sugar to enter the country for much of 2011, imports was stopped in December when China’s domestic harvest started As a result, prices in the north of Vietnam fell towards the end of the year This means that there are likely to be periods when prices in the north trade at a premium to the south but also periods when prices fall below this level

 When China is allowing imports from Vietnam, prices in the north are likely to trade above prices in the south

 However, when China is not allowing imports, prices in the south could trade at a premium as some of the surplus in the North Central region would have to be

transported south

Section 1: Overview of the Vietnam Sugar Sector

Diagram 1.18: Relative prices in Vietnam and China

Thai f.o.b Vietnam, ex-factory China, Guangxi, ex factory

Looking forward, this means that the outlook for price differentials within Vietnam is likely to continue to be complicated, and vary within the year However, if we take the view that, on average, the domestic price in Vietnam will be set by sugar imports, this suggests that the price in Hanoi can be expected to be slightly higher than in Ho Chi Minh City This is for two reasons:

 Transportation costs from Northeast Thailand are higher to northern Vietnam are higher than the south For sugar transported over land, while the distance is broadly similar (around 1,000 km) the cost per km is higher (in the region of US$20 per tonne) Moreover, if sugar is transported by sea, there is the additional transportation cost to take the sugar to Hanoi, which is also likely to be around US$10-15 per tonne

 If China continues to provide an outlet for Vietnam sugar, this will support prices in the north of the country This is because, at the margin, sugar from the Central Coastal region or Central Highlands will be required to be transported north

This suggests that prices in the North can be expected to trade at a small premium (around US$15 per tonne) to prices in the south However, it should be noted that this assumes the trade with China continues to provide an outlet for surplus sugar produced in the North of the country This seems likely given that China looks set to be a net importer of sugar going forward, although this trade may be limited to the off-crop period

Ex-factory prices in the regions can be expected to trade at a discount to this price reflecting the costs of transportation These differentials are presented in Table 1.8 We have based these differentials on trucking costs of 8 US cents/km/tonne in the South and 9 US

cents/km/tonne in the North of the country

Section 1: Overview of the Vietnam Sugar Sector

Table 1.8: Estimated regional differentials in major producing regions vs HCM City

Diagram 1.19: Ex factory prices vs retail prices

Jul- 07

Oct- 08

Jan- 08

Apr- 08

Jul- 08

Oct- 09

Jan- 09

Apr- 09

Jul- 09

Oct- 10

Jan- 10

Apr- 10

Jul- 10

Oct- 11

Section 1: Overview of the Vietnam Sugar Sector

this situation changing, this suggests molasses prices in Vietnam will continue to reflect export parity going forward

Diagram 1.20 presents the estimated level of ex-factory prices in Vietnam relative to the f.o.b price in Thailand These estimates match fairly closely to reported prices received for molasses

in 2011, which were around US$100 per tonne

Diagram 1.20: Molasses price estimates in Vietnam vs Thai export prices

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

Key conclusions

 The government targeted sugar production of 1.5 million tonnes of sugar from 300,000 hectares of land by 2010 In reality, production has fallen short of these figures The government is preparing a target for 2015, which is also expected to continue to aim for 300,000 hectares of cane land, but for higher yields and sucrose content to be achieved (vertical rather than horizontal expansion) However, there is no clear mechanism for how improved yields will be achieved, with many areas suffering from poor crop practices

 With these targets in mind, the government has stated that no new sugar mills will be given licences for construction However, existing mills are allowed to expand in order

to achieve economies of scale and improve their competitiveness

 Currently a 5% duty applies to sugar imported from ASEAN member states Under the ASEAN Economic Community (AEC), all duties are to be reduced to 0% by 2015

Vietnam appears to be working towards this deadline However, because sugar is classified as a sensitive product, there is some flexibility, which could mean tariffs are not reduced to zero until 2018 This represents a significant risk to a new mill located in Cambodia that is designed to supply the Vietnam market

 The current policy on non-tariff barriers is also unclear Under a Protocol signed

between ASEAN members in 1999, all non-tariff barriers (which include the import licencing system) are to be removed by 2013 However, the AEC suggests that non-tariff barriers are to be removed by 2015, with certain flexibilities to 2018 for members that joined later (Cambodia, Laos, Myanmar and Vietnam)

