Soaring sugar imports put jobs in danger

28 Nov 2014
Business Report
Zandi Shabalala

Johannesburg - The local sugar industry’s slow action to stem imports of cheap sugar may result in sugar mills closing down and 40 000 jobs being lost.

Illovo Sugar managing director Dave Howells said last week that the industry was late to apply for a tariff increase. “We were a bit late, but it’s only really over the last year where we have seen such a huge increase in imports,” he said.

South Africa is importing more sugar than ever at an annual pace of 400 000 tons this year, from 204 000 tons last year, according to the SA Sugar Association.

The industry was losing R50 million a month to cheap imports and 40 000 jobs hung in the balance, the group said.

Howells said if a higher tariff was not introduced soon, the local sugar industry would suffer irreversible damage. Farmers would not invest in a dying business and re-establishing sugar mills would be difficult as sizable amounts would have to be invested.

“The world price of sugar was quite high in previous years,” Trix Trikam, the chairman of the SA Sugar Association, said. “For that reason we didn’t see any reason to apply for a tariff. But when the price dropped to below the cost of production, it was realised that the formula that the [government] had in place was not appropriate, then we immediately applied.”

The association approached the International Trade Administration Commission of SA (Itac) in March to apply for a higher tariff and was invited to make a presentation on September 10.

On Friday, the commission placed the application in the Government Gazette and now it awaits comment from the public. This will take four weeks. Itac said the application was completed in August and only then could the commission accept the submission.

The local sugar industry applied for Itac to review the dollar-based reference price as it said the current price was distorted. The world price of sugar is measured on a dollar-based reference system.

The sugar industry’s request for a 50 percent tariff would translate to an increase in the sugar price from the current world price of 8 (R3 540) a ton to 4 a ton, Itac said.

The global price of sugar is lower than the cost of production in South Africa and local producers face the prospect of having to shut down their least-efficient mills as they will no longer be profitable.

According to the London-based International Sugar Association (ISA), the world price of sugar began to decline in the 2008/09 season when there was a large surplus of sugar.

It predicted last month that the coming harvest would produce more sugar than ever and this would result in the world price dropping further.

The global price of sugar had fallen by 16 percent so far this year and was likely to decline further as supply outpaced demand, the ISA said.

The price of raw sugar in March was at 17.7 US cents a pound on Friday, compared with a price of 14c a pound in September 2008, according to the World Bank. In January 2009, the price increased to about 29.74c a pound.

The import tariff is raised when the world price of sugar falls below a certain level, and the local sugar industry believes that this threshold has now been breached.

At present, local producers are forced to sell their sugar at a loss, and are being outsold by countries such as Brazil, the largest exporter of sugar, which sell their produce more cheaply in part because their farmers are subsided by their governments.

The Sugar Act states that all surplus sugar in the country must be exported.

Howells said Illovo had four mills running in South Africa and the producer was aggressively trying to grow its production through many incentive schemes. It employed about 5 000 people directly and, Howells estimated, about 20 000 indirectly through cane growers.

Howells said that he did not think the 50 percent tariff increase would be enough to slow down imports, adding that the industry would still be under pressure.

Although the SA Sugar Association said the country’s sugar industry was among the top 10 out of the world’s 130 sugar producers, the cost of production was increased by high input costs. These included employment, transport, fuel and fertiliser.

The local industry has an annual income of about R12 billion and employs 11 percent of the total workforce in the agricultural industry, according to the association.

Kagiso Asset Management head of research Abdul Davids said an increase in the reference price was justified given the dumping of sugar in the world market. The increase in the cost of production locally was a challenge to producers.

“The local sugar industry has endured significant cost challenges culminating in the farmworkers’ strikes recently. Consequently, sugar growers have been reluctant to invest in new plantings, resulting in declining sucrose yields.

The industry needs to invest in new roots to arrest the decline in yields,” he said.

Tongaat Hulett declined to comment.