Putting The Clock Back
The chimney syndrome dies hard. It is time to stop throwing good money after bad and let savvy commercial and strategic acumen chart a new way forward
There is currently a surge of spin doctoring in the press on the leaked recommendations of the Joint Technical Committee (JCT). Some who are unaware of the ground reality of the sugar industry let alone able to fathom the intricacies of sugar marketing in a highly competitive market place are glibly parroting the tall claims and abhorrent proposals made by the JCT. The writing was on the wall since 2009 with the abolition of the Sugar Protocol. Nearly a decade of burying heads in the sand has made matters come to a head. This is therefore not the time for the dilettante with no commercial acumen or an incisive insight into the sugar industry to pontificate on such a complex issue but for honest and objective analysis and stocktaking.
When an export commodity is uncompetitive and is incurring systematic losses, it is not rocket science to decide to stop its production forthwith. However this elementary rule of commercial savviness is obviously not applicable to sugar. Despite the losses incurred since the 2014 crop, emergency bail-outs from the reserves of the Sugar Industry Fund Board and other similar makeshift measures have kept the sugar industry on a tenuous lifeline. The upshot is that despite all the support measures to prop an ailing sugar industry, the situation is worse today.
Prices payable to producers have plummeted to Rs 11,000 per MT of sugar for the 2017 crop and are forecast at Rs 10,000 per MT for the 2018 crop. These are far below the current industry viability price of Rs 17,000 per MT. The Joint Technical Committee galling and horrid proposals aim at making sugar industry workers bear the brunt of a reduction in production costs by Rs 2,000 per MT to attain a viability price of Rs 15,000 per MT in the next five years. Similarly, the Government Environment Protection Fund and the Port as well as mainstream Mauritius comprising domestic consumers, vehicle and motorcycle owners, electricity consumers and all and sundry are being press ganged through an array of levies, duties and fees to contribute to an annual fund of some Rs 1.3 billion to again provide a lifeline to an unviable and uncompetitive sugar industry till 2022. What is the point of keeping loss making white refined sugar production on a costly life support system?
People from all walks of life are legitimately already up in arms against the decried and unfair approach of imposing levies, duties and fees on the price of fuel to raise funds to finance a host of projects and expenditure which should have been funded by the government budget. Why on earth should mainstream Mauritius and government finance and the workers of the industry bear the burden of a five-year hand out to boost the falling earnings of producers of an uncompetitive sugar industry including principally those of the otherwise well endowed corporate sector?
This is the more preposterous as the Rs 1.3 billion of annual support to producers will be paid on the production figures of each category of producers. Planters owning up to 1.99 hectares (4.92 acres) (which encompasses most of the small sugar planters in the country) produce only some 9% of the annual production whilst producers and corporate planters owning more than 100 hectares (247 acres), produce some 60% of sugar output. Millers who obtain 22% of the annual sugar produced are also to receive Rs 2,675 per MT every year. The small planter which has been left high and dry by the government and the Ministry of Agriculture is yet again being blithely used as a Trojan horse.
Inequity of treatment
We must also remember that unlike the small and medium-sized sugar planters who have been receiving a pittance for their by-products, the corporate sugar sector also benefits from handsome earnings from the various ventures of the sugar cane cluster using the bagasse and molasses of all producers as feedstock through their shareholding of the Independent Power Producers (IPPs) and distilleries which help them make good the falling revenue from sugar. The cast-in-stone IPP contracts indexes the electricity price on fuel oil and coal costs as well as currency and economic indices.
The IPPs despite being already remunerated for the electricity sold to the CEB have a second bite at the cherry as they also receive half the amount of the Bagasse Transfer Price Fund as from the1998 crop. Millers and corporate planters also receive at least another 12% of this Fund. In addition molasses for the production of ethanol by Omnicane is sold at a preferential price to them compared to the world price or the avoided cost of importing molasses. To crown it all, the sugar producers are also made to pay a stiff refining fee to the refineries for the production of uncompetitive white refined sugar.
