SADC COUNTRIES ADOPT DIVERSITY STRATEGIES AS SCRAPPED EU QUOTA RESTRICTIONS TAKE EFFECT
AS ACP/EU sugar tariff protocol changes take effect this month the Mauritius sugar industry says not only does it have strategies in place to diversify its sugar crop, but since the scrapping of quota restrictions was first announced in 2009 it has established markets in at least 50 different countries outside the EU.
THE Mauritian sugar industry is “well poised” to meet and beat the challenges of the free market following a strategic decision prior to 2009 to overhaul the industry in the country.
The Indian Ocean island is just one of a score of developing countries in the African, Caribbean and Pacific (ACP) regions where sugar industries are under threat as the abolition of the European Union (EU) sugar production quotas takes effect in 2017.
Devesh Dukhira, CEO of the Mauritius Sugar Syndicate – the marketing arm of the country’s sugar industry – said a decision to diversify its market base and improve cost efficiencies was taken upon announcement of the EU to abolish in 2009 the ACP/EU Sugar Protocol.
The protocol was providing guaranteed access for sugar from Mauritius into the EU market at fixed prices. This effort was intensified when the EU consequently announced in 2013 it would scrap quota restrictions to EU internal sugar production and sales. These restrictions created space for preferential access for EPA (Economic Partnership Agreement) and EBA (Everything But Arms Agreement) sugar producing countries. Once these restrictions are scrapped, the EU market will be primarily supplied and/ or oversupplied by EU sugar, and it is expected that the preferential margins over the world price earned on these markets by ACP and the least developed or LDC countries will disappear.
EU SUGAR IMPORTS EXPECTED TO DROP BY HALF AS THE REVISED PROTOCOLS TAKE EFFECT
Under the “Everything But Arms” agreement and existing Economic Partnership agreements with the ACP countries, duty-free access to the EU market for sugar exports remains in force, but demand for the imported commodity is expected to drop by almost half as France, Germany and Poland in particular ramp up beet sugar production and export capacity following the decision by the EU.
In a report released by the European Commission late in 2016, Europe is the world’s leading beet sugar producing region producing 50% of the total global sugarbeet crop. Beet sugar represents 20% of the world’s sugar production – the other 80% is from sugar cane.
Sugar imports into the EU in the 2013/14 financial year totalled 2.2 million tons, but EU market conditions linked to climatic conditions – which included the crippling drought in the SADC region – caused a drop to 1.6 million tons last year.
In the 2016/17 season and as a direct result of the drought South Africa’s total diminished sugar crop was consumed locally with no surplus sugar available for export.
The United Kingdom accounts for more than a quarter of the EU’s cane sugar imports from developing countries enjoying the duty-free access and it goes without saying that the future of these imports is dependent on favourable post-Brexit trade agreements, particularly for the African continent.
The Tongaat Hulett milling group, which has extensive interests in South Africa and the rest of Africa said, in its 2016 annual report, that it was positioning itself to influence the debate and outcomes of the post-Brexit environment in a bid “at least” to continue with existing preferences, particularly for higher-margin, value-added sugars.
Since the announcement that the beet sugar cap would be removed this year, EU sugar prices have also declined rapidly from an artificial high in 2013, becoming increasingly aligned with world market prices. This is a further concern for ACP countries.
Critically, production in the EU will use first world infrastructure and technology with farmers and millers benefitting from substantial agriculture support measures.
In a 2015 report by the UK-based charity Fairtrade Foundation titled: Sugar Crash: How EU Reform is Endangering the Livelihood of Small Farmers, European beet sugar producers reportedly enjoyed a single farm payment subsidy. In 2014, the report said these payments were approximately £195.41 (R3 279.68) a hectare, equivalent to about 1.8p (30 cents) for every kilogram of sugar.
ABOLITION OF SUGAR QUOTAS EXPECTED TO RAMP UP WORLD POVERTY
Also in the report, Fairtrade predicted that by 2020 the abolition of the EU sugar quota could increase the number of people in poverty worldwide by 200 000.
And, while under the current quota system, the World Trade Organisation (WTO) rules restrict the EU’s “out of quota” global sugar exports to 1.374 million tons a year and its parliament has made available 1.2 billion Euros for restructuring or diversification of the industry in 18 developing countries, the report said it would be foolhardy for African states to depend solely on handouts for growth in the industry, particularly as it predicted the promised funding would be “felt too late”.
Mauritius depends on the EU for at least 80% of its raw sugar exports – 20 000 people are employed by the sugar producing sector in the country.
With the support of the Mauritian government towards improving cost efficiencies, Dukhira said, in addition to market diversification, there had also been an expansion of the revenue base through higher remuneration from cane by-products such as bagasse and molasses. “Diversification allows an expansion of risk and benefits, and with the given flexibility, the industry can be rewarded with the highest market prices.”
