Sunday Times

Sugar’s sticky situation trips up CEO

Turmoil as tax, tariffs and price slump leave producers reeling

- By PERICLES ANETOS anetosp@sundaytime­s.co.za

● With its share price languishin­g way below its 2014 peak and in an industry struggling against the backdrop of falling sugar prices, Peter Staude’s 16-year run as Tongaat Hulett’s CEO is nearing its end. The group has announced he will retire in April.

The announceme­nt comes in a week in which an Investec Securities analyst called for the CEO’s resignatio­n after what he termed an “appalling” set of annual results. Headline earnings fell more than 37%, with the group’s operating cash flow declining by over 28%.

Staude, who has been with the Durbanbase­d company for four decades, reaches his retirement age of 65 this month. He said the primary objective in the succession process was ensuring a smooth transition during the selection and appointmen­t of his successor.

Over the course of his tenure, a period marked by increased sales of sugar lands north of Durban, the 126-year old company’s shares almost doubled. Since Tongaat’s September 2014 peak, however, the stock has shed 54.4% in value, compared to the JSE All Share gaining 11.78%.

The analyst called the pace of Tongaat’s land sales “painfully slow”.

Over the past few decades, Tongaat has been carving up pieces of its land for highend property developmen­t on the KwaZulu-Natal North Coast, as the sugar industry struggled with low prices as a result of falling demand.

Apart from slack demand, bureaucrat­ic blunders and the effects of South Africa’s new sugar tax have also hit sugar production, which began in the 19th century.

Durban and KwaZulu-Natal have largely been shaped by the sector. This week its vulnerabil­ities were laid bare with the release of the biggest sugar producer’s figures.

One reason for the poor performanc­e was the continued rise in imports, displacing local producers and compelling them to sell their sugar on the internatio­nal market.

On average, South Africa produces just under two million tons of sugar a year, making it the 12th-largest producer in the world. Ten years ago it was a 2.5-million-ton industry.

The country’s production is in excess of Southern African Customs Union demand, and is expected to remain so for some time.

Local sugar producers used to get $0.25 to $0.26 a pound compared to $0.16 currently but on the internatio­nal market producers are likely to get only $0.13 a pound.

“Sugar in the world market is sold well below cost of production. On this basis, the South African industry does need an effective tariff to protect it against imports from the distorted world market,” said Trix

Trikam, executive director of the South

African Sugar Associatio­n.

Since the start of the year, the internatio­nal price of sugar has fallen more than 12%.

Analysts predict that sugar producers were going to be close to breakeven from September 2017 to March this year.

Mamongae Mahlare, MD of Illovo Sugar, said imports reduced the South African sugar industry’s sales year-on-year by 27%.

“If imports continue unabated, against the backdrop of a recent two-year drought, farmers who have the ability to cultivate alternativ­e crops will switch to other crops, while those that cannot will simply go out of business,” she said.

The associatio­n has applied for the reference price — the price at which tariffs kick in — to be adjusted. If the reference price is raised, the prospects for the sector in the next 12 months will improve.

Globally, the sugar sector is a highly supported commodity. India, the world’s second-largest producer of sugar, will spend $231-million (R2.9-billion) this year to subsidise its farmers as the price of sugar continues to fall.

The US sugar industry enjoys industry subsidies estimated at 66% of the farm gate price (the price reached by the farm after marketing costs have been subtracted). The world’s largest sugar producer, Brazil, subsidises the farm gate price by 27%, through a number of support instrument­s including a fuel ethanol programme.

Investec Asset Management analyst John Thompson said if the tariffs came through it could fundamenta­lly change the outlook for the industry.

But, while South Africa’s R14-billion sugar industry’s biggest short-term impediment are imports, it also faces a sugar tax.

In South Africa it is estimated that noncommuni­cable diseases caused by a poor diet, such as diabetes and hypertensi­on, account for 40% of all deaths.

Trikam said the impact of the Health Promotions Levy, which came into effect on April 1, may be far-reaching.

The tax is fixed at 2.1c per gram of the sugar in beverages with sugar levels above 4g per 100ml.

The sugar associatio­n expects that the sugar tax will reduce sugar demand in the sugary beverage sector by 200 000 tons. Illovo South Africa forecasts its sales to the beverage sector will fall by at least 30% owing to the tax.

Food producers such as Pioneer Foods said the impact of the sugar tax had been negligible to date. But Martin Neethling, the group’s executive for groceries, said the group’s concern was that if tariffs increased “the cost increases will have adverse consequenc­es for downstream commercial operators and ultimately for the consumer”.

Neethling said Pioneer had introduced products with reduced sugar levels, adding that low-sugar recipes were continuall­y being developed and implemente­d.

Tiger Brands, whose products Oros, Roses and Energade are affected by the tax, said it was still looking into the detailed impact this would have on the business.

Trikam said should demand be reduced by 200 kilotons, 3 129 jobs could be lost.

But he said if the tariff level was not revised, the loss in jobs could reach more than 20 000.

The associatio­n estimates that the industry employs about 85 000 people, with a further 350 000 employed indirectly.

If imports continue unabated, farmers who have the ability to, will switch crops Mamongae Mahlare MD of Illovo Sugar

The industry needs an effective tariff to protect it . . . in a distorted market Trix Trikam South African Sugar Associatio­n executive director

The cost increases will have adverse consequenc­es for commercial operators and the consumer Martin Neethling Business Executive: Groceries, Pioneer Foods

 ??  ??
 ?? Picture: Rogan Ward ?? Sugar-cane fields near Umzinto in KwaZulu-Natal. If current conditions continue, experts say, farmers who cannot switch crops may well go under.
Picture: Rogan Ward Sugar-cane fields near Umzinto in KwaZulu-Natal. If current conditions continue, experts say, farmers who cannot switch crops may well go under.
 ??  ??
 ?? Picture: Waldo Swiegers ?? Tongaat Hulett has announced that its CEO, Peter Staude, will step down in April after 16 years.
Picture: Waldo Swiegers Tongaat Hulett has announced that its CEO, Peter Staude, will step down in April after 16 years.

Newspapers in English

Newspapers from South Africa