Too much of a good thing

Andrzej Łyda, the finance and marketing director of the Wrocław Sugar Factory (CW), sees a bright future for Poland's sugar industry. He hopes that science will propel sugar beyond the food sector to new reaches of demand, including synthetics and biofuels. "There is definitely a future for sugar," he said. "There is research underway to use sugar in the production of plastics, while the by-products are a source of renewable energy and can be used to produce biofuels." Unfortunately for CW, it is not in the best position to take advantage of these promising scientific developments. "The Wrocław refinery does not differ a lot technologically from Western sugar factories in terms of technology," Łyda said. "We differ in that we have been starved of investment. There was little we could do. For many years now our strategy has had to aim for survival, not investment." Government foot-dragging has resulted in the limited restructuring and privatization of Poland's sugar industry. While only six factories supply sugar for the entire U.K., Poland's 76 sugar factories must scramble for a share of the government-allocated national quota of 1.52 million metric tons a year. As a result, many sugar producers cannot operate efficiently because their share of the national limit is too small to reach their peak production capacities. This forces them to sell sugar at below cost to preserve their quotas. "We still have virtually the same number of factories as 10 years ago," said Zygmunt Smoleński, a professor at the Institute of Agricultural and Food Economics (IERiGŻ). "In these conditions it would have made sense to close half the factories, but the government feared the reallocation of quotas. Everyone decided to pretend that everything is fine." Consequently, many factories increased their production capacities during the 1990s, further exacerbating the sector's problems, said Mieczysław Pietrzak, the president of the Polish Sugar Producers Association (PZC). "The industry as a whole has increased its production capacity by nearly 50% during the past decade. Today this capacity cannot be used because our industry can produce about 3 million tons of sugar (a year), while the market needs only 1.5 million tons."

Bitter harvest CW, which can produce 40,000 tons of sugar a year, has a quota of only 21,000 tons, which led to losses of zł. 1 million ($238,000) during the 2001-2002 season, Łyda said. With production levels and sugar prices fixed by the government, cost cuts are CW's main hope for getting back in the black. To boost cost efficiency, CW needs to switch to extracting sugar from sugar beets rather than processing liquid sugar from other refineries. But the firm lacks the funds for a laboratory to analyze sugar content, cargo handling facilities and the computerization of its production line, Łyda said. "All this requires investment but, unfortunately, we just don't have the money," he said. Despite Poland's competitive sugar beet prices, the high production costs resulting from the industry's overcapacity pose a serious threat to domestic sugar factories for the country's European Union entry, planned for 2004, which will bring fixed sugar beet prices and heavyweight competitors. "Poland is an expensive place to produce sugar," said Stanisław Dziedzic, the business development director and a member of the board of British Sugar Overseas Poland (BSO). "If you take the beet cost out, then it is significantly higher than in EU factories ... The average (output) of state factories is 25,000 (metric) tons (a year), and in the EU we talk of a minimum viable factory size of 120,000 tons." There is no money available in Poland to create sugar factories capable of withstanding EU competition, while the country's infrastructure is unable to support their logistical needs, Pietrzak said. "To produce 120,000 tons, you need to process 15,000 tons of beets a day, which requires roads that can handle some 750 trucks a day or several railway lines," he said. "Infrastructure and finance are the biggest problems in building such a factory." So far, only four European sugar producers have penetrated the Polish sugar market. The earliest entry, in 1989, was by BSO, whose factory in Glinojeck is the country's largest and will produce 100,000 tons of sugar during this year's sugar beet harvest. In 1997 the British investor poured zł. 45 million ($10.7 million) into modernizing Glinojeck, which produces half the company's sugar in Poland. According to Dziedzic, BSO has boosted productivity at its 10 Polish plants at a cost of £60 million, taking BSO's total output to 11% of the national quota. "We average around 400 tons of sugar per employee, while many state-owned factories are still under 100 tons," he said. The company has also introduced centralized purchasing and sales and developed the SugarPol and Złota Łyżeczka brands. "We have also invested heavily in people to give them a broader skills base to lead to higher productivity and to change the whole business culture from a state cooperative into a highly motivated, dynamic organization able to rise to the challenges that will come on EU entry," Dziedzic said.

Legal issues Meanwhile, CW is one of 16 factories that comprise the Silesian Sugar Company (ŚSC), whose future hangs in limbo while a lengthy legal battle between the Polish government and the French sugar company Saint Louis Sucre (SLS) drags on. In November 2000, Saint Louis Sucre (SLS) signed a contract with the former government to buy a 95% stake in ŚSC, but the Treasury Ministry halted the privatization due to pressure from the Interior Ministry, which insisted that SLS lacked a permit to control the factories owned by ŚSC. SLS struck back by suing the treasury in the Supreme Administrative Court (NSA), which ruled the Interior Ministry's obstruction illegal and gave SLS the rights to its share of ŚSC. The NSA has yet to provide a final ruling, and the ŚSC shares remain blocked, preventing essential investment and restructuring by SLS, which has already handed over zł. 580 million ($138 million) to the treasury as a deposit to secure the transaction, said Patrice Sainthérant, the director of international development at SLS. "The sugar market is really in a terrible situation, and the future of the remaining factories will depend on how fast the transaction with SLS is closed and consequently how fast the factories are refinanced," he said. While SLS awaits a final verdict from the NSA, the treasury has declared its own plans for the Silesian holding, linked to the creation of Polish Sugar (PC), a group combining three smaller regional sugar groups with 19 sugar factories with a total market share of 37%, announced last month by Treasury Minister Wiesław Kaczmarek. But with limited time before EU entry, Władysław Łukasik, the president of PC, faces the challenge of kick-starting restructuring in the group and creating a company capable of competing on a pan-European scale. "It needs to depoliticize itself, which will be a difficult time," Dziedzic said. "They don't have much time - they need to concentrate production in their leading factories and close the rest. Sales and logistics for the whole group will have to be centralized." The creation of PC, intended to revitalize Polish sugar making, has cast a doubt over the future of SLS's investment in Silesia, since the treasury has declared its intention to merge ŚSC's sugar factories into PC. Although the Treasury Ministry declined to comment on its plans for joining ŚSC with PC until the NSA has posted its final verdict, SLS will not back out of the privatization, Sainthérant said. "SLS is still strongly motivated to acquire the shares of ŚSC and is totally convinced of its rights to close the transaction according to the contract signed in November 2000," he said.