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Strategic Case Analysis: ADI Sugar - Essay Example

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Australian Diversified Industries Limited (ADI) is a multi-faceted company consisting of three primary divisions; ADI Sugar, ADI Timber Products, and ADI Fertiliser and Chemicals. These segments operate largely autonomously, and management is currently considering the divestment of the sugar division due to poor performance…
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Strategic Case Analysis: ADI Sugar

Download file to see previous pages... ADIS competes in the highly speculative and volatile world sugar market. It produces its finished product through two methods of processing; milling and refining. Each of these processes yields a different type of sugar product that is produced, priced, marketed, and distributed in different ways; both nationally and internationally. Regardless of the various product distinctions, however, this external industry analysis section will focus on the pricing and consumption of the all-inclusive product we will call "sugar," with all of its derivative products, i.e., for these purposes, there is no significant distinction between table sugar, confectioner's sugar, or molasses.
The world's sugar consumption has "grown steadily by approximately two percent each year" (13) and, while stable industry growth is always perceived as a good thing, there are various economic, demographic, political, and other developments that make the sugar industry somewhat anomalous and less predictable than other industries. This means that there are enough variables within the industry that no one company can count on the growth in consumption to directly translate into growth in the profits of the organization.
Economic Factors. The world price of sugar is a direct function of supply and demand; and sugar is a traded commodity on the international markets. This means that price fluctuations will occur for fundamental economic reasons, like major shifts in supply or demand. Most countries, with the exception of Australia and Brazil, manufacture enough sugar for domestic consumption and just enough of a surplus to sustain the domestic needs in years of crop shortfalls. When there are significant shifts in supply and demand, like what happened when Brazil chose to halt its sugar-based ethanol development and sell the sugar on the open market, the supply skyrocketed with a corresponding drop in the price. Prices will also fluctuate due to technical or non-fundamental economic reasons such as speculators trading futures contracts. These traders will bid the futures prices up or down, take profits, cut loses, etc., and all of that activity impacts spot pricing, particularly in the short and medium term timeframes. This means that at any particular moment in time, the sale of a significant amount of sugar could be subject to a wide variety of price points.
Another significant economic factor affecting growth and profitability is the issue of currency exchange. The sugar market is priced in US Dollars, and the resulting relationship between any country's currency to that dollar will be reflected in the final pricing. For example, the manufacturing process for ADIS is based on the Australian dollar. If that monetary unit is weak against the US dollar when a sugar transaction is made, the cost has been artificially inflated by the currency exchange rate. This factor impacts the growth of the industry as companies will have to predict, or hedge, their currency management to maintain operational efficiencies and profitability.
Demographic Factors. One industry-wide issue that impacts the potential future growth ...Download file to see next pagesRead More
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