By Devesh Dukhira
This year has been especially marked by the Covid-19 lockdown and its severe impact on the Mauritian economy. We should, at the outset, highlight the resilience shown by the sugar industry during these difficult times: not only the cane continues to grow, but market demand has been least affected. We shipped almost 40,000 tonnes sugar over that period of confinement. The pandemic has nonetheless curtailed the improvement in global market conditions triggered during the last quarter of 2019, and which was to persist in 2020.
Mauritius’ sugar sales for the 2019 crop have unrolled under an improved market environment. As global supply fell short of demand in 2019/20, the deficit having first been estimated by the International Sugar Organisation at almost 5 million tonnes, compared with surpluses cumulating to over 10 million tonnes over the two preceding years, prices started rising in September 2019, and attained by February 2020 a peak equivalent to some US$ 450 per tonne white sugar, a level last seen over three years ago.
This world market recovery also supported prices in the European Union where, coupled with the fall in beet sugar production from 21.3 million tonnes in 2017 to 17.6 million and 17.3 million tonnes in 2018 in 2019 respectively, pressure on stocks intensified, entailing a rise in white sugar prices as from the start of the marketing year in October 2019: the average monthly ex-works price has now attained € 362 per tonne, which is 14% higher than in the preceding campaign.
As a result, most Mauritius sugars have been directed to the EU market, which therefore absorbed 73% of exports from the 2019 crop, compared with 64% in the previous year. The proportion of white sugar deliveries is even more revealing, with 87% of sales directed to the EU, compared with a mere 47% in 2017 when production quotas in the EU had just been liberalised.
It is interesting to note that after the drastic fall in market prices in 2017, pursuant to production quota liberalisation, EU producers have become less ambitious on exports. They have closed 12 mills and reduced the beet area by almost 10%. This has also contributed to the declining production trend, in addition to the unfavourable weather conditions which have prevailed on the continent and impacted on sugar yields over the last three years.
The same decreasing trend, triggered by the drastic price fall of 2017/18, has been observed in other countries, as farmers switch to more attractive crops, while factories shut down or shift to ethanol. Two noteworthy examples are Russia with a 20% year-on-year reduction in beet area and Thailand with a further 8% year-on-year reduction for the 2020/21 season.
The Covid-19 has affected market conditions
Had there not been the Covid-19, we would have seen a larger global deficit in 2020/21 with further rise in the market prices that had been attained earlier this year. The subsequent confinements, which lasted for months in certain countries, have unfortunately severely disrupted the global supply and demand trend. Firstly, according to the ISO report of August 2020, world sugar consumption for 2019/20 would have been impacted by over 6 million tonnes, i.e. 3.5% of global consumption.
The subsequent confinements have severely disrupted the global supply and demand trend.
Secondly, oil prices have fallen drastically owing to excess supply, largely because of the same lockdown, entailing a significant reduction in the ethanol parity in Brazil, hence enticing its producers to prioritise sugar production at the expense of ethanol, which should lead to a year-over-year increase of 8 million tonnes in sugar output. As a result, global production estimate for 2019/20 has been increased by the ISO in August 2020 by 2.8 million tonnes, to almost 170 million tonnes, while that for 2020/21, taking into account yield improvement foreseen, namely in India, the United States and Mexico, has been raised by a further 3.5 million tonnes.
With the reduction in 2019/20 global consumption forecast in August 2020 to just under 170 million tonnes, the global deficits anticipated earlier this year for 2019 and 2020, which would have drawn down the stock build-up over the preceding two years, have consequently become negligible. As a result, supported by the meaningful depreciation of currencies among the major sugar exporters, especially Brazil and India, global prices fell drastically as from end February 2020, the New York #11 attaining a 12-year low of US 9.05cts/lb by end April, i.e. 40% decrease over this 8 weeks’ period, but slowly recovering thereafter as activities started picking up in regions moving out of lockdown.
The Covid-19 has likewise affected market conditions in the EU. The likely decrease in sugar consumption in 2019/20, estimated by LMC International at some 500,000 tonnes, together with the significant global price fall, have restrained further price improvements, notwithstanding the low crop outturns over the last two years. Some segments such as the food service (hotels, restaurants, coffee shops) or certain non-essential industrial utilisation have been particularly affected.
