Johannesburg — ILLOVO Sugar, Africa's biggest producer of sugar, said yesterday it expected a tough year ahead because of volatile sugar prices and the strong rand.

The group, a 51% subsidiary of Associated British Foods, paid its MD Graham Clark 34% less last year after earnings fell. Mr Clark's pay excluding share options was R3,96m in the year to March 31, down from R6,01m a year earlier. That included a R465000 bonus compared with R2,37m the previous year.

The group was likely to produce more cane, sugar and downstream products than it did in the past financial year, with output in Zambia expected to grow more than 25%, chairman Robbie Williams said in the company's annual report, which was released yesterday.

However, world sugar prices were volatile and below last year's average prices. Sugar revenue would remain negative if prices remained the same.

The level of the rand would also affect results. In the past year the rand's value was stronger than in the previous year, which negatively affected export revenue for sugar and downstream products, as well as the conversion of foreign subsidiary profit into rands.

Sugar exports to the European Union were anticipated to grow following increased market access, which would be of long-term benefit to the group, but the financial crisis in the euro zone and its effect on currency values were likely to have a negative effect on results this year.

Financing costs were expected to be similar to last year. The effective tax rate was expected to remain at about 30%. Headline earnings per share fell 19% to 171,2c, after the dilution effect of a R3bn rights issue. The group was in a positive cash position of R213m at year-end, despite expansion projects and the acquisition of businesses amounting to more than R1,1bn during the past year.

Illovo intends to continue to significantly increase its cane and sugar production capacity outside SA and to become self-sufficient in power for its operations as well as supply power to the national electricity grids in the countries in which it operates. In Swaziland, an expansion and co-generation project would lift annual sugar production to more than 300000 tons from 220000 tons, and increase power generation capacity using biomass as supplementary fuel for the factory boilers.

The power plant would make the factory and estates self-sufficient in electricity consumption and an agreement had been reached with the Swaziland Electricity Company to supply electricity to the national grid for 48 weeks of the year.

The first step of the Zambian expansion project was completed for the beginning of the 2009- 10 season. "The plant has been settling down and is demonstrating its increased production capability," Mr Williams said. "The Zambian operation also acquired a cane-growing company, Nanga Farms, producing 325000 tons of cane per year with the potential to increase it further."

Illovo's shares have fallen about 11% since the start of this year to R28,30. The share price traded at R28,21 yesterday.