IMPROVED COST EFFICIENCIES CRITICAL FOR SADC SUGAR INDUSTRY SURVIVAL
However, Dukhira said cost efficiency was a critical priority if the industry was to remain competitive against the subsidised EU market. “Cost efficiency is absolutely essential at both production level and along the supply chain. The industry also needs to be flexible to be able to tap the most attractive sales opportunities.”
He said the future of the sugar industries in the South African Development Community (SADC) was dependent mainly on favourable intra-regional and-continental trade agreements. “The African market overall has an annual deficit of more than 7 million tons and should be a safe haven for the sugar produced on the continent. Unfortunately, owing to porous borders and inappropriate trade policies in several countries, imports from outside the region exceed intra-regional trade. Sugar should be high on the agenda for the Continental Africa Free Trade Agreement in order to further promote regional integration,” he said.
SOUTH AFRICA’S MILLERS LOOK TO EU AND AFRICA “DEFICIT” MARKETS FOR GROWTH
In the Tongaat Hulett annual report however, the milling group said EU supply and demand dynamics could evolve to levels more attractive than those achievable in the African “deficit” markets. “There is emerging consensus that imports of one to 1.5 million tons of sugar a year will be required from October 2017 to meet EU internal demand, particularly in areas where beet production is absent or uncompetitive, and for the higher value special brown sugars that are not produced within the EU.”
The milling group said it had ramped up delivering high-value, special brown sugars to EU buyers from its two Mozambican sugar mills.
Responding to emailed questions Illovo Sugar Africa said it was “intent on capturing the growth opportunities which existed in regional African markets”. It said the strategy would benefit the group from both price and long-term sustainability perspective.
“The longer term outlook for sugar is for global demand to increase at a steady 2% a year with supply fluctuating depending on individual government subsidy programmes, currency rates and weather conditions. Illovo operates in a region where demand for sugar is rapidly growing, in excess of 2% a year, supported by Gross Domestic Product (GDP) and population growth. Our desire to be a local market leader is premised on the group’s ability to supply more sugar to local and regional African customers in the offering they require,” they said.
A direct outcome of this strategy has seen the group’s sugar exports to the EU fall from 23% of total sales in 2013 to 9% in 2017.
PROTECTIONIST STRATEGIES BY AFRICAN COUNTRIES BLOCK NECESSARY ECONOMIES OF SCALE
In Africa typical trade barriers such as poor infrastructure, isolated markets, import tariffs, high transit costs and production dominated by mainly small-scale farmers make for a stark and challenging contrast to the EU markets.
Also several African governments, including major consumption regions such as Nigeria and Tanzania, have imposed hefty tariffs on regional sugar imports in a bid to protect their own industries from competition according to an article in The Economist Intelligence Unit publication earlier this year. “This is a flawed strategy…Africa is missing opportunities to benefit from economies of scale because producers are often barred from selling to their neighbours,” it said.
Both Fairtrade and the authors of The Economist article agreed economies of scale were the key to the future success of the industry, and while trade barriers were being addressed they would not happen fast enough to allow sugar producers on the African continent to find alternative markets in time to stave off the effects of the EU reform.
In Swaziland, where 5.8% of export earnings are derived from sugar sold into the EU, Nontobeko Mabuza, who is the Trade and External Affairs Manager at the Swaziland Sugar Association said the strategic response by the country’s sugar industry to the beet quota abolition was to divert sales from the European region and increase sales into the Southern African Customs Union countries which include Botswana, Lesotho, South Africa and Namibia.
And while the landlocked country had yet to introduce a diversification strategy in its sugar production industry, she said it was a “key” supplier of sugar downstream industries and agri-processing operations for products such as canned fruit, jams and fermented maize meal drinks.
Mabuza said the industry was also pursuing value addition in the form of electricity generation which she said would curb costs for sugar mills and cost to growers, particularly smallscale growers whose crops were mostly irrigated.
Ubombo Sugar Limited, which is majority-owned by Illovo Sugar Africa, has recently upgraded its power co-generation facilities which now supply all of the operation’s electricity requirements, including agriculture, and exports power to the Swaziland grid in terms of a commercial supply agreement with the Swaziland Electricity Company.
However, further expansion of the supply of green energy from sugar mills is proving problematic as South Africa’s electricity supplier, Eskom floods its neighbours’ markets with its excess electricity.
Responding to questions from the Digest, Eskom said it was in fact looking to “grow” electricity sales to the SADC region because of its surplus supply.
“Over the last 18 months or so it has been fortunate that Eskom’s surplus capacity could be used to support the SADC region – from Swaziland through to Zambia. Eskom is of the view that increased transmission interconnection and mutual inter-dependence is the way to reduce electricity prices and to stimulate economic growth.”
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