The sugar industry has been in crisis for over 20 years. Beset by droughts, ambushed by cheap imports and stymied by ever-rising costs, the R16-billion sector is now facing a “perfect storm”, writes Shirley Le Guern.
That’s how the authors of a government-driven masterplan to revive the industry describe it. Other insiders suggest it is close to breaking point.
The masterplan says: Annual sugar production in South Africa has declined by nearly 25%, from 2,75 million to 2,1 million tons per annum over the past 20 years. The number of sugarcane farmers has declined by 60% during this period and sugar industry-related jobs are estimated to have reduced by 45% ….
The average sugarcane farmer and sugar milling company is incurring losses that are no longer sustainable and which now create a set of conditions where there is a real risk of unmanaged decline in the industry with devastating consequences for rural unemployment and poverty.
Trix Trikam, executive director of the South African Sugar Association (SASA), which is widely recognised as the governing body within this still highly regulated industry, was one of the signatories to the Sugarcane Value Chain Master Plan to 2030 in November last year.
He believes the masterplan offers a glimmer of hope, and says failure to resurrect one of the province’s oldest industries is not an option.
“We support 65 000 direct and 270 000 indirect jobs. And at least one million people, mostly in deep rural areas, are dependent on the cane growing and milling activities of the sugar industry which operates in the provinces of KwaZulu-Natal and Mpumalanga.
“At this stage, it would be impossible to quantify the exact number of jobs which would be at risk if the industry were to continue to be in crisis.”
The sugar industry currently comprises a complex value chain that includes an estimated 20 200 growers. Approximately 19 300 black growers produce 24% of the average 19 million tons of cane produced each year and 680 large-scale commercial farmers account for the remaining 69%.
This is processed by 14 sugar mills of which three are independently owned. The rest are owned and operated by three large milling companies – Tongaat-Hulett, Illovo and RCL – who also operate the major sugar refineries.
Cane growing and milling in South Africa is focused on the production of refined sugar and molasses for domestic consumption and raw sugar for export, although some companies have invested in diversifying production for the co-generation of electricity and production of animal feed, alcohol and the organic compound furfural.
FNB agricultural economist Paul Makube suggests that declining productivity and higher inefficiencies in downstream industries such as milling and refining have been a factor in the industry’s decline and have also accounted for the lack of investment in new technologies that would reduce costs.
“Due to lack of profitability and sustainable policy support, the industry became unattractive for investments,” he says.
But Makube warned that the contribution of the sugar sector should not be underestimated.
“It remains a significant earner of agriculture revenue even though its contribution has decreased. Dairy production and processing has expanded a lot over the last 10 years as dairy farmers have moved down from inland toward the coast, but sugarcane still remains the largest (agricultural) industry in KZN.”
Sugar farmers have also diversified into growing macadamia nuts, essential oils and avocados.
Government’s masterplan supports this but also offers a long-term direction that reroutes the value chain away from raw and refined sugar and into a wide range of globally competitive sugarcane-based products including biofuels, bioethanol (alcohol), bio-plastics, co-generated power and a range of other base and specialty chemicals.
But, first, some shorter-term, band-aids need to be applied.
The first was an increase in tariffs on imported sugar from $566 per ton to $680 per ton.
“The implementation of the master plan has led to a substantial restoration of the local market for the industry. Relative to the previous season, sales to both the direct and industrial markets are ahead by more than 170 000 tons. Clearly, demand for sugar from local customers has increased substantially and commitments regarding price restraint by producers have been upheld,” says Trikam.
But it does not detract from the ever-present problem of cheap imports.
Trikam says that South Africa has more than enough sugar for its needs. “Last season (2019/2020), we sold 1 249 476 tons of sugar on the local market. To put matters into perspective, for the previous season, sugar production stood at 2 227 230 tons. There were 41 863 tons of duty paid sugar imports.”
Imported sugar, which is landed at prices well below those of local producers, comes from the likes of Brazil and India where the industries are subsidised by their governments. They can therefore sell their finished product at well below their actual production costs.
“This gives them an unfair advantage over South Africa which has no subsidy. Hence, it is often referred to as ‘dumped sugar’ sold at a lower price compared to the locally produced sugar. The price paid by the household consumer, however, is seldom substantially lower than locally produced sugar. Much of the value is trapped by the importer.”
Another problem during the 2019/2020 season was that a whopping 424 447 tons of sugar from eSwatini found its way into the South African Customs Union market, most of it landed up in South Africa, translating into a 23% increase compared to the previous season.
This was the result of the loss of eSwatini producers’ preferential European Union quotas in September 2017. Because they do not pay tariffs, Swati producers can price their sugar below local producers. As a result, South Africa had to sell its surplus sugar on to the loss-making export market.
Another major problem for local producers was the Health Promotion Levy introduced by the government in April 2018.
Makube says this was “the last straw” for local producers as it significantly reduced demand for sugar in the value chain.
According to SASA and an independent study commissioned by Nedlac, the levy has cost R3,6-billion in lost revenue over the last three seasons. The industry has had to close two mills (Darnall and Umzimkhulu) with significant job losses due to the implementation of this sugar tax.
Although unapologetic about the consequences, the government’s masterplan acknowledges that, left unchecked, the problems will see significant operators leave the industry within 24 months.
According to the masterplan, these exits will come disproportionately from small scale growers and independent millers – with the consequence of further accelerating increasing levels of rural poverty, undermining of industry transformation and inclusiveness, and increasing industry concentration.
Unmanaged exits risk a situation where capacity mismatches will result in increased costs at all levels as mills struggle to access cane that is further away from mills, causing potentially destructive competition between mills for cane. It may well also have the effect of closures happening in the wrong places – a situation where the best cane fields and most efficient mills close, leaving behind an industry that is poorer in its performance overall, the authors warn.
A far better option will be a restructuring of the sugar industry.
“Optimisation of the local market and expansion of products from sugarcane through diversification form part of the apex priorities of the masterplan. For this to happen, there must be a systematic approach which includes restructuring and diversifying for growth. The task teams of the masterplan are currently working on the finer details and implementation,” says Trikam.
He acknowledges that, for years, the industry has pursued the possibility of producing ethanol/biofuels from sugarcane – but has had little buy in from policy makers.
“This would obviously require a conducive policy and legislative environment. We are glad to be at the stage where we are progressing this discourse through the masterplan. We are determined to come up with clearly defined diversified solutions for the industry,” he adds.
But actual details are thin on the ground.
Nevertheless, observers like Makube remain optimistic about the creation of alternative markets for sugar such as bioethanol, biojet fuel, electricity generation through biomass, and biogas production.
There are also opportunities to accelerate use in pharmaceutical and other applications in manufacturing of packaging material.
“The industry is still well placed on an international competitiveness scale. Our sugarcane farmers have proven to be some of the best in the world. As long as the industry and the government continue to work together, the industry can continue to thrive and maintain its position as a key crop in KZN. The industry worldwide is reliant on large infrastructure and capital investment. Milling, transport and harbour investment and infrastructure are imperative to the long-term competitiveness of the industry. South Africa has these in place and, with policy certainty, will come ongoing re-investment in the industry.
Makube says FNB is heavily invested in the sugarcane industry and works closely with all the industry players to support both established and new entrants into the cane industry.
“An improvement to legislation and a more predictable and stable cane price will lead to investment being redirected back into the industry – one that has served the KZN farming industry very well for more than 100 years,” he says. *
PHOTO: FNB agricultural economist Paul Makube remains optimistic about the creation of alternative markets for sugar such as bioethanol, biojet fuel, electricity generation through biomass, and biogas production.