BEVERAGE INDUSTRY PLANS COLLIDE WITH THE SUGAR POLITICS IN

UNCLAS SECTION 01 OF 02 HO CHI MINH CITY 000661 SENSITIVE SIPDIS STATE FOR EAP/MLS, USAID/ANE, EEB/TPP/BTA/ANA USDOC FOR 4431/MAC/AP/OPB/VLC/HPPHO USDA/FAS/OTP/LBENNETT E.O. 12958: N/A TAGS: ECON EAGR EINV ETRD VM SUBJECT: BEVERAGE INDUSTRY PLANS COLLIDE WITH THE SUGAR POLITICS IN HCMC HO CHI MIN 00000661 001.2 OF 002 ¶1. (SBU) By protecting its sugar markets through high import tariffs and limited import quotas, Vietnam has elevated sugar prices but disrupted supply, according to HCMC's foreign-invested beverage industry. These policies are beginning to make it difficult for companies to expand their investments or even plan current production. The general manager (GM) of one major U.S.-based soft drinks manufacturer asserts that sugar policy pits Vietnam's pro-farm Ministry of Agriculture and Rural Development (MARD) against the pro-industry Ministry of Industry and Trade (MOIT),though with additional sugar imports recently authorized for three FDI beverage/confectionary companies, the GM believes industry has gained the upper hand. In this environment, his company is looking to lobby the GVN on sugar policy and has decided to invest another $200 million dollars over the next three year to increase their bottling capacity in Vietnam. End summary. Rising Prices Prompt Opportunism, Gouging and Smuggling -------------- -------------- ¶2. (SBU) This year's steep increase in global sugar prices has prompted Vietnamese sugar refiners to renege on supply contracts, the GM said. Sugar prices have risen by better than 67 percent in 2009: world sugar prices are up from 344 USD/metric ton (bulk) in January to 583 USD/metric ton (bulk) in October, and prices in Vietnam rose from 8,000 VND/kg ($457 USD/metric ton) in January to 15,000 VND/kg ($833 USD/metric ton) through early November. Vietnam's prices are consistently higher than the global market, mostly because of quantitative import restrictions and import tariffs, but follow the global trend, the GM said. Vietnam's sugar mills are mostly state-owned, usually by the provincial governments, or recently-equitized (converted into a joint-stock company by selling a share of the company). As a result they are bloated and inefficient, he continued, and they are able to carry on business as usual only because of the country's 40 percent tariff on in-quota sugar imports (the most-favored nation rate) and a cost-prohibitive 100 percent tariff rate on out-of-quota imports. ¶3. (SBU) This trade policy hurts everyone, the GM said, because �0A;his company can't get enough high-quality domestic sugar and doesn't have consistent access to imported sugar. Because Vietnamese sugar refiners cannot meet peak demand, he said, not only must MARD and MOIT license additional ad hoc sugar import quotas but there is also a significant volume of sugar smuggled from Thailand via Cambodia. His beverage company cannot hedge its exposure to fluctuating sugar prices in Vietnam (by buying sugar future contracts in foreign markets) because the company cannot be certain it will be allowed to import the sugar, he stated; instead the company is stuck buying on Vietnam's spot market for sugar. Vietnam's sugar refiners concentrate on low-quality sugar because profit margins are higher, but confectionary and beverage manufacturers can't use it, the GM said. Of Vietnam's 38 sugar mills, only 9 provide the high level of quality (equivalent to table sugar) that his company needs. Because the purchasing and pricing of raw materials is not transparent, Vietnamese farmers sometimes hoard the sugar crop hoping that prices will rise, he continued. According to the GM, even a marginal increase in the efficiency of Vietnam's sugar crushing and refining industry could turn the country from net importer to exporter of sugar. As it is, overall sugar cane acreage in Vietnam has dropped about one percent per year over the last decade. Wild fluctuations in pricing mean that the beverage company has decided to build a physical inventory of sugar and pay for its storage. While none of these problems are unique to Vietnam, the trend here worries the GM. Where the company has budgeted $2 million for domestic sugar purchase in 2009, it plans for $5 million in 2010. ¶4. (SBU) In the latest round of sugar import quotas, his soft drink company didn't get official word that their quota request had been approved until two weeks after stories in the media claimed his company, along with Nestle and Vinamilk had been granted quota. To their credit, the GVN did give the company enough lead-time to manage the imports it approved, with four week's advanced notice before the start of a four-week window of opportunity to import their approved quota. Industry Looks to Lobby, but Not Sure Where to Start -------------- -------------- ¶5. (SBU) The GM said his company would like to engage the GVN on its sugar policy, but isn't yet sure where to start. The Ministry of Industry and Trade (MOIT) approves sugar import HO CHI MIN 00000661 002.2 OF 002 licenses, he said, but needs Ministry of Agriculture and Rural Development (MARD) concurrence. MoIT's constituency is industrial, so the ministry argues that Vietnam is short of sugar and needs to license more sugar imports. On the other hand, MARD represents agricultural interests and argues that there is no sugar shortage and no need to increase imports, which would certainly drive down the domestic prices of sugar to something closer to the world commodity price for sugar. In recent weeks HCMC newspapers have carried conflicting and often contradictory articles on sugar availability and pricing. ¶6. (SBU) The beverage company has turned to Brooks and Bowers, an American consulting firm, to develop a strategy on how best to lobby the GVN for the right to import sugar regularly. Should the company lobby the GVN as a company, as the foreign-invested beverage industry, or through a broader industrial coalition? Sugar supply has become a bottleneck for the company, delaying planned expansion. Prospects for Growth Remain Good; Really Good -------------- ¶7. (SBU) That's too bad, the GM concluded, because his company plans to invest $200 million dollars in Vietnam over the next three years, including $90 million in capital expenditures to expand manufacturing and bottling in Ho Chi Minh City and Danang, as well as Hanoi. Company sales volumes increased 20 percent in 2008 despite 28 percent inflation in Vietnam and will again grow by 20 percent in 2009 despite the effects of the global economic slowdown, he continued. The average Vietnamese person drinks 11 bottles of carbonated soft drinks per year, just a fraction of the 50 bottles per year in Nigeria or a rounding error in the 600 bottles per year consumed in Mexico. Paired with favorable demographics -- 60 percent of Vietnam's population is under age 35 -- the relatively untapped Vietnam market makes its one of the three most attractive markets in the world (along with India and China) to beverage companies, he said. Comment: -------------- ¶7. (SBU) The soft drink industry's sugar difficulties are a great example of internal politics at work in Vietnam as the country struggles to implement WTO reforms. Since the sugar refineries often have strong political ties at the provincial level, both MARD and MOIT come under considerable political pressure to create favorable conditions for domestic sugar. End comment. ¶8. (U) This cable was coordinated with Embassy Hanoi. FAIRFAX