Increase in the domestic dollar-based reference price of sugar

The initial duty on sugar has been calculated as the difference between the US6/ton and the price of sugar on the London sugar exchange on 3 January 2014, which amounted to US0.40/ton at an exchange rate of R10.47 to the US$ as follows:

Future adjustments to the level of support will be based on quantum movements in the world reference price as follows: The difference between the 20 trading day moving average London No.5 settlement price and the established domestic reference price of sugar will be calculated daily. If the 20 trading day moving average of the No.5 settlement price shows a variance of more than US/ton from the previous trigger level for 20 consecutive trading days, a new duty will be calculated. The resulting dollar duty will be converted to Rand, based on the Rand/Dollar exchange rate prevailing on the day that the adjustment is triggered.

The Commission’s recommendation was made following an in-depth investigation of the industry, upon an application lodged by the South African Sugar Association (SASA), on behalf of its members, for an increase in the DBRP for sugar from the existing US8/ton to US4.34/ton.

SASA’s request was that the DBRP be substantially altered from the current methodology used to determine the variable tariff formula, and instead be based on the domestic sugar industry’s own cost of production and desired return on investment.

As reason for the application, SASA submitted that it needed a fair level of protection, based on the importance of the South African sugar industry in the South African economy and its contribution to sustainable socio-economic development. It submitted that increasing imports affect the financial sustainability and competitive position of the domestic industry.

The application by SASA was published in the Government Gazette on 20 September 2013 for comment by interested parties. As part of the consultative process, ITAC engaged extensively with interested parties throughout the investigation.

These parties consisted of representatives from the SACU primary and secondary industries, importers, retailers, the National Agricultural Marketing Council (NAMC) and the Department of Agriculture, Forestry and Fisheries (DAFF). Representatives from the primary and secondary sugar industries, the Association of South African Sugar Importers (ASASI), as well as the downstream manufacturers of products containing sugar e.g. the Beverage Association of South Africa (BEVSA), Tiger Brands Limited, Snackworks (Pty) Ltd, and the South African Chocolate and Sweets Manufacturers Association (SACSMA), made oral presentations to the Commission at its meeting of 10 December 2013.

The Swaziland Sugar Association supported the application for an increase in the DBRP, stating that the DBRP must be at a level that guarantees effective protection of the SACU sugar industry. This protection is justified for a number of reasons such as distortion in the global sugar markets, sensitivity to the sugar industry in SACU and the need for a positive tariff in negotiations with third parties. It was submitted that the sugar industry continues to be threatened by escalating sugar imports into SACU that could significantly affect economic growth, employment, human development and Swazi economic empowerment. It further requested that the DBRP be reviewed every year to accommodate developments in international prices and/or the distortion levels.

The Ministry of Trade and Industry of the Republic of Namibia submitted its objection to the application stating that it supports the views forwarded by Matrix One-Two-One Commodity Market (Pty) Ltd, that commented on behalf of the Namibian private sector, stating that the SADC Protocol’s aim was that no sugar industry within SADC should suffer injury, but with the long term objective to establish full liberalisation of trade in the sugar sector in the SADC region after the year 2012.

The Ministry of Trade and Industry of Botswana objected to the application stating that the increase in the domestic DBRP would have a negative effect on the sugar downstream industries, and that prevailing restrictions or conditions in the SACU market should be removed to allow Botswana to import cheap sugar from other sources.

Comments were received from some of the major South African industrial users who use sugar as an ingredient in their respective industries. The companies, namely, Ceres Fruit Juices (Pty) Ltd, the Beverage Association of South Africa (BEVSA), the South African Chocolate and Sweets Manufacturers Association (SACSMA), XA International Trade Advisors representing [Snackworks, a division of National Brands Limited (NBL)], Heinz Foods South Africa (Pty) Ltd, the COTI Chocolate Manufacturers (Pty) Ltd, Cape Cookies, Halewood International SA, Bokomo Foods, a division of Pioneer Foods, Coca-Cola South Africa, and the South African Fruit Juices Association (SAFJA) objected to the application for an increase in the DBRP on sugar stating that an increase in the DBRP for sugar would directly increase their input costs, thus affecting the production of products containing sugar.

Supplementary comments were also received from six importers of sugar, namely, Sugar on Tap, Akila Trading (Pty) Ltd, Matrix One-Two-One Commodity Marketing (Pty) Ltd, Flava Foods CC and River Edge Trading 4 (Pty) Ltd. These companies submitted that an increase in the DBRP of sugar to the requested level would eliminate all imports and put their companies out of business.

