SA sugar cartel’s sweet deals may dissolve

By Eddyson Lugangwa Posted 05 April 2006 @ 05:44 am EET     Print     Reprint     E-Mail     Comments

Nairobi (IBTimes.com) - Government aims to break big firms’ stranglehold and let in small players, writes Sharda Naidoo

02 April 2006 Print friendly Send to a friend



SOUR NOTE: Despite being a low-cost international sugar producer, with exports pouring through the landmark sugar terminal at Durban harbour, above, sugar sold on the domestic market is expensive by world standards. Government hopes its planned industry reforms will lower prices for local consumers Picture: RICHARD SHOREY



THE government is planning to break a local sugar “cartel” that has a stranglehold on the R6-billion a year money spinner. This comes as foreign investors begin to show increasing interest in the South African industry.

The intervention is part of proposed sugar reforms that aim to end “price-fixing” and “destructive competition” by this cartel.

South Africa is credited as a low-cost sugar producer globally, pushing out 2.5 million tons per season. But sugar sold domestically is still considered expensive in relation to international raw sugar prices, which recently hit a 25-year high.

This week the price of white sugar reached $480,50 a tonne.

The main industry players are llovo Sugar, Tongaat-Hulett Sugar, Transvaal Sugar, UCL Company, Umvoti Transport and Ushukela Milling.

Government is hoping the industry overhaul will bring lower prices for millions of South Africans who use sugar in various forms on a daily basis.

According to a discussion document by the Department of Trade and Industry (DTI), the proposed changes would enhance competition, stimulate empowerment and create new downstream value-add industries — spurring job creation.

The industry employs, directly and indirectly, about 350000 people.

The reforms would also give rise to globally competitive emerging producers, and open doors for small, medium and micro enterprises (SMMEs) in milling operations and the value-add industries, said the DTI document. “The fact is, when it comes to local marketing of sugar, the Sugar Act doesn’t promote growth on competitive advantages and efficiencies,” the DTI’s Elize Koekemoer said.

“The Act allows for price fixing, collusion and manipulation of competition by cartel-like operations.”

This puts local value-add operations, like the confectionery industries, at a “competitive disadvantage” globally, with no room to grow and expand.

“Sugar exported by SA in many instances ends up, at extremely favourable prices, in the hands of foreign downstream value-adders that export their value-added products to SA at a premium,” stated the DTI document.

Growth in sugar value addition was stagnant and required special assistance to encourage investment in new innovative manufacturing processes and products, added Koekemoer. “Prices have to come down.”

Proposed interventions include:

•Establishing a Sugar Authority, a watchdog body that would oversee reforms and ensure greater transparency.

•Switching from a notional pricing system to net prices. Growers would no longer have input into the price received for sugar sold on the domestic market. This should stimulate competition between millers, and result in lower prices for consumers.

•Redistributing proceeds of sugar sold to millers from a quarterly payment to an annual one. This system should reward growers and milling companies on production efficiencies, increasing competition.

•Introducing special rebates or permits for the downstream industries that would enable value adders to get hold of sugar at export parity prices from the local millers.

The government was also punting the creation of a “non-centrifugal open pan” sugar industry, which would produce whole sugar or “poor man’s sugar” of high nutritional value through organic farming methods at lower costs. Open pan sugar processing has never been commercially undertaken in South Africa, but it is well-established in India and South American countries.

“Open pan sugar provides a high-value market alternative with lower capital and input cost requirements and it offers ideal opportunities for SMMEs and BEE, and for organic production,” according to the DTI document.

But analysts were not convinced of the potential benefits. They believed the reforms would neither bring price relief to consumers nor halt cartel-like operations, without sparking a price war or an oversupply domestically.

Neither Tongaat-Hulett nor Illovo Sugar would comment on the interventions, and said the South African Sugar Association (Sasa) was formalising submissions.

Sasa head Trix Trikam said: “It’s premature for us to comment on the changes. I’d rather have discussions directly with DTI than through the media.”

Industry parties had until the end of April to make final submissions to the DTI.

Koekemoer said the proposed interventions would not make it difficult for foreign producers to enter the country. Nor would it counter EU reform.

“The EU reform is in our favour. It will equalise the price paid for all raw sugar imported into the EU and help boost South Africa’s competitive advantage in export markets,” she said.

EU ministers agreed last November to slash sugar subsidies by 36%.

Its new sugar regime will take place over four years and be effective until September 30 2015.

The first phase comes into effect in July, culminating in duty-free and quota-free access for exports by least developed countries by 2009.

Illovo Sugar, target of takeover bids by French producer Tereos and Associated British Foods, has said the EU reforms will boost export volumes from its African operations.

The world sugar price has been distorted over the years because of government interventions such as tariffs or subsidies. In SA, policy has dictated tariffs if the price is high.