 Although there is still some uncertainty about the exact timing, when implemented, these measures will nevertheless mean that the Vietnam market will be entirely exposed to duty-free sugar imports in the near future

In the sections below, we highlight the major production, import and marketing policies that are applied to sugar operators in Vietnam

Production policies

The government sets production targets for the sugarcane industry In 2007, the government set a target of 300,000 hectares, producing 1.5 million tonnes of sugar to be achieved by 2010/11 In 2010/11, the area totalled 266,000 hectares and 1.15 million tonnes of sugar was produced, although production is expected to increase in 2011/12

The government is currently preparing a target for 2015 This is expected to state that the cane area should again be 300,000 hectares However, production should reach 1.8 million tonnes due to higher cane yields (70 tonnes per hectare) and improved cane quality In other words, the government is keen to achieve vertical rather than horizontal expansion However,

it is not clear how these higher yields will be achieved While the government provides some support to farmers (discussed below), some areas suffer from poor crop management, which has resulted in the prevalence of diseases

Section 2: Sugar Policy

Section 2: Sugar Policy

Furthermore, the government has stated that no new mills can be built However, existing

mills can be expanded to achieve economies of scale and help the industry to improve its

2010/11 Actual

For sugarcane producers

As we have discussed in Section 1, there is no formalised sharing of the revenues from sugar

production in Vietnam’s cane sector Instead, the government establishes general frameworks

for cane prices within which millers and growers have freedom in setting prices The

government recommends that the minimum cane price is set at around 60% of the sugar

price, although this does vary depending on the level of competition for cane in each region

and the threat posed by alternative crops This means that cane prices have risen sharply in

recent years on the back of rising sugar and alternative crop prices Molasses, bagasse and any

additional revenues from cane, such as ethanol or electricity, are considered the sole property

of the miller

The government supports cane farmers in a number of other ways:

 It is the responsibility of the Ministry of Agriculture and Rural Development (MARD) and

the Provincial People’s Committee to implement and review the land plan of each cane

zone It is based on this zoning that the growing of sugarcane is contracted between

millers and farmers However, when competition for cane is intense, millers have been

known to purchase cane from outside of their cane zone

 The effort with building transportation and irrigation systems is shared between state,

factories and farmers Factories contribute building materials; growers contribute their

labour to construct the infrastructure, while the state invests the remainder of the

capital

 State banks provide loans for sugarcane producers without the need for collateral if the

loan is less than VND 30 million per household Poor farmers, with certification from

local authorities, can borrow at preferential rates Sugarcane producing households are

exempted from taxes since 2003 However, to encourage farmers to plant cane, mills

also offer pre-financing for as much as VND20 million per hectare in order to help

farmers cover the cost of planting This finance is then deducted from the cane price

when the farmer delivers the cane to the mill

 Part of the state budget is spent on importing high quality sugarcane seeds to help

farmers to improve their yields In addition, provinces have their own policies of

seedling price and transportation support The state runs extension programmes that

include support for farmers in terms of fertiliser, plant protection and technical advice

with the aim of improving productivity and reducing costs However, the industry has

Section 2: Sugar Policy

suffered from severe disease problems, particularly in the last few years, suggesting that these policies are ineffective

 To curb the situation of cane mills competing with each other for cane, a Board for Supervision of Sugar Distribution was created in 2000 to monitor adherence to cane pricing and supply contracts Each mill signs contracts with farmers before each cane-growing season Payments are made at the end of each harvesting season depending

on the quantity and sugar content of cane Since 1998, the state has only

recommended prices of cane, leaving farmers and sugar processors to negotiate the price of cane

For sugar processing companies

The following support measures are available to sugar milling companies:

 Sugar processing companies can get medium and long-term credit from the National Development Support Fund or be supported on interest payments by other credit organisations Processors can borrow a portion of their investment from the domestic fund (ADB) at preferential interest rates often with grace periods

 Companies investing in area that have been identified as ‘difficult or ‘very difficult’ have been exempted some or all of both land use tax and income tax

Import controls

Vietnam is a member of ASEAN (Association of South East Asian Nations), along with Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore and Thailand As a member that joined in the second phase (along with Brunei, Laos, Myanmar and Cambodia), Vietnam has had looser guidelines on the lowering of import duties for goods originating within ASEAN

