The industry wants stronger measures to save it from cheap imports and ‘distorted’ world prices.
The most protected industry in the country is applying to have the threshold at which protective measures kick in more than doubled.
This would make it twice as easy for sugar producers to be protected from cheap imports that are allegedly being dumped on the local market.
The Sugar Association of South Africa put through a request in March that the “dollar-reference price” for imports of sugar into the country be increased from an existing $358 per tonne to $764 per tonne.
The world sugar price quoted by the Nymex (New York Mercantile Exchange) is currently $339 a tonne.
South Africa is a low-cost sugar producer and is consistently ranked in the top 10 of producing countries globally.
It is also a highly protected market, which requires domestic surpluses to be exported to support local prices.
Investigating the sugar industry
The International Trade Administration Commission of South Africa, to which the request was made, is expected to publish its intention to investigate the local sugar industry on September 20.
When sugar that is cheaper than the reference price is brought into the country, tariff measures kick in to protect the local industry.
However, when imports are higher than the reference amount, no tariffs are paid.
Because of this, the reference price has had no effect since 2009.
In its application to the trade administration commission, the sugar association argues that the reference price is too low, because sugar importers have enjoyed “zero” tariffs for the past four years.
“The intention of a tariff is to protect an industry from the effects of a distorted world market but if there is no duty payable because the formula deems there to be zero duties payable, this means the tariff is ineffective,” the sugar association’s executive director, Trix Trikam told the Mail & Guardian.
Difficulties facing sugar producers
The application is the second of its kind made by the sugar association, with the first one lodged in 2008.
Although sugar producers faced similar difficulties five years ago, the association says the situation has grown dire.
“In 2008, the sugar association applied for an increase in the dollar-based reference price from $330 per tonne to $400 per tonne, premised on what it perceived to be a 60% distortion of the international sugar price,” explained Grant Herholdt, trade expert and director at legal firm ENS.
“The sugar association was of the view that the world reference price for sugar was lower on average than production costs. It complained that production costs were increasing in South Africa due to the increasing costs of major inputs such as diesel, herbicides and fertilisers,” he said.
Herholdt said that the domestic industry simultaneously came under pressure from cheap imports of sugar by markets such as Brazil and India.
This meant that demand in South Africa for sugar from domestic producers was reducing and demand for imported sugar at lower prices was increasing.
Collapse of the domestic industry
“It followed that stockpiles of domestically produced sugar increased. The only option was to sell the stockpiled sugar to an export market that prescribed a price that was insufficient to absorb the higher production costs.”
The sugar association argued that these market conditions “would result in the collapse of the domestic sugar industry,” said Herholdt.
In July 2009, the trade administration commission found that, although the world sugar prices were distorted, they remained relatively high.
For that reason, the commission ruled against the blanket protection of the sugar industry of the Southern African Customs Union, but increased the dollar-based reference price from $330 per tonne to $358 per tonne to “mitigate against the effect of the distortions”, said Herholdt.
But despite the commission only granting a marginal increase in 2009, players in the industry feel that things have deteriorated to such an extent that the request to double the reference price is a reasonable one.
“The imports into South Africa have reached alarming levels, causing losses of more than R50-million per month to the industry, threatening [its] sustainability,” Trikam said.
Importers take advantage
Importers have begun to take advantage of the “zero tariff” reference-price weakness, he said.
“The imports are increasing at an alarming rate, displacing more and more South African sugar on to the distorted world market.”
The country currently imports about 400 000 tonnes of sugar which, according to the sugar association, is the equivalent output of three sugar mills.
The result is that 40 000 jobs could be on the line if the application is not granted, he said.
According to Ferdi Meyer, the director of the Bureau for Food and Agricultural Policy, producers are anticipating that the global sugar price would drop further.
“There are plausible scenarios for the future that entail the increased production of sugar worldwide, while the sharp rise in the demand for sugar in the production of ethanol is expected to slow down significantly over the next few years.
World prices go low
“The local industry sees the scenario putting world prices even lower. This is a cause for concern [where there are already] difficult times for the farmers.”
Because about one million South Africans depend on the sugar industry, the association is confident that the government will come on board with its request.
“The government has always understood and supported the necessity for protecting the South African sugar industry because of the distorted world market price,” said Trikam.
“Almost all sugar countries are protected by their government to manage sugar imports, which can have a devastating effect on domestic producers due to the simple fact that imported sugar would be below the global cost of production. South Africa’s government support of the industry is not new or unique.”
But the application by the sugar association is unlikely to be seen as a sweet proposition by all.
Domestic packaging companies and major industrial users of sugar are likely to oppose the move by local sugar producers to hike up protection of their selling prices, said Herholdt.
Opposing the application
In 2008, Tiger Brands, the Federation of Soft Drink Manufacturers and the South African Chocolate and Sweet Manufacturers Association opposed the application.
They argued that “they could not compete with an influx of finished goods made from cheaper sugar, unless they were able to secure their sugar at the most competitive prices, namely those of importers”, said Herholdt.
At the time, Mandla Tisani, president of the Federation of Soft Drink Manufacturers, told Moneyweb: “We oppose increasing the reference price trigger. It's counter-productive and not in the spirit of fair trade and competition.”
Tisani added that the sugar industry was “already well protected".
Analysts believe that the increased reference price would have a knock-on effect for consumers, but have not yet determined by how much.
When asked about the possibility of higher costs, the sugar association said that it is not involved in the pricing of sugar on the local market.
“However, it is fair to state that when the world price was higher than the local price, the South African sugar industry did not increase its price of sugar in the domestic market,” said Trikam.
“This demonstrates that the South African sugar industry is responsible in its pricing and aims to remain competitive.”