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Foreign investors bail out Slovak sugar industry

Two German and French sugar companies arrived in the nick of time on July 30 to rescuscitate the moribund Slovak sugar refining industry, which has been mired in financial woes for the past two years. Along with a Slovak investor, the foreign buyers announced at a press conference they had combined to create a joint enterprise named Word. Aiming for a 40 percent share of Slovakia's sugar market, Word has been welcomed by industry experts but has attracted the attention of the Slovak anti-monopoly office.
The Slovak sugar industry has long been plagued by an inefficient production process and has more recently suffered from a massive sugar surplus on the domestic market. The country's eight refiners lost more than 500 million crowns ($14 million) in 1997, and faced a 70,000 ton excess supply of sugar at the beginning of 1998. Robert Straka, executive director of the Slovak Sugar Refining Society (SCS), said that "in the long term, there is no way all eight refineries in Slovakia can survive."

Two German and French sugar companies arrived in the nick of time on July 30 to rescuscitate the moribund Slovak sugar refining industry, which has been mired in financial woes for the past two years. Along with a Slovak investor, the foreign buyers announced at a press conference they had combined to create a joint enterprise named Word. Aiming for a 40 percent share of Slovakia's sugar market, Word has been welcomed by industry experts but has attracted the attention of the Slovak anti-monopoly office.

The Slovak sugar industry has long been plagued by an inefficient production process and has more recently suffered from a massive sugar surplus on the domestic market. The country's eight refiners lost more than 500 million crowns ($14 million) in 1997, and faced a 70,000 ton excess supply of sugar at the beginning of 1998. Robert Straka, executive director of the Slovak Sugar Refining Society (SCS), said that "in the long term, there is no way all eight refineries in Slovakia can survive."

Enter Word, with start-up capital of 1.001 billion Slovak crowns ($29 million). Half of the sum, plus one share, was invested by Eduard Šebo, director of the Trnava sugar mill. The rest of the shares were taken by German company Nordzucker (32 percent), and French sugar refiner Union des Sucreries et Distillers Agricoles (Union of Sugar Refiners and Agriculture Destillers - SDA), which owns 17 percent.

According to Šebo, Word seeks to invest 1.5 billion Slovak crowns ($43.2 million) in the coming years. The company has shown an interest in gaining a majority in three sugar mills - Trnavský, Považský and Šurianský - and minority in two - Seredský and Gemercukor. Through these purchases, Word would control 40 percent of the sugar market. The English-French company Eastern Sugar, which owns the sugar mill Juhocukor in Dunajská Streda, holds another 30 percent. "The rest of the market (30 percent) will sooner or later be taken over by one of the two foreign companies," said Šebo. Additional foreign investment becomes more likely when in view of Eastern Sugar's plan to increase its market share to 50 percent, Šebo added.

Sugar industry specialists welcomed the formation of the company, and predicted that eventually no domestic owners would control sugar mills in Slovakia, a phenomenon that has occured in Austria and the Czech Republic. "At this time, contributions from foreign investors are the only possible way to avert a crisis in the sugar industry," said Straka.

But Slovakia's business watchdogs have yet to be convinced that Word is good for the sugar industry. On August 11, the Slovak Anti-Monopoly Office initiated an investigation of whether the company would gain a dominant position on the market through its investment. "To be a monopoly means to hold 100 percent of the market share. But in this case, what matters is domination," said Slavko Križan, executive director of the Anti-Monopoly Office. "You can have only 40 percent and still be dominant." Križan, however, agreed that foreign investment would be the salvation of Slovakia's sugar industry.

Independent market resear-chers doubted the new company's ability, in the face of current market policies, to single-handedly change the face of the sugar industry in Slovakia. "The sugar market in Slovakia is not liquid, which means that Word will try to lobby for a sugar price increase so that they can get their investments back soon," said an independent market researcher who requested anonymity. He said he believed that Word would not begin to invest until domestic sugar prices climbed.

But SDA President Philippe Duval told The Slovak Spectator that his company was being realistic, and expected that a return on capital would take five years to germinate. "In every country the return on capital investments in the sugar industry is not quick because it's a heavy industry," he said, agreeing that the Slovak market suffered from "the low price of sugar over 1997/98 season and from very high interest rates."

Indeed, a two-year excess of sugar has left the industry in deep trouble. At the beginning of 1998, when refiners faced a 70,000 ton excess of sugar, the State Fund of Market Regulation pitched in to help by purchasing 20,000 tons. Sugar companies exported another 20,000 tons on their own risk, losing 5,000 Slovak crowns ($144) per ton. The remaining 30,000 tons has not been sold yet.

Currently, production costs for sugar total 15,000 to 17,000 Slovak crowns per ton. The domestic sugar price is controlled at 13,500 Slovak crowns per ton.

Nothing daunted, on August 12 Word launched its first capital activity: an offer to buy public shares of the Trnava sugar mill, where the company already held 29 percent. According to Šebo, Word wants to increase its share to 71.22 percent and become a majority shareholder of the Trnava site.

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