SA sugar industry outlook still sour

The country’s sugar industry remains stuck in the doldrums, thanks to a number of factors.

The key challenge is a low sugar price, caused primarily by a high level of global sugar production. The industry says this has led to cheap imports and it has called for greater tariff protections in order to survive.

To add to its woes, the health promotion levy (HPL) on sugar-sweetened beverages has negatively affected business, the industry claims.

But experts and health activists disagree and argue that the industry is uncompetitive.

The sugar price has fallen by 65% from a high of 34 United States cents a pound (R4.93 for 0.5kg) in 2010 to just 12c a pound (R1.74 for 0.5kg) in March this year, according to data firm Macrotrends, because of an increased supply by the world’s leading producers, such as Brazil, India and Australia.

One local sugar giant, Tongaat, has seen a shift in its fortunes as its share price plunged by 89.2%, from R169.04 in December 2014 to R18.29 on Monday. But, in its case, there have been several other problems.

Last month, the group revealed that its financial results needed to be restated after it picked up accounting irregularities. In a statement, it said auditing firm PwC would undertake a comprehensive review of “certain practices, which will require further examination”.

“The problems of Tongaat are not new,” said David Holland, the director of Fractal Value Advisors. “Its performance has been horrific for the last 10 to 20 years. So their return on capital has been far less than its cost of capital.

“So when you have that sort of situation, a company should not really be investing; it should be downsizing its business.”

To add to its distress, the company had mishandled its land sales, Holland said. The company had been including the profits from its land sales with its sugar operating profits, which has masked its problems.

“They have been selling land and evidently they did some of those sales before they should have,” he said. This would have resulted in the company overstating its profits, which should be investigated.

In its annual financial results for the 12 months ending March 31 this year, now subject to review, its earnings decreased by at least 250% compared with the R617-million
earned in the previous 12 months. The group has attributed its weak sales to an oversupply of cheap sugar.

“Local market sales across the industry remain under considerable pressure due to the excess sugar bought in and a greater-than-expected impact of the sugar tax on local demand, in particular with the reformulation of products in the beverage industry,” Tongaat said.

The levy was launched on April 1 last year to help to combat obesity and other health issues. In 2018-2019, R2.4-billion was collected in tax, although only R1.7-billion was expected.

“Since the implementation of the sugar tax, 200 000 tonnes of sugar were exported on to the world market due to a surplus in production. This surplus was as a result of a drop in demand from the industrial market since the implementation,” said Graeme Stainbank, the chairperson of the South African Canegrowers’ Association (Saca).

“For every tonne that is exported, or for a drop in the demand of South African-produced sugar, the industry loses about R5 000 in revenue,” he said.

According to Stainbank, the sugar industry as a whole had lost R1.3-billion in revenue in the 2018-2019 season.

“The revenue loss will no doubt translate into severe job losses, which could put up to 10 000 jobs at risk in the cane-growing sector alone,” he said.

Sugar producer Illovo, which operates in South Africa and several other countries, including Malawi and Mozambique, has also raised concerns both about imports and the levy.

“The importation of sugar has reduced the South African sugar industry’s sales year on year by approximately 30%,” said Mamongae Mahlare, Illovo Sugar South Africa managing director.

Because of the levy, Illovo is forecasting a 30% decrease in sales to the beverage sector, she said.

But Paul Makube, a senior agriculture economist at FNB, said the industry’s problem was that it could not compete with external markets.

“Although South Africa produces enough sugar to meet domestic demand, over 50% of local produce is subject to the influence of the world sugar price and exchange rate. The cheaper imports due to the relatively low international prices reduced the competitiveness of domestic product as costs were out of sync with output prices,” he said.

To protect local producers, last year the International Trade Administration Commission (Itac) increased the dollar-based reference price of sugar from $566 to $680 a tonne, which is a key element in calculating the import tariff and the rate at which it is set. But the industry maintains that the increase was too low.

“In 2018, the industry lobbied government to provide tariff protection against the dumping of cheap imports, mainly from Brazil. It was increased but it’s not even close to the $856 per tonne level that the industry had applied for,” said Stainbank.

Illovo wants imports banned completely. “The ideal situation will be to have zero [imports],” Mahlare said.

But, according to Itac, the tariff has limited the importation of cheap sugar.

“The volume of imports from non-Sacu [the South African Customs Union, which includes Botswana, Lesotho, eSwatini, Namibia and South Africa] countries has declined significantly, as evidence shows. This demonstrates that the increase in the
tariff has had an impact on non-
Sacu imports, which is its intended purpose,” said Thalukanyo Nan-gammbi, Itac’s communications manager.

In a bid to turn its fortunes around, Saca is calling for the HPL to be dropped because there is no evidence that it could reduce obesity.

“We are of the view that government should immediately place a moratorium on the sugar tax until a thorough assessment on its impact on jobs and the economy has been done,” said Stainbank.

“There has been no evidence that the sugar impact has had any tangible effect on public health in South Africa, but we do know that the tax has dealt a huge blow to the industry.”

But health experts said commercial gains should not come before the health needs of the nation.

“The tax will send a message that these drinks are [now] expensive and people will think twice before buying [these beverages]. There will still be people who will buy sugary drinks and, if they want to do that, they will find a way,” said Karen Hofman, the director of Priceless SA, a research unit aimed at enabling smart decisions about health.

“But there will be a significant number of people who will stop drinking [them], in the same way that has happened with cigarettes.”

Heala, an alliance of nongovernmental organisations aimed at addressing obesity, said the sugar tax had worked in Mexico and it would work locally.

According to Heala, South Africans were among the top 10 consumers of sugary drinks in the world and the most obese nation in sub-Saharan Africa; more than two-thirds (69.3%) of women and 39% of men are overweight.

“Mexico had the world’s highest intake of sugary drinks,” said Thando Lamula, the communications co-ordinator of Heala. “The introduction of a modest sugary drink tax in Mexico in 2014 of one peso per litre [about a 10% tax] has effectively reduced sugary drinks consumption and is hailed globally as a successful, positive public health policy.”

Makube said the sector had to think creatively about how it could sustain itself. “Diversification into alternative uses, such as bagasse for electricity generation and bio-ethanol are the immediate options,” he said.

“The current electricity blackouts through Eskom load-shedding makes the [case for] co-generation even more attractive to ensure security of supply.”

Tshegofatso Mathe is an Adamela Trust business journalist at the Mail & Guardian