Not so sweet

A year ago this month Xiwang Sugar changed its name to Xiwang Property. The largest Hong Kong-listed sugar producer had decided to sell its core operations and switch to real estate development, after reporting its first loss for 10 years.

Why? Producing food sweeteners was no longer profitable due to rising raw material prices, Xiwang explained. It argued that building homes offered a more stable outlook in the long run. But the transformation is yet to pay off. Xiwang got into property at a time when most developers were starting to struggle. In fact, its net loss widened to Rmb966 million ($155 million) in 2013 from Rmb18 million. Its market value has shrunk to less than $100 million, or one tenth of what it was worth in 2006.

But could Xiwang have been in even worse condition if it had stayed put, and remained focused on sugar products?

Quite possibly. One of its former competitors, Fenghao Sugar, is reportedly on the brink of bankruptcy. The Guangxi firm and its units have amassed borrowings of more than Rmb2.4 billion, according to 21CN Business Herald. Fenghao has been unable to generate sufficient cash to finance its debts.

“The cashflow problem of Fenghao happened in May. Everyone in Guangxi’s financial sector is now aware of this,” 21CN quoted an unnamed banker as saying, adding that about 10 lenders or trust firms could find that their loans to the sugar firm have turned sour.

Guangxi is China’s most important sugar production base. More than a hundred firms contribute about 60% of total output every year. In the decade to 2010 the industry was highly profitable, Xinhua reports. But the mood changed in 2012. Bumper harvests in Brazil, the world’s largest sugarcane grower, pushed down global prices. As a result the share of imported sugar in the Chinese market tripled to 30% last year. Domestic sugar prices fell to about Rmb4,000 per tonne from Rmb7,000.

Like so many other industries in China, sugar also suffers from significant overproduction. In latest sugar season, domestic output reached 13 million tonnes but consumption was far less at 5.96 million tonnes. CBN calculates that the bulk of the unsold inventory carried a production cost of about Rmb4,600 per tonne, estimating that producers nationwide could report combined losses of Rmb10 billion this year.

As more arable land is rezoned for development, other sugar firms have been venturing into real estate too. But their lack of experience in the industry – as well as the debts they have run up to fund the switch in strategy – mean that many are ending up in worse financial health. “The liquidity problem of Fenghao is a direct result of its diversification not paying off,” 21CN suggested.

Meanwhile the Guangxi government has earmarked up to Rmb9 billion of interest-free loans to help sugar producers this year (of course, 21CN suspects that some of the money is being channeled into property projects instead).

For now, creditors are willing to help the Guangxi government by giving the debt-ridden producers more breathing space, the newspaper says. Another option under consideration is absorbing the unsold inventory into a strategic reserve.

However, the Worker’s Daily suggests the longer-term solution is rooted in the land. “We need to make sure there are large enough economies of scale to preserve a strategic industry,” the newspaper said. That also implies that the provincial government will need to encourage a wave of consolidation across what remains a widely fragmented industry.

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