A sweet deal: Efforts to diversify the sugar industry

One of South Africa’s larger agricultural commodities, the sugar industry is now looking to maintain its performance in an increasingly competitive global environment. The segment, which is a key contributor to the economy and labour force, has been grappling with a combination of weakening production, fierce competition and declining global prices.

A KEY EXPORT PRODUCT: The country has long been a notable global player in the sugar arena, and produced 18.65m tonnes of sugar cane. Raw sugar was South Africa’s fifth-largest agricultural export by value in 2009, according to the UN Food and Agriculture Organisation. Cultivation occurs over more than 383,000 ha, primarily in Kwazulu-Natal, Mpumalanga and the Eastern Cape, and there are roughly 30,000 registered farmers who feed the country’s six milling companies. The two largest milling firms, Illovo and Tongaat-Hulett, have four mills each, while Tsb Sugar operates three mills. The remaining firms – Gledhow Sugar, UCL and Umfolozi – each operate one mill each.

The country accounted for 1.8% of global production and 2.4% of global sugar exports between 2002 and 2007, according to the US Department of Agriculture. The majority of the exports are bound for regional neighbours, although a sizeable portion is sent further abroad to Europe and the Middle East. However, production has been slowing. The total raw sugar output of 1.91m tonnes for the 2010/11 growing season was the lowest total for 16 years, according to the South African Sugar Association (SASA). The forecast for 2011/12 is even lower at 1.83m tonnes, while that for sugar crane crush, a by-product of raw sugar harvests, was left roughly unchanged year-on-year, at around 16.8m tonnes.

MAJOR EMPLOYER: The broader slowdown in output represents a challenge not only for the sector, but also for the country’s economy as a whole. According to data from SASA, the industry directly supports 79,000 jobs and indirectly another 350,000, accounting for 11% of employment in the agricultural sector. Given the government’s plans to boost employment and rural development through agriculture, the industry will remain a key priority.

According to Imameleng Mothebe, director of agro-processing at the Industrial Development Division of the Department of Trade and Industry (DTI), “The sugar industry is important for the South African economy because it provides jobs mainly in rural areas. So it’s a strategic position for South Africa [to support the local sugar industry].”

André Jooste, senior manager of the Market and Economic Research Centre at the National Agricultural Marketing Council, also agreed. “It is particularly suited for emerging farmer production. It is good for smallholder farmers. There are not really a lot of additional products that can grow in areas where they grow sugar cane,” Jooste told OBG.

COMPETITION ABROAD: To maintain its supportive role in the broader national economy, one of the chief obstacles the sector will have to navigate is competition abroad, particularly from increasingly dominant producers such as Brazil, which benefits from sizeable cost efficiencies. One of the main issues is the high tariff implemented in the EU, and the high domestic prices in the eurozone, with local producers paid 2.23 times more than the world reference price in 2007, according to the OECD.

While most member countries of Southern African Development Community (SADC) have preferential access to the EU market for a range of products including bananas and sugar under the Cotonou Agreement, South Africa was excluded from this deal. This is particularly important for the sugar industry, which exports around 40% of its total production. “We can still send sugar to the EU but as a developed country. Developing countries have preferential access, so we’re trying to work around this. South Africa is repositioning itself,” Mothebe said. “It’s not an easy process and it’s a slow one. We’ve made substantive progress from when we started but it’s going to take a while.”

Pricing has also been a challenging issue. According to a February 2012 report by Bloomberg, citing Macquarie Group, sugar prices may fall as low as 18 cents ($0.02) per pound in 2012, as a result of a 9mtonne surplus. This will put pressure on South African producers, which are low-cost but still significantly more expensive than Brazil, which is one of the largest producers in the world, at between 8-11 cents ($0.01-0.013) per pound, according to the World Bank. (This same report suggest Brazil produces at an average of 7.5 cents [$0.009] per pound.) NEW PRODUCTS & SOLUTIONS: However, this has prompted the industry to begin looking at new products and solutions that will help increase local beneficiation and maintain sugar production levels.

“The sugar industry can no longer survive on sugar production only,” Trix Trikham, the executive director of SASA, told Business Day in November 2011.

“It needs to diversify into large-scale power generation and ethanol production.”

The DTI concurs with this view. According to Mothebe, “The industry is experiencing decline. Globally, the sugar sector is changing and our industry is not moving at the same pace as our competitors. So we need to look at things other than [simply producing] sugar, such as the renewable energy [potential].”

The South African sugar industry is now asking the government to take its first steps in this direction including a 2% ethanol blend for petrol. While the government’s draft Biofuels Industry Strategy calls for a 2% penetration of biofuels, or roughly 400m litres, in liquid fuels by 2013, there has been little movement on this so far. Peter Staude, the CEO of the domestic sugar firm Tongaat Hulett, told local media that the industry had the potential to push bio-ethanol production up to 5% of South Africa’s total fuel consumption by using the sugar surplus of 600,000 to 1m tonnes that is currently exported. The initiative has gained support across the board. Producers of sugar beets are also pushing for an increase in ethanol conversion and usage.

ENERGY OPPORTUNITIES: According to media reports in February 2012, there are plans afoot for a new R2bn ($244.8m) ethanol plant to be developed by local company Sugar Beet RSA and the government. The plant would have an initial output of roughly 90m litres of fuel, although this could eventually be raised to 200m litres. The plant, which will use sugar beet and grain sorghum as feedstock to produce ethanol, would be located in the Eastern Cape. Construction is targeted to start by the end of the year and production could begin in 2014.

There is also greater attention being paid to bagasse, the dry fibre waste product left over after the extraction of the cane juice, which can be used for the production of electricity.

According to Jooste, “On the bio-fuels side, it will only be feasible if there’s government support. On the co-generation side, it looks a lot more feasible without government intervention. Whether it will happen in the next 12 months… I don’t think so.”

According to statistics from SASA, the industry produces approximately 20m tonnes of cane each year whose biomass is the equivalent of 1.75m tonnes of coal. This has the potential to generate 1.6 GWh of power. However, implementing the framework to allow this to happen remains a long-term process.

According to Mothebe “The government is still recognising the benefits that the sugar industry should be experiencing in renewable energy. But we’re light in terms of our water supply, so the debate over agriculture for food versus agriculture for other purposes is a thorny issue.”

COSTS & PRICES: Although blending regulations for liquid fuels have yet to be set, perhaps the primary outstanding issue for co-generation surrounds the regulated pricing per unit that sugar producers would get for supplying electricity.

There is currently a lack of clarity on this issue, according to Mothebe, and there are still some concerns from producers over whether electricity generation will be cost-effective. According to Trikham, the industry has asked to be included in the Department of Energy’s Integrated Resource Plan from 2013, with annual capacity increments of 150 MWh.

With the industry providing around 1.3% of overall national employment, 0.7% of GDP, as well as 0.5% of income tax, it seems only a matter of time before South Africa’s sugar producers begin churning out new, high-demand products to cater both to local and foreign demand.

The DTI is pushing hard for regulation and pricing that would allow sugar producers to expand into electricity generation. According to Mothebe, “Globally, sugar industry sustainability is based on renewables rather than sugar. Sugar is becoming a byproduct. We cannot afford not to be in that space [of renewable electricity generation]. We‘re hoping [regulation and pricing] will be finalised in 2012.”