As the 2020 crop campaign has also been affected, firstly by the dry and hot summer in North Western Europe, and secondly by the beet yellows virus after the widened ban on the use of neonicotinoids, especially in France, sugar production is presently forecasted at below 17 million tonnes. Price improvements to date are nevertheless uncertain owing to the reduction in consumption, though we have been trying to at least maintain last year’s price levels. A hard Brexit, which could result in a tariff of £ 350 per tonne on EU sugars, could, on the other hand, open a window of opportunity for better prices in the United Kingdom given that Mauritius, as a member of the Eastern and Southern Africa group, will continue enjoying duty-free access as under the existing EU Economic Partnership Arrangements.
The African market continues to present challenges
The African market, which should have been the most accessible destination for Mauritius sugars, unfortunately continues to present challenges. Although its overall deficit exceeds 8 million tonnes annually, regional sugar receives limited trade preferences, or if it does, it often lacks predictability. This is the case in Kenya which, as a COMESA member, provides a margin of preference of 100% for brown cane sugar, but limits such imports to only 250,000 tonnes despite its annual deficits exceeding 500,000 tonnes. Moreover, sales contracts face the risk of being repealed from time to time, owing to arbitrary decisions, such as the sudden opening of its borders to all origins in May 2017, and more recently in July 2020 the suspension of all sugar imports. Other COMESA members simply allow free access, or have negligible tariffs, for world market sugars and the global price distortions therefore prevail.
Likewise for SADC, in light of a derogation of the Trade Agreement, a meaningless TRQ of some 2,800 tonnes is allocated to Mauritius in the SACU market, which is less than 0.2% of its consumption. Despite the significant changes in market conditions since this agreement of 2000, there is strong reluctance from the South Africans to review this derogation. Other countries such as Mozambique, Malawi, Zambia and Zimbabwe, consequently impose non-tariff barriers to keep out SADC sugars
The least exposed products are the special sugars as they are targeted at niche market segments.
In light of the trade restrictions faced, coupled with the volatility and distortion of sugar prices, the least exposed products are the special sugars as they are targeted at niche market segments. Annual production was limited to 70,000 tonnes during the Sugar Protocol days but increased to 120,000 tonnes by 2011. While our EU sales have averaged some 80,000 tonnes over the first half of the decade, we have subsequently faced fierce competition from new suppliers, especially from Central America, after they had finalised free trade agreements with the EU, and started supplying ordinary raw cane sugars for direct consumption at aggressive price levels.
The Mauritius Sugar Syndicate is sparing no effort for a sustainable recovery of its traditional markets while striving to consolidate its market base elsewhere. Mauritius special sugars are often praised for their quality standards in the over 50 countries where they are presently being sold. While producers ensure, through continuous improvements, that this advantage is retained, the Syndicate, on its side, is strengthening its efforts towards customer satisfaction, even if further market segmentation becomes necessary.
In this regard, the sugar industry has also responded positively to the persistent trend in sustainable sourcing commitments driving demand worldwide. Since 2008, the Syndicate has supplied some 220,000 tonnes Fairtrade certified sugars, representing over US$ 13 million in Fairtrade premium: based on our latest assessment, sales of such sugars could treble if more planters were to embark on this programme. In addition, 20,000 tonnes white sugar have been supplied to Ferrero since 2015 under the Altromercato Sustainable Development Programme against an incentive of 40 euros per ton, and more recently 28,000 tonnes white sugar were sold under VIVE. The Syndicate has, moreover, just achieved certification to the Chain of Custody Standard of Bonsucro, the leading global standard for sustainable sugar cane production, aimed at improving the social, environmental and economic sustainability of sugar cane farming.
After the EU, the US has been the most consistent market for Mauritius’ special sugars. The Syndicate has been supplying an annual average of 13,000 tonnes over the last five years, thereby fulfilling the duty-free TRQ allocated to Mauritius under the US WTO commitments. Mauritius can occasionally benefit from additional TRQs against US supply shortfalls, which was the case this year, and which enabled the Syndicate to sell an extra 3,000 tonnes sugar. With the initiation last July of negotiations for a Free Trade Agreement between US and Kenya, which will lead to a model FTA for other AGOA beneficiaries prior to its expiry in 2025, Mauritius could have an opportunity to permanently increase its annual preferential access to the US. We understand that Mauritius is in the next batch of African countries due to negotiate such an FTA with the US.
The Syndicate is otherwise also selling 15,000-20,000 tonnes special sugars to Eastern Europe, Middle East, South East Asia and Far East, targeting countries with increasing purchasing power or consumer trend towards healthy products. To meet its sales objectives, it plans to consolidate these markets and even expand beyond. The bilateral FTA signed in October 2019 between Mauritius and China, once ratified, should help pave the way towards such growth.