Comments objecting to the application were also received from two shipping companies, namely, Nicholson Shipping SA and MOL South Africa (Pty) Ltd., who objected to the application indicating, inter alia, that should the duty be granted, consumers would be put under pressure as the price of white sugar has increased over the past six years.

Comments objecting to the application were also received from the following retailers: Shoprite Checkers and Wheels Cash and Carry cc, citing, inter alia:

• The right of everyone to food in terms of the provisions of the Constitution;
• The proposed increase would not benefit the consumer;
• The increase would increase the level of inefficiency of SASA’s members and diminish broad-based economic empowerment;
• Millers would maximise profits; and
• The depreciation of the Rand sufficiently protects the industry.

Although comments objecting to the application by SASA were received from various interested parties, there was acceptance by these interested parties, especially those that appeared before the Commission, that there was a need to adjust the current DBRP given the passage of time since the last review, but not at the level requested by SASA.

Support for the application was received from 65 entities, including farming, logistics, energy, manufacturing companies and associations.

The main reasons for support from the above entities revolved around issues such as that the companies are directly dependent on the sugar industry for their businesses and that mill closures would lead to significant job losses in farming as well as in supporting industries.

The Commission considered four scenarios in making an appropriate tariff determination. Before considering the four scenarios, the Commission firstly considered an appropriate, evidence-based distortion factor in the global sugar market, due to subsidies. The Commission drew on information obtained from a report by Patrick H Chatenay, prepared for the American Sugar Alliance, titled: “Government support and the Brazilian Sugar Industry”, dated 17 April 2013. It was found that the Brazilian sugar industry benefits from US.5 billion per annum of direct and indirect government incentives, representing 7% of the price of Brazilian sugar.

The above distortion factor was decided on as it was evident from the latest Landell Mills Commodities (LMC) data, specific to the sugar industry, that the average world sugar price has, since the Commission’s last review, increased to such an extent that it now exceeds the average world cost of production. In the last review, the Commission determined that the difference between the weighted average global cost of sugar production and the much lower average global sugar price was indicative of the distortion in the global sugar market. In determining an appropriate current distortion factor, the LMC data was not helpful and the Commission instead relied on the above-mentioned report on the Brazilian sugar industry.

The Commission determined that the current freight rate and other costs to import sugar from Brazil, the main source of imports into SACU, to a port in South Africa, amounts on average to US/ton.

The Commission then considered the following variable tariff formula scenarios, taking into account a distortion factor of 7% in the average world price and ocean freight costs of US/ton:

Scenario 1:

Based on a 10-year average world sugar price of US0/ton

Over the last ten years, the average world sugar price was US0/ton. Applying a distortion factor of 7% (US/ton) and transport costs of US/ton, the domestic reference price would be US6/ton.

Using the price calculations as at 3 January 2014, no duty will be triggered as the price on the day (US0.40/ton) was higher than the domestic reference price of US6/ton.

The 10-year average world reference price was used by the then Board of Tariffs and Trade (BTT) as a benchmark price. However, a ten-year average was found by the Commission to be too long a period to account for structural changes in the global sugar market and rising price levels. In the case of the variable tariff formula for wheat, the Commission found that a shift in this parameter was required to account for recent structural changes. The Commission decided on a five-year average world wheat price that properly reflected prevailing circumstances in the global wheat market.

Scenario 2:

Based on a 5-year average world sugar price of US9/ton

Over the last five years, the average world sugar price was US9/ton. Applying a distortion factor of 7% (US/ton) and transport costs of US/ton, the domestic reference price would be US4/ton.

Using the price calculations as at 3 January 2014, a specific duty of 77c/kg (equivalent to 15% ad valorem) will be triggered, equal to the difference between the price on the day (US0.40/ton) and the higher domestic reference price of US4/ton.

Although the 5-year average is consistent with the methodology followed on wheat, the Commission took the view that a DBRP of US4/ton would just fall short of adequately supporting the sugar industry in relation to current costs of production.

Scenario 3:

Based on a 4-year average world sugar price of US8/ton

Over the last four years, the average world sugar price was US8/ton. Applying a distortion factor of 7% (US/ton) and transport costs of US/ton, the domestic reference price would be US6/ton.

Using the price calculations as at 3 January 2014, a specific duty of 132c/kg (equivalent to 26% ad valorem) will be triggered, equal to the difference between the price on the day (US0.40/ton) and the higher domestic reference price of US6/ton. Given the peculiar circumstances of the sugar industry as these relate to the cost of production and the industry’s price-competitive position vis-à-vis landed cost of imports, a four-year average world reference price was found to be an appropriate benchmark price.

