Some of the major sugar producers such as Tongaat Hulett are already warning customers that prices are expected to rise by 19.5% as a result of the notional price increase. (AFP)
Tariff protections on sugar were increased last week but not everyone is thrilled by the decision, particularly industrial purchasers.
The International Trade Administration Commission (Itac) increased the dollar-based reference price to $680 after the South African Sugar Association (Sasa) had applied for an increase, precipitated by a rapid increase in imports.
The reference price is a key determinant in how import tariffs for sugar are calculated and the rate at which import duties are set. Sasa had requested an increase to $856 a tonne.
The increase was granted despite objections from major industrial consumers such as Coca-Cola Beverages South Africa (CCBSA), Tiger Brands and sugar importers.
They argued among other things that increases protect an inefficient industry, which needs to improve productivity.
They also warned that, as has happened in the past, an increased tariff could result in higher local sugar prices to the detriment of downstream customers. But Sasa denied these claims.
CCBSA raised concerns that price increases did not translate into increased efficiency in the local industry, which was exacerbated by prolonged under investment.
“The increase to the dollar-based reference price is going to be a short-term solution,” said Tshidi Ramogase, CCBSA’s director for public affairs and communications.
There were significant long-term issues facing local sugar producers that needed to be addressed, including ensuring that small-scale black farmers received appropriate levels of support and funding.
The CCBSA, in its submission to Itac, argued that an increase would “protect an inefficient industry from much-needed productivity enhancements and rationalisation at the expense of downstream clients and consumers”.
It also said that, after the last hike in the reference price in 2014, domestic prices were pushed up to a level comparable with import parity.
The level of tariffs directly affected domestic sugar prices and “had significant undue adverse pricing effects downstream”.
Any increases in domestic sugar prices would come on top of the recently introduced health promotion levy on sugar-sweetened beverages, Ramogase said.
In the event of a domestic price increase, the CCBSA would have to consider carefully whether to pass it on to consumers or whether it could absorb it.
But some of the major sugar producers such as Tongaat Hulett are already warning customers that prices are expected to rise by 19.5% as a result of the notional price increase.
A spokesperson for the company said it was in discussions with its entire customer base about pricing because of the increase in the notional price.
Although sugar millers negotiate prices with their customers directly, Sasa periodically sets a “notional price” for white and brown sugar.
This price, according to Sasa, is used to calculate what is known as the recoverable value price that millers pay sugar-cane growers.
Other factors informing this include the exchange rate and industry costs and it is legislated to ensure a fair price to all growers for the cane delivered.
Tiger Brands said that, although it recognised the importance of the sugar industry to South Africa, the industry “lags global peers from a yield and efficiency perspective”. It added that duty increases “will contribute to food inflation across the board”, and the recently gazetted duty was expected to add R180-million of cost inflation a year to the Tiger Brands business.
The proposed increases also had implications for locally produced food products, which could affect exports.
In addition, imported finished goods, many of which were not subject to import duties, benefited from a world sugar price that was half the South African price and was likely to see an influx of imports to retailers, according to Tiger Brands.
The Association of Sugar Importers also objected to the proposed increases. Its chairperson, Chris Engelbrecht, told Itac that, given the distortions in global markets, tariff support for the local industry was necessary, provided that any inefficiencies and structural flaws were not entrenched.
He also warned of the likely effects the reference price increase would have on local prices, pushing them to import parity, with no benefit to downstream users.The 19% increases meant the industry was using this as an opportunity to increase the local price, he said.
Sasa said it could only comment in detail on Itac’s decision after it had studied the report closely and had completed its interactions with Itac.
But in its response to the submissions opposing its application, Sasa denied the assertions.
Regarding the claim that the local industry had failed to invest, it cited among other things the R1.4-billion one major milling group has been committed to in the past five years, including in energy savings, packing plant upgrades and maintenance.
It also denied that the industry was taking excessive profits or that price increases would harm consumers.
The industry had taken a cumulative price reduction of 20% in the past year and sugar prices had dropped further below local production costs, which was unsustainable.
It pointed to a Sasa-sponsored study done in 2013 that showed the effect sugar price increases had a minimal effect on overall food inflation.
It also argued that, when the notional price was reduced in July 2017 and March 2018, the price of a 330ml beverage actually increased.
Although the introduction of the health promotion levy might have contributed to this, Sasa said “soft-drink manufacturers seem to have captured the value from the sugar-price reduction and not passed on these to the consumers”.
Coke denies cashing in on cheap imports
The threat posed to the local sugar industry has been complicated because, during 2017, increases in sugar tariffs should have been triggered but the government failed to implement them.
This was exacerbated by an administrative error that reduced tariffs to zero, presenting a golden opportunity to import cheap sugar.
Lobby group FairPlay, which watches for “predatory” imports in the chicken and sugar industries, has publicly quizzed Coca-Cola about buying cheap imports in recent months, which it says is happening at the expense of South African suppliers. It also questions whether this went against public interest conditions undertaken in 2016 when various bottlers of Coca-Cola merged.
But the company said that, although it has had to import sugar in recent years, particularly because recent adverse weather conditions, such as the drought, affected supply, the amount was “nominal”, given the public interest commitments to local sourcing made at the time of the merger. Since January 2015, it has sourced nearly 95% of its sugar locally.