Import duties

Sugar is classified as a sensitive product for Vietnam, and as part of the Protocol on the Special

Arrangement for Sensitive and Highly Sensitive Products, agreed in 1999, Vietnam had to reduce

import duties on sugar to 0%-5% by 1 January 2010 for fellow ASEAN members The evolution

of tariffs applied to imports from within or outside ASEAN are presented in Diagram 2.1

 Vietnam imposes a tariff on raw and white sugar imports These have gradually been cut to 5% for sugar entering the country from ASEAN members

 As part of Vietnam’s WTO commitments, imports from outside ASEAN are now subject

to a reduced duty of 15% for both raw and refined sugar from April 2011 onwards This was cut from 25% for raw sugar and 40% for white sugar

 These duties refer to the tariffs that apply to sugar for which an import licence has been granted Sugar entering the country without an import licence has to pay a duty of 80% for raw sugar and 100% for white sugar However, as we have discussed in Section 1, smuggled sugar from Thailand enters the market without the payment of duty,

although the transaction cost is similar to the cost incurred by paying the 5% duty

Section 2: Sugar Policy

Diagram 2.1: Evolution of import duties for raw and refined sugar (in quota)

The amount of sugar that can be imported is limited by a system of licences, which are

allocated by the government Import licences were granted for 295,000 tonnes of sugar in

2010 and 250,000 tonnes in 2011 to 48 companies A good crop last year means that only 207,000 tonnes were imported Table 2.2 presents the list of major importers and their import volumes in 2010

Table 2.2: Major importers and import volumes in 2010

 The process to apply for a licence is complicated, with the following steps:

– Based on production estimates from the Agricultural Ministry, and consumption information from the Ministry of Industry and Trade, as well as the projections of the sugar mills, reported by the Sugar Association, the government determines the quantity of import licences to allocate for the year

Section 2: Sugar Policy

– Companies applying for licences send applications to the Ministry of Agriculture and the Sugar Association These industries review applications and forward to the Ministry of Industry and Trade The three organisations allocate import licences according to the quantities allocated by the government

It is worth noting that the only agricultural products still subject to import quotas are sugar, poultry egg, tobacco and salt

ASEAN Economic Community

Further changes will be implemented over the next few years as ASEAN members move towards the ASEAN Economic Community (AEC), which strives to change ASEAN into a single market and production base by 2015 Economic integration goals include, among others, the elimination of tariffs, free movement of professionals, freer movement of capital and a

streamlined customs clearance procedure Under this goal, all tariffs are to be eliminated by

2015 for fellow ASEAN members At present, Vietnam appears to be working with the

deadline in mind However, as sugar belongs to the sensitive list for Vietnam, it is currently unclear whether sugar duties have to follow the same deadline duties on other goods or whether extensions are possible to 2018

AEC integration also has implications for Vietnam’s sugar licencing system, which acts as a

non-tariff barrier As part of the Protocol on the Special Arrangement for Sensitive and Highly

Sensitive Products, non-tariff barriers and quantitative restrictions on sugar imports in Vietnam

have to be eliminated by 1 January 2013 This suggests that Vietnam’s import licensing system will have to be removed from the beginning of next year

However, it appears that this protocol has been superseded by more recent protocols as part

of AEC Under the ASEAN Economic Community Blueprint, section 14 (elimination of non-tariff

barriers), it suggests that all non tariff barriers are to be eliminated by 2015 with flexibilities to

2018 for the late joiners Vietnam, Cambodia, Laos and Myanmar

In summary, there is still some uncertainty about the exact timing of when trade barriers with ASEAN will be removed However, when implemented, these measures will nevertheless mean that the Vietnam market will be entirely exposed to duty-free sugar imports in the future In theory, this should take place in 2015, but there is a risk that this could not be until

2018

Section 3: The Sugar Value Chain

In this section, we present details of the sugar marketing chain and the margins that are available at each stage of the chain This allows us to give a view about the profits that are being captured at each stage of the value chain

Key conclusions

 Strong competition for raw material (cane) means that farmers are best placed to capture the value added in the value chain This has been particularly the case in the Mekong River Delta, where millers have been unable to cover their full costs of production because of the high price they have to pay for cane