Scenario 4:

Based on a 3-year average world sugar price of US5/ton

Over the last three years, the average world sugar price was US625/ton. Applying a distortion factor of 7% (US/ton) and transport costs of US/ton, the domestic reference price would be US8/ton.

Using the price calculations as at 3 January 2014, a specific duty of 207c/kg (equivalent to 41% ad valorem) will be triggered, equal to the difference between the price on the day (US0.40/ton) and the higher domestic reference price of US8/ton. Due to price instability over the short term (world sugar prices have since fallen steeply below the 3-year average world price), the Commission found that, in this instance, a 3-year average world reference price was too unstable to serve as a longer-term world reference price. A domestic reference price of US8/ton would overprotect the industry and have an inflationary impact.

The Commission’s determination of an appropriate DBRP

The Commission could not support the applicant’s request for a radically altered formula, to be periodically updated, based solely on the domestic sugar industry’s own production cost and desired return on investment. Spiralling cost and price increases and investment returns would be automatically accommodated through a higher tariff on imports, completely isolating the domestic industry from import competition. In effect the industry would be setting the tariff. Such a system would not be conducive to competitiveness and would have a significant inherent cost-raising impact downstream with unintended consequences for food security as well as the tariff-setting process and methodology for other commodities such as wheat and maize. In addition, the level requested by SASA would disadvantage the large industrial manufacturers using sugar as an intermediate input, constituting more than 60% of the domestic sugar industry’s downstream clientele.

A DBRP as suggested by SASA could lead to unintended consequences by encouraging industrial users to consider less costly imported substitutes for sugar, such as high fructose cassava syrup or artificial sweeteners.

The Commission found Scenario 3 (DBRP of US6/ton), the most appropriate model for a revised domestic reference price for sugar. The reference price of US6/ton yielding an immediate duty equivalent to 26% ad valorem, sufficiently accounts for the structural changes in the global market since the last review, and corresponds to the existing price disadvantage experienced by the domestic industry. This reference price of US6/ton is consistent with one of the major reasons cited by SASA for this application that the aim is to have a “fair level” of protection.

Using the world sugar price of US0.40/ton as at 3 January 2014 and at an exchange rate of R10.47 to the US$, SASA’s request of a DBRP of US4.34/ton would have resulted in a specific duty of 339c/kg (equivalent to 66% ad valorem). South Africa’s WTO bound rate on sugar is 105% ad valorem.

In arriving at its recommendations and in light of the foregoing, the Commission considered the information at its disposal and the comments received. The Commission also took the following factors into account:
• The rising level of imports into the SACU and erosion of market share of domestic producers. On average, imports constituted approximately 7.6% (including SADC) of the total SACU market from 2009 to 2012. However, provisional data indicates that imports have increased from 7.6% to 18.6% of the SACU market. This spike in import volumes in the latter part of 2013 seems to coincide with the movement towards the finalisation of this investigation and once the new tariff dispensation is implemented this is expected to normalise;

• The suppressed domestic sugar price as a result of distorted global market prices;

• The domestic sugar industry’s considerable levels of production, employment and investment; and,

• The competitive position, including the cost and price structure, and the level of price disadvantage experienced by the domestic sugar industry vis-à-vis foreign producers.

The Commission also considered that the domestic sugar price is not set in the market but is a self-regulated (standard or notional) price set by the sugar industry, comprising the growers and the millers, at the beginning of each year. General inflation levels dictate the price, regardless of cost increases or import competition.

Although South Africa’s WTO bound rate on sugar is 105% ad valorem, the Commission also considered that an increase in the duty on sugar would have an impact on downstream industries and consumers. Unlike the other tariff scenarios, the price-impact analyses considered by the Commission, suggest that the domestic reference price recommended below, yielding an immediate duty of 132c/kg, equivalent to 26% ad valorem, would not have a considerable price-raising effect, but would remove the price disadvantage experienced by the domestic industry and lead to increased production levels and profitability.

In view of the above, the Commission recommended that the DBRP for sugar be increased to US6/ton as follows:

Domestic reference price = World reference price + distortion factor – transport costs

i.e. US6/ton = US8 + US - US

Using the price data as on 3 January 2014, a specific duty of 132c/kg (equivalent to 26% ad valorem) has been triggered using a DBRP of US6/ton.

Lastly, the idea is not a complete ban on sugar imports and therefore international competition but rather to create a level playing field with foreign competition so that domestic farming and manufacturing are reasonably profitable. In these investigations to increase tariffs, carried out on a case-by-case basis and supported by evidence, the Commission acts rationally and does so within government’s set policy objectives.

For further enquiries, please contact:
Mr Siyabulela Tsengiwe
Chief Commissioner
ITAC
Tel: 012 394 3712
Cell: 082 454 8979.