The package being proposed by the JTC therefore doubly comforts the position of the corporate sector.
The JTC which comprises representatives of government ministries, sugar institutions and Business Mauritius also proposes that labour costs which is claimed to represent around 60% of the industry’s costs have to be reduced by at least 40%. This obviously conjures the image of fat cat field and factory workers earning handsome salaries. Beyond the rhetoric, what is important is the actual salary earned by the sugar industry workers in absolute terms. The stark reality is that the average salary of a field worker is about Rs 11,500 for women and Rs 13,500 for men per month, which is a shade above the minimum wage. Is the JTC grudging the field workers who are already having difficulties to make both ends meet, this meagre salary for one of the hardest jobs in the country? Despite this the JCT is still intent on reducing labour costs by 40% in the teeth of the international norms of ethical trade.
Throughout its chequered history, the prosperity of the sugar industry has been built on the diligent hard work of the field workers through thick and thin as there would be no sugar industry without them. How can the JTC also propose that sugar industry workers be denied a well earned VRS/ERS, the conditions of the Blue Print, etc., or a better pension after decades of strenuous hard work for the sugar industry? Who are these civil servants who are so cut off from the ground reality of the country to have ‘unanimously’ endorsed such abject proposals? Should they not be made answerable for their ineptitude? Why are there instead no proposals to significantly prune overhead costs, cease the production of loss making white refined sugar or review the model of operation of the industry?
The country is seething at these shameful proposals which are anathema to the people and contrary to the ethos, values and ideals we fought for independence and built the nation on. The nation therefore stands in solidarity with the workers of the sugar industry to safeguard their rights. The multitude of us who have been farming family estates for three generations cannot subscribe to a sugar industry which is devoid of basic humanity towards such a valuable partner of the industry.
The JTC proposals call for so many comments. Bagasse is once again used as a Trojan horse to portray the IPPs as clean producers of energy. With falling sugar cane output, the share of electricity produced from bagasse has fallen to 14.7 % in 2017 whereas 42% of electricity is produced from coal in the coal/bagasse power plants. The JTC argumentation on energy masks the damning scientific evidence against coal. Coal pollutes significantly more than oil, gasoline or natural gas. It produces more carbon emissions than any other energy source. Burning coal leads to soot, smog, acid rain, global warming and carbon emissions. It also generates a great deal of waste, including sludge, toxic chemicals and heat.
Coal pollutes during every stage of the energy production process from transportation to storage and burning. Natural gas emits 50 to 60 percent less carbon emissions than from a coal plant. Fuel oil is cleaner as hydrogen burns cleanly with no pollution. In a world more and more conscious of the dire adverse impact of climate change, the country should urgently be moving away from coal towards the production of more and more energy from renewable sources.
Better than Donald Trump
The proposal to hike the duty on imported sugar for the domestic market from 15% to a whopping100% says it all on the un-competitiveness of locally produced white refined sugar. In commercial terms it measures the substantial difference between the cost of producing uncompetitive white refined sugar locally and the cif Port Louis price (i.e. cost of sugar plus freight & insurance) plus landing costs of competitive imports of white refined sugar from third countries.
Why should local consumers of sugar who are already paying a high price of Rs 36 per kg now be forced to pay a significantly higher price for white sugar to subsidize the uncompetitive production of white refined sugar? In a liberalized world market situation, a 100% import duty to ring fence the local market is unheard of. Even Donald Trump did not dare go that far when approving new import duties. What then would be the plight of the SMEs who are currently importing, packing and distributing sugar for the domestic market?
The sugar industry can only be sustainable if all the stakeholders of the sugar industry such as the sugar planters and the workers have a fair deal. Is the Cane Planters and Millers Arbitration and Control Board now absorbed as a department of the MCIA diligently assuming its role as a fair and independent arbiter of the sugar accruing to planters in a context of falling extraction rates and ensuring that the Arbitration Act is strictly adhered to? The fact that the 35% shareholding commitment made to planters and employees since 2007 into the ventures of sugar cane cluster using their share of cane by-products and eventually into other value added derivatives from the cane biomass has not as yet been implemented, more than a decade after, have denied planters of the additional earnings to cover their losses from sugar revenue.