 Millers in the Central regions of the country are in a stronger position and as a result benefit from higher margins that those in the south of the country

 Higher sugar prices mean that most millers across the country are now achieving positive returns However, this was not the case in 2007 and 2008, when domestic sugar prices were lower

The sugar value chain

Diagram 3.1 summarises the sugar value chain in Vietnam

Diagram 3.1: Sugar value chain

Raw & refined sugar

Source: Bunge Vietnam

 Farmers either sell their cane directly to the mill (in which case it is purchased at the factory gate) or they sell to traders who act as intermediaries who then sell cane on to the mills

Section 3: The Sugar Value Chain

Section 3: The Sugar Value Chain

 Millers are free to market their sugar independently, and there are no formal

distribution channels Millers sell directly large end users such as Coca-Cola, PepsiCo, Vinamilk and Dutch Lady These industrial users also use imported sugar from the world market The vast majority of RE sugar is sold directly to end users in this way Some of the larger mills, such as Sucrière Bourbon Tay Ninh (SBT), have regional warehouses (particularly in Ho Chi Minh City) in order to offer better service to their clients in major consumption centres

 In contrast, most RS sugar is sold to around 40-50 trading companies, who then sell it

on to smaller industrial end users and retailers who demand sugar in relatively small quantities (20 tonnes per month or less) These traders buy both domestically produced and imported sugar On average, traders include a mark-up of around 5% in order to cover their costs

 Virtually all sugar is traded in 50 kg bags (both RE and RS sugar)

— Most RS sugar is sold through wholesalers under cash payment terms

— Large industrial end users, who purchase sugar directly from the sugar mills are generally offered 1 month’s credit

 The retail market for sugar is highly underdeveloped, with most sugar being rebagged

by individual retailers (without the use of brands) for sale to consumers

 Direct consumption is estimated at around 600,000 tonnes, or around 40-45% of the total market (Diagram 3.2) Of this, branded sugar sold in supermarkets accounts for around 90,000 tonnes (15%) The remainder is sold unbranded in convenience stores where the owners purchase sugar in 50 kg bags and re-bag it themselves to sell in

smaller quantities

Diagram 3.2: Sugar consumption by sector

Direct consumption 43%

Supermarke ts 15%

Supermarkets 15%

Convenience stores 85%

 Of the branded sugar market, Bien Hoa sugar is the No.1 brand, accounting for around 60% of the market Other brands have small market shares and include Indofood, TTC and Toan Phat However, branding is not considered to be an effective way of

increasing market share as consumers are generally price sensitive and not very

responsive to branding and marketing campaigns The retail mark-up is generally in the

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 chain this profit is captured In order to conduct this analysis, we have drawn

upon some of the analysis of farmers’ and millers’ costs that appears in later sections of the

report Our key assumptions are highlighted below:

 Millers’ costs include depreciation, which is based on the full replacement cost of

capital This means that our estimates of profitability may vary with financial reports of

milling companies, who will value their capital assets based on their book value Our

analysis is designed to give a long term view of each region’s underlying profitability

 For traders, we have assumed a fixed margin of 5% In practice, this figure could vary

over time

 In the ex-factory sugar prices, we have included the value of molasses, the value of

which is accrued to the miller However, we have not allowed for the value generated

from electricity sales This is because not all mills have surplus electricity to export, and

the value tends to be small (just a few dollars per tonne of sugar)

Results

Diagrams 3.4 to 3.7 presents the value chain based on the costs and revenues for sugar cane

growers and millers in each region Table 3.1 summarises where the total profit in the value

chain are earned, distinguishing between growers, millers, traders/retailers and the

government (in the form of revenue generated from VAT)

 In general, farmers are able to capture a large portion of the profit in the value chain

This is particularly true in areas where there is strong competition for cane, or where

alternative crop costs are particularly attractive

 The best example of this is the Mekong River Delta, where intense competition among

the ten mills for available cane means that farmers are able to capture 80% of the total

profit in the value chain, with millers operating at a loss This suggests that millers in

this region are unable to reinvest fully in their assets and implies the sector will decline

further in the future

 Farm margins are smaller in the Central regions, but farmers still capture around 40% of

total profit

 This means that millers appear to be in a much stronger position in the North Central,

