Luis Fernando Leal is the general manager of Ingenio Magdalena, one of Guatemala’s biggest sugar exporters with a turnover of US$500mn. GTR caught up with him to discuss trends in the industry, major challenges and developments in trade finance.


The Guatemalan sugar industry has gained a reputation as one of the most efficient and innovative in the world, delivering some of the highest-quality produce, and showing remarkable flexibility too. As well as sugar, up to 20% of Ingenio Magdalena’s revenue comes from electricity production (including an export line to El Salvador) and 12% from high-quality alcohol.


GTR: For the Guatemalan sugar industry at large, what have been the dominant trends in recent years?

Leal: Thirty years ago there were 90 sugar mills in Guatemala; today there are 12. There has been a lot of consolidation, accompanied by substantial growth in production and quality. We produce much more than we did 30 years ago but with fewer units running.

One of the main trends to have driven the industry other than growth has been co-generation. Today we’re a major supplier of electricity. During the harvesting season when we produce energy we [the sugar industry] produce about 20% of the energy needs of the country. On a yearly basis it’s about 11%.


GTR: How did the sugar industry become so prominent in the power sector?

Leal: Every sugar factory requires two kinds of energy: heat and electricity. Sugar mills have traditionally used their own biomass, which we can burn to supply both types of energy. Up to the early 1970s, when the price of oil increased dramatically, we always used bunker oil when there wasn’t enough biomass. But with the price increasing so much, the mills had to become self-sufficient in energy. Even when they became self-sufficient there was no incentive to go further. There was no economic incentive to become more efficient, energy-wise.

In the early 90s the electricity sector started to open up so we invested a lot of money in the factories to consume less steam. We also increased the generation capacity with more efficient equipment. In 1994 we set up our first PPA with the energy-servicing company. In 1996, there was a new law that opened up the sector, meaning that you just needed to comply with technical and environmental standards and you could supply energy. With an open market, any entity has been free to invest and the mills have done that. We continue to seek more efficient technologies, which allow us to increase the amount of energy on the grid.


GTR: Is this a model that’s common to the sugar sectors of other countries?

Leal: The electricity market is different in every country. In Guatemala, six sugar mills signed contracts in 1994 for PPAs, but today nine are supplying electricity. The ones that aren’t are very small. The industry is integrated into the energy market. The price of energy in every country depends on available resources. Why have we invested so much? Because Guatemala doesn’t have a local supply of energy, we don’t have oil or gas. Peru, for example, has very cheap energy, a lot of hydropower and gas. In Brazil they have a lot of energy, so the energy is lower-value.


GTR: On the sugar side, has the Guatemalan market evolved much in recent years?

Leal: The domestic market increases at the rate of population growth, so most of our growth has been driven towards exports. What has changed is that Guatemala used to be a raw sugar exporter and now it plays a bigger role in the refined market. Larger mills have their own refineries and because they’re integrated to the mill they tend to be more efficient. We supply the raw material to the refinery and we have very cheap energy that comes from biomass.


GTR: Does the fact that you’re exporting a refined product shield you from commodity price fluctuations?

Leal: Definitely. The volatility of sugar is high. But the refined product price tends to be more stable. We’ve also had to change a lot of our commercial practices and the required certification has changed a lot since we started exporting the refined product.

The final consumer is very concerned with food safety and is becoming more expectant in other areas of the supply chain. For example, Coca Cola: before they only cared about the quality of sugar. Then they had an interest in the quality of the process. Now they are concerned with social issues and sustainability. We have to keep on top of all of that.


GTR: So it is important for the company to have control over its supply chain?

Leal: Yes, Guatemalan sugar facilities are world class. The government owns the major port, at Puerto Quetzal. It built the main infrastructure, but most of the additional infrastructure such as warehouses, conveyor belts, and weighbridges has all come from private entities. We pay rent and have built most of the facilities that we use for exports.
Thirty years ago it took a month to load a 50,000 tonne vessel and now we load a 40,000 tonne vessel in two days. Before the ships were loaded by hand and now it’s all conveyor belts and automated processes. That required a lot of investment.


GTR: You visited the market last year for a pre-export finance (PXF) facility [the company obtained a US$125mn line, arranged by Bladex, with funds coming from ABN Amro, Deutsche Bank, KfW-Ipex, Banco Itau of Brazil, Davivienda of Colombia and the Panamanian banks Aliado, Global Bank and Prival]. How typical is this kind of facility for the sector and region?

Leal: We have grown and as we’ve invested more we’ve had a need for additional lines of credit. Before we only worked with local banks, then regional and now more and more with international banks. Lloyds and Citi used to be here, Citi is still here but Lloyds sold its operation. We have more interest from other banks such as HSBC, and the banks that participated in our facility. Some hadn’t participated in Guatemala before, that deal was their first step and they’ve expressed interest to further their exposure to the country.


GTR: The PXF was priced at below Libor plus 4%. Has this heightened interest in the Guatemalan market given you access to better pricing?

Leal: It has. If local banks didn’t have the competition from foreign banks, we’d be paying a lot more for our loans.


GTR: How fierce is the competition Ingenio Magdalena faces from domestic Guatemalan sugar producers?

Leal: We all have to increase our productivity; we compete a lot for cane and land. But we also share a lot of knowledge and technology, because we are not necessarily competing with each other. We are part of a global sugar market and have learnt that through co-operation we can also improve productivity and all gain. We share a research institute, we share a lot of the infrastructure that we use, and we also share other aspects such as a code of conduct to which we all comply, including environmental and social issues.


GTR: Is the government active in supporting the sugar exporters? What sorts of regulation are you subjected to?

Leal: No. This has been almost entirely a private sector effort. There is domestic regulation regarding work conditions, environmental and transport standards. But the mills have gone beyond that regulation. We have realised that we
need higher standards if we’re to compete internationally. For example, we don’t have regulation regarding air emissions, but in the sugar industry we agreed that we’d comply with a certain standard.

At the same time, all the financing that comes from the international banks usually comes with conditions regarding the Equator Principles or the World Bank standards, so we have to ensure we comply with that.