This has fuelled the exit of some 7,407 small planters of the 19,671 planters owning up to 1.99 hectares (4.92 acres) in 2009 from sugar cane production by 2016 and reduced cane output. Less cane has meant that refineries are working below capacity, higher costs of production at the mill and less energy production from bagasse. A critical mass of sugar cane seems more and more elusive as the tonnage of sugar produced by large planters owning more than 100 hectares and accruing to millers has also declined by 47,394 tonnes (12.9%) between 2009 and 2016. This trend is expected to continue with the increased diversion of cane lands for diverse projects such as smart cities, education hubs, etc.
More importantly, the JTC does not address the core issue of unviable world sugar prices. Without viable marketing options, there cannot be a future for white refined sugar. This is not a case of getting a quart into a pint pot. We do not have any control over world sugar prices which are basically unpredictable beyond a short time frame, fluctuate to the tune of market fundamentals, events and sentiment and are generally low and benchmarked on the cost of production of the most efficient producers in the world. World white sugar prices are on a declining trend and are well below the industry viability price.
The white sugar London no 5 Fob price is currently $348.40 per MT (Rs11,900). There are more troughs than peaks in the world sugar price trend. No industry can survive on the hypothetical conjecture that world white sugar prices will by some esoteric mojo rise to viable levels and more importantly stay at those levels. The viability of any product can only be assured by its sustained and proven competitiveness in the market place per se.
The world sugar market is structurally in surplus. EU increased white sugar production has added to the bearish weight of supplies on the market. The EU now exports some 4 million MT of white refined sugar. This surge in production has been at the expense of ACP/EBA (Least developed countries) sugar exports to the EU and has had a bearish impact on prices. ACP/EBA exports to the EU which stood at 2.25 million MT in 2013/14 have declined to some 1.25 million in 2016/17 MT.
As a consequence, African ACP/EBA countries, including the most efficient ones, which benefit from preferential market access in COMESA and SADC countries are inter alia seeking outlets for their sugars on the African market which has become the fierce new battleground for market share. For example, in our region Kenyan sugar imports in the 11-month period to November 2017 increased threefold to 971,212 MT. However, more than 620,000 MT were imported from principally Brazil and other non COMESA countries despite the preferential market access enjoyed by COMESA member states. Only the most competitive countries wrest market share. We must remember that lower world sugar prices also mean that the prices for special sugars will also be lower.
The only rational way forward is not the JTC proposals to squeeze the basic earnings of the industry workers eking out a livelihood from the sugar industry and making mainstream Mauritius and government raise an annual fund of Rs 1.3 billion till 2022 to basically maintain a moribund horse on a fragile lifeline. The industry can be re-engineered by focusing on the remunerative elements of the cane plant rather than the dead wood. This means ceasing the production of white refined sugar production forthwith, moving towards high fibre cane varieties to boost the bagasse and biomass feedstock of power plants, rationalizing the production of special sugars to reap economies of scale, Fair Trade sugars, rhum production, biotechnology and pursuing opportunities in the value added derivatives of the cane biomass, molasses and other by-products of the sugar cane. We can no longer continue to bury our heads in the sand when the marketing options for the sale of refined sugar are neither predictable nor viable.
More importantly, the planters and the employees of the sugar cane industry must become commensurate shareholders of the various ventures of the sugar cane cluster using their share of cane by-products, in line with the undertaking of the 2007 sugar industry agreement with government.
The chimney syndrome dies hard. It is time to stop throwing good money after bad and let savvy commercial and strategic acumen chart a new way forward for the sugar cane industry with all stakeholders on board.
* Published in print edition on 8 June 2018