Central Coastal and Central Highlands regions

Table 3.1: Distribution of the profit in the value chain, 2011

North Central/ Central Southeast Mekong River

Section 3: The Sugar Value Chain

 Traders and retailers generally capture around 20% of the profit in the value chain, although it is difficult to disaggregate this figure between the two groups

 Finally, VAT means that around 16-20% of the value generated by sugar production is captured by the government

Diagram 3.4: Sugar value chain, average 2009-2011 — North Central/Central Coast

Section 3: The Sugar Value Chain

Diagram 3.6: Sugar value chain, average 2009-2011 — Southeast

Section 3: The Sugar Value Chain

Evolution of margins

In order to show how margins have evolved over time, Diagrams 3.8 to 3.11 present our

estimates of farmers’ and millers’ margins over the last five years The results show that lower sugar prices in 2007 and 2008 means that mills were not able to cover their full costs of

production However, even when sugar prices were lower, strong competition for cane meant that farmers were able to command cane prices that were high enough to ensure they

generated healthy profits

Diagram 3.8: Grower and Miller

margins — North Central/Central Coastal

Farmers' margin Millers' margin

Diagram 3.9: Grower and Miller margins — Central Highlands

-150 -100 -50 0 50 100 150 200 250 300

2007 2008 2009 2010 2011

Farmers' margin Millers' margin

Diagram 3.10: Grower and Miller

Farmers' margin Millers' margin

Diagram 3.11: Grower and Miller margins — Mekong River Delta

-400 -300 -200 -100 0 100 200 300 400 500

Section 4: The Cost of Cane

Because of the diverse geographical area over which cane is cultivated in Vietnam, the cost of cane differs significantly 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 for cane in each region To do this, we have calculated the cane supply price (the price required to encourage farmers to plant cane rather than the next best alternative crop) over the last few years and presented our long term projections of this price based on the outlook for the returns from alternative crops

Key conclusions

although rubber area is increasing in the North Central region In coastal areas, cane competes with cassava and rice Lower wages and limited competition from high value crops means that this region has the lowest cane supply prices However, the region has suffered from disease, which has limited cane yields in many areas Moreover, farmers are often poor, which means that they choose crops that require low investments and yield results quickly, such as cassava Consequently cane area has remained fairly flat while cassava area has increased in recent years

region However, in some areas (e.g Dak Lak), cane competes with coffee In these areas the attractive returns from coffee mean that cane supply prices are very high However, area available for cane is limited (production in the region in 2010/11 was less than 100,000 tonnes)

declining because of loss of land to rubber This is partly because farmers are wealthier

in this part of the country and are able to invest in long term crops Looking ahead, there is a risk that this could continue as the cane supply price is very high when rubber

is the alternative crop Labour costs are also high, pushing up the costs of cane

production

between mills in this region mean that cane prices have been bid up well above the level needed to encourage farmers to grow cane rather than rice However, cane area has been declining as land has been lost to urbanisation Labour is scarce and

difficulties mechanising mean that cane cultivation faces significant challenges going forward

The cost of growing sugarcane

Table 4.1 presents the cost of growing sugarcane in each region in 2011 Since most farmers are paid for their cane at the farm gate, these costs exclude the cost of cane transport to the mill, which is estimated at around US$7 per tonne

Cane cultivation is carried out almost entirely by hand The only operation that is mechanised

is land preparation, where tractors are used in most areas However, some farmers still use bullocks to perform this operation For the purpose of this analysis, we have assumed that farmers harvest two ratoons, which is the average in most areas

Section 4: The Cost of Cane

Section 4: The Cost of Cane

Table 4.1: The cost of growing sugarcane by region, 2011 (US$/hectare, unless otherwise

specified)

Because most operations are performed manually, the main reason for the difference in costs

between the regions is the difference in cane yields and wages paid for farm labour This is

illustrated in Diagram 4.1, which shows the average wages paid to field workers in different

regions in 2011 Wages are highest in the south of the country because of greater competition

for labour from other activities In contrast, wages are relatively low in the centre and the

north, which are less well developed parts of the country where alternative employment

opportunities are much more limited

Diagram 4.1: Field wages by region, 2011