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Global hop market

A local alternative to mass beer suggested by independent brewers has been successful and is now altering the global market. Beer is becoming more diversified, so transnational companies have to accept the new game rules and to switch focus to young and fast growing markets. All these processes increased the demand for aroma and bitter hop as well as their acreage expansion on two continents. However now there appeared a downward trend of alcohol consumption in the world, so even special sorts can soon turn to be sufficient. In this connection the dynamic American hop market is already facing some problems. EU hop producers have become more cautious, they are not racing to exceed the demand and look forward with more confidence, judging by the contract terms. 

Hop Market in Russia

Germany still dominates the Russian market, yet over the recent two years one has been able observe a continuous success of Czech hop suppliers. Their expansion and growing popularity of hops from the United States became the drivers of supplies growth in 2016 despite the preceding modest harvest crop in the EU, as well as the factor of relative stability in 2017. In this connection, in 2017, the ratio of the varieties continued to shift towards the aroma ones, and the supplies of Magnum hop and other alpha varieties were reduced. However, the import of bitter hop pellets is partially replaced by extracts, especially from the major beer manufacturers. Total volumes of alpha acid supplies, according to our estimation, decreased by approximately 5% and returned to the level of 2015. Barth Haas Group continues dominating the hop products market; HVG also increased its weight. At the same time, Morris Hanbury significantly reduced the supplies in 2017.

Sri Lanka. Fitch affirms Lion Brewery’s ‘Aa-(lka)’ rating; says wellplaced to recover from floods

Fitch Ratings has affirmed Lion Brewery (Ceylon) PLC’S (Lion) National Long-term Rating of ‘Aa-(lka)’ with a Stable Outlook and said the firm is well-placed to recover from the recent floods and expects its financial profile to remain consistent with its rating.

Fitch has also affirmed the National Long-term Rating of ‘Aa-(lka)’ on Lion’s outstanding senior unsecured debentures.

Fitch has maintained a Stable Outlook despite Lion’s weakening credit metrics due to the one-time disruption to production caused by floods in May 2016. Lion is Sri Lanka’s largest beer producer, with a leading domestic market share in the beer industry. Beer is the country’s second most-consumed alcoholic beverage after arrack. Lion’s credit profile is supported by its entrenched domestic brands and limited product substitution due to the high technical competence required for brewing beer in contrast to manufacturing spirits. Lion’s leading position has helped the company secure new brands and access a wide distribution network.

Fitch expects revenue to decline in the financial year to 31 March 2017 (FY17) due to higher excise duties on beer introduced in 2015, as well as lost sales due to a temporarily halt in production, as Lion’s manufacturing plant was heavily affected by Sri Lanka’s adverse weather conditions in May 2016.

However, Fitch expects beer sales to recover from FY18 onwards, supported by rising urbanisation, increasing tourist arrivals and increasing per capita income, which will help the segment regain lost market share.

“We expect Lion’s EBITDA margin to normalise to around 27 percent in the medium-term, from the high of 33 percent in FY16, mainly due to taxes on beer overtaking spirits on an equivalentalcohol basis since late 2015,” Fitch said. However, Lion’s margins should benefit in the long-term from operational efficiencies following an upgrade of its production facilities, which have sufficient capacity for the next five years.

Lion’s revenue declined 52 percent yoy in 1Q17 due to lost inventory and a temporary manufacturing halt caused by the floods.

The company is importing beer until local production recommences in late 2016 to mitigate the loss, but this is limited to its main product categories and may negatively affect margins due to the higher costs of imports. Losses on fixed-assets, stock and business interruption are covered by insurance, but the quantum of the claim or when Lion will receive payment is not yet determined.

Fitch expects Lion’s financial leverage, measured as leaseadjusted net debt/operating EBTIDAR, to weaken in FY17 due to lower profitability from business interruption. However, the company should accelerate its deleveraging from FY18, benefitting from lower capex and normalised returns, bringing its leverage ratios below Fitch’s negative triggers.

Meanwhile Fitch cautioned about the high regulatory risks faced by Lion.

Domestic producers of alcoholic beverages face high excise duties, which put legitimate alcoholic beverages outside the reach of many people. The 2015 double duty hike led to tax on strong beer overtaking the tax on hard liquor on an equivalent-alcohol basis, which we believe will slow the demand shift to beer from hard liquor.

Fitch expects further tax increases on beer to moderate, now that beer is taxed more than hard liquor.

31 Авг. 2016



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