Something’s amiss in the sweet and sleepy world of Canadian sugar. After years of relative calm, it seems the two behemoths that make up Canada’s sugar duopoly—Redpath Sugar Ltd. and Rogers Sugar Income Fund—are suddenly spoiling for a battle, and that has analysts and investors nervous.
Slow, steady and profitable has long been the state of affairs in Canada’s sugar business. But a few weeks ago, analysts warned that the giants had awoken and seemed to be ready for a mutually destructive fight. Michael Van Aelst at TD Newcrest released foreboding reports alerting investors that “ramped-up competitive activity” had “reached a level not seen in over a decade,” and he downgraded Rogers stock to “reduce” from “hold.”
What’s at the root of all the bedlam? Turns out, it all comes back to the loss of a single contract. And not even a real biggie.
Earlier this year, Redpath managed to outbid Rogers on a contract to supply sugar to an Ontario-based retailer. According to analysts, the customer was Loblaw Ontario, though neither sugar company nor the grocer will confirm it. That lost contract, reports Rogers, represents a measly one per cent of the total volume it anticipates selling in fiscal 2009. Put that way, the situation doesn’t sound so severe; more like giving up cheap candy to a pushy chum coveting your convenience store loot.
But to really understand what’s going on, one must first get a handle on the strange dynamics that dominate Canada’s sugar business. If nothing else, the controversy highlights just how little action the sector usually sees. “It’s a pretty sleepy, small industry,” says one insider who spoke on condition of anonymity. “No one really pays any attention.” Only three stock analysts cover Rogers, and since Redpath is private, little is known about its inner workings. Truth is, there’s not much to behold. Per capita sugar consumption has not changed since the 1940s, according to the Canadian Sugar Institute. “It’s a stable, solid kind of business,” says one analyst. “It doesn’t go anywhere.”
Since 1995, the Canadian International Trade Tribunal has imposed strict anti-dumping legislation against the United States and Europe as a way of protecting Canadian companies from imports of cheap, foreign-refined sugar. Every five years since then, when CITT has reviewed whether those duties should continue, the domestic heavy-hitters Redpath and Rogers have succeeded in maintaining their lucrative protection.
As a result, Rogers and Redpath hold roughly 96 per cent of the Canadian sugar market. The rest is spread between foreign companies, some of which may face the tariffs. For the most part, analysts say, Redpath and Rogers have operated in relative harmony. There are plenty of industrial and retail customers to go around, and there doesn’t seem to be much point in cannibalizing the industry. Ed Makin, president of Rogers, says “there’s competition every single day in the marketplace,” but both companies have seen relatively stable volumes and profits for several years now.
So why would Redpath suddenly disrupt the domestic equilibrium by actively pursing the Ontario business held by Rogers?
One theory posited by some analysts is that American Sugar Refining Co., which has owned Redpath since February 2007, has “deep pockets” and wants a bigger chunk of the Canadian market. It’s simple: Rogers has always had just a little bit more market share, and Redpath sees an opportunity to squeeze a rival. Its aggressive move has the potential to trigger a mini price war, and while that’s great news for customers, analysts and investors worry it’ll be terrible for profits.
But there’s another hypothesis, which is far more beguiling. The CITT’s next review of anti-dumping tariffs is slated to begin in 2010, and at least one cynical observer suggests that Rogers and Redpath need to demonstrate that the domestic market is already highly competitive, to bolster their argument that the tariffs must remain in place. After all, if the two companies are already slugging it out for business, there’s little incentive for regulators to open the doors to more foreign competition and risk flooding the market.
This, of course, is pure speculation. Makin scoffs at the notion that the two companies are merely putting on a show for federal trade regulators. Redpath declined to comment for this story. But could a little competition between Rogers and Redpath actually end up benefitting both companies? “Well, if it does, it does,” Makin says.
This much is clear: pretty soon industrial consumers who make candy with Canadian sugar and grocers who sell to the public might benefit from lower prices. And for now, sugar refining is a lot less boring than usual.