Swaziland Sugar Association (SSA) Chief Executive Officer Mike Matsebula says the sustainability of the sugar industry will be under severe strain for the next few years.

He said this emanated from the fact that the forecasts in the two main markets namely the Southern African Customs Union (SACU) and the European Union (EU) were bleak.

Matsebula said it was therefore important for all partners to recognise this and play a constructive role. 

The CEO said on its part, the industry has been continuously implementing cost-reduction measures ever since the announcement of EU sugar sector reforms in 2005.  

“Cumulatively, the industry has invested more than E2 billion in expanding capacity and improving productivity as well as efficiencies at field, factory and administration levels.  

“The EU has complemented this effort by allocating more than E1.8 billion (€120 million) most of which is targeted at smallholder sugarcane growers. 

All of this forms one big part of what is necessary for the long-term sustainability of the industry.  A second big part is the cooperation of all partners towards cost containment.  Any partner who seeks to maximise own benefits to the neglect of long-term sustainability of the industry is taking a dangerous short-term view. A third big part is the protection of existing preferential markets and creation of new ones.  

In this connection, efforts of government are most laudable,” he said in a press statement.  

Matsebula said SSA would continue providing the necessary technical support for government to be successful in the protection of value in existing markets and creation of new markets, especially in the Tripartite Free Trade Area (encompassing COMESA, EAC and SADC).  

He said because this would take some time before it generates the necessary revenues for the industry, it is of utmost importance that all other partners cooperate in cost containment.

The CEO said sales were equally split between the two markets and other markets are the Common Market for Eastern and Southern Africa (COMESA) and United States (US), whilst important in the long-term, are currently considered on a residual basis. 

Matsebula said it all depends on relative prices among all the available markets. Because of extremely low and volatile prices, SSA tries as much as possible to avoid the “world market” (i.e. markets without preferential trading arrangements).

“The outlook on prices in existing markets is rather bleak.  The only way in which the long-term sustainability of the sugar industry can be assured is if all relevant stakeholders come to the party in the protection of value in existing preferential markets, creation of new preferential markets, cost containment at all levels of the industry and finding other appropriate strategies,” he said.

Competition with India, Brazil hurts local sugar in SACU market

Local sugar had to be discounted so as to remain competitive at the Southern African Customs Union (SACU).

Swaziland Sugar Association (SSA) Chief Executive Officer Mike Matsebula said since April 2014, this market enjoys tariff protection, reversing a long period of being flooded with low-priced imports from countries like Brazil, Thailand and India. 

She said the SACU market remained the most important one for Swazi sugar, since it offers relatively high and stable prices with no exposure to exchange rate volatility.  

“Since April, 2014, the SACU market enjoys tariff protection, reversing a long period of being flooded with low-priced imports from countries like Brazil, Thailand and India.  This has hurt the local industry because it had to discount its sugar to remain competitive, divert some of its sales to lower-paying destinations and hold larger than normal sugar stocks.  What has ameliorated performance has been the depreciation of Lilangeni coupled with a sound foreign exchange hedging policy in the case of exports outside SACU,” he said.

Matsebula said the tariff effected in April, 2014 was expected to provide a temporary cushion for the industry since production costs would soon exceed the prices protected under the tariff system in use.  He said the tariff was based on a Dollar Based Reference Price (DBRP) mechanism which provides for declining protection as world market prices rise; thus exposing Swazi sugar to external competition in SACU.  The CEO said the current DBRP was at a level which would not cover industry cost increases into the medium term and will therefore soon become inconsequential in providing effective protection.  Matsebula said this would occur as world market prices rise in response to global increasing production costs and the result will be the displacement of Swazi sugar in SACU by imports. He said the tariff decisions were not in the hands of government since they are presently made in South Africa.  

“Therefore, the ability to increase the tariff in order to allow the industry to attain optimal prices in SACU to cover rising production costs is not in Swaziland’s control. It is also worth noting that there are conflicting interests of producers and consumers, including manufactures of sugar-based products when it comes to such tariff adjustment decisions. The EU market has undergone considerable reforms in the past eight years whose net effect has been the reduction in receivable prices to levels closer to the world market.  No industry can survive on the basis of world market sales.EU prices today are about 30% lower than the levels attained in 2011,” he said.

Matsebula said such price reductions have, in the short term, been compensated by favourable movements in the exchange rate; but this cannot be counted upon going forward. 

Therefore, there is a risk of EU returns being even much lower going forward if the downward price trajectory continues and/or the exchange rate strengthens. The CEO said the diversion of sugar to other markets, like the US and COMESA, is not a realistic prospect as these currently take limited quantities, not exceeding a combined volume of 50 000 tons (compared to annual sales of about 700 000 tons).