Sugar Industry

The right way to protect SA’s sugar industry

After a spike in sugar imports and despite higher import tariffs, local producers argue the correct way to protect the industry must be based on the cost of production and not the selling price

The decision by SA’s International Trade Administration Commission (Itac) to raise sugar import duties by 20% does not go far enough to protect local producers from the surge in sugar imports over the past two years, says the SA Sugar Association (Sasa).

Department of trade & industry (DTI) minister Rob Davies last week endorsed Itac’s recommendation for a rise in sugar import duties from $566 to $680 a ton. Sasa applied to Itac in February for it to be increased to $856 a ton.

Sasa says cheaper sugar imports displace the local product and have accelerated the industry’s decline. It says the current protection is less than the cost of producing sugar, making it impossible for local producers to compete with cheaper imports.

Import duties have to be in line with the cost of production to be effective, it adds.

According to Sasa, SA has 20,161 registered growers who produce about 20Mt of sugar cane each season, which is processed into about 2.2Mt of raw sugar in 14 sugar mills. Sugar consumption in the Southern African Customs Union region is 2.1Mt a year.

From January to November 2017, more than 508,000t of sugar were imported into SA, mainly from Brazil and the United Arab Emirates. This was more than 25% of SA’s total sugar production and cost the industry R2.3bn in lost revenue, Sasa says. In the months before September 2016, average sugar imports were less than 1,000t a month.

“However, from September 2016 through December 2016, that average increased to approximately 25,000t a month.

“This situation worsened from January 2017 onwards as the average spiked to more than 45,000t a month, reaching highs of 83,156t in September 2017,” Sasa says in its application to Itac.

Without adequate protection against imports, the incentive for investments in refining capacity dissipates
Sasa commercial director Judith Wilson says there was a sudden surge in imports after the government erroneously set and gazetted a zero tariff for sugar, which allowed importers to bring in and stockpile sugar duty-free. She says the delay in the gazetting of a duty — which is the difference between the 20-day moving average of the world sugar price and the dollar-based duty ($680) — also triggered an increase in imports.

The association says lack of protection is threatening the local industry’s sustainability and survival. It says because most of the imports are refined sugar, local refiners are operating far below capacity.

“Without adequate protection against imports, the incentive for investments in refining capacity dissipates,” it says.

Sugar production contributes about R14bn to gross domestic product (of about R4.6-trillion). The industry employs 85,000 people directly and 350,000 indirectly through food processing and other sectors. Across the value chain about 1-million people depend on the industry, says Sasa.

The DTI says that though the approved duty is below what the industry wished for, “the $680 a ton will provide the immediate relief urgently required by the industry and sufficient trade protection against the surge of imports”.

But though the industry welcomes an increase in “effective duty” it says “the level is critical in providing medium-to longer-term stability to the industry”. Sasa’s request for a dollar-based reference price of $856 was based on the industry’s costs of production, says executive director Trix Trikam.

Sasa says Itac should not compare net selling price with landed import cost because the local industry has suffered severe price depression in the past three years. “Costs increased at a significantly faster pace than prices and the industry was not able to raise prices due to the threat of imports. In order to protect the industry at the correct level, the cost of production, and not the selling price, must be the benchmark,” it says.

The SA Sugar Association says the industry will struggle to survive without protection against imports

Local producers have not been able to recover their production costs because of reluctance to hike prices in order to stem the tide of imports.

The DTI says a sugar value-chain task team — including representatives from the beverage industry, retailers, Sasa, small-scale farmers and manufacturers and the Industrial Development Corp — was formed in May 2018, “to identify ways of supporting the industry while keeping prices paid by consumers affordable”.

The task team had to find “rapid” solutions to the problems facing the sugar industry, with plans for the short, medium and long term.

In addition to imports and the introduction of a sugar tax, the industry is recovering from the effects of the multiyear drought, which hit exports in the past two seasons. “In a normal season, the industry would typically produce 2.2Mt of sugar,” says Sasa.

“With adequate protection, it is likely that the industry would sell about 1.65Mt in the local market with 550,000t exported. The most recent export differential is approximately R4,500.”

Azwimpheleli Langalanga, a senior associate at Tutwa Consulting, says the sugar industry should use the reprieve of the import duties to improve its competitiveness.

“But import duties cannot be a permanent solution. The industry must use the time to address logistics, transport and labour costs,” he says.