The sugar market has undergone a structural change

By Devesh Dukhira

There is wide consent that the sugar market has undergone a structural change. In fact, after several years of depressed prices, triggered by surplus production coupled with domestic support and trade subsidies provided in key origins, producers have not been inclined to expand their output whilst global consumption continued to rise.

Consequently, while world sugar production has failed to keep pace with the record outturn of 180 million tons in 2017/18, consumption has not subsided and is now almost 4% higher than the level reached in that year. This gradual stock depletion has supported the rise in global sugar prices since the drastic fall in 2017, except for the abrupt but provisional drop in early 2020 with the outburst of Covid-19 when the futures price of raw sugar on the New York #11 exchange had fallen below US$ 250/ton. The global market price returned to some US$ 400 by mid-2021 and remained within a range of US$ 400-450 over the following 12 months, which consequently influenced sales negotiation for our 2022 crop sugars.

On the other hand, production costs have continued rising worldwide, having been exacerbated by the post-COVID and Ukrainian invasion-related inflationary costs, be it for fertilizers in the fields or energy for sugar processing. This has been particularly the case in the EU, where in 2022, the price of energy, a significant cost component for beet processors and cane sugar refiners alike, has increased by up to 7 times over the previous 5 years’ average, while beet prices have almost doubled further to the price rise for alternate agricultural crops like wheat or rapeseed.

This cost escalation has occurred alongside an EU stocks drawdown, firstly with the decline in beet area since the record 2017 crop, secondly due to the weather-afflicted 2020 crop, while the 2022 crop was also affected by a dry Summer and subsequently cold December spells in North West Europe, combined with yellow-aphid attacks in certain prone areas. The forecasted EU sugar production in fact declined over the harvest, from an initial 15.8 million tons to a mere 14.6 million tons. As a result, increasing imports have been required to meet market demand, in fact above the regular preferential supplies of the preceding years, against a strengthened world market price. In fact, to meet its market shortfall, the EU even had to import sugar under its WTO quota, namely from Brazil, at € 98 import tariff, thereby supporting the price increases.

The latest average ex-works price for white sugar in the EU as communicated by the Commission reached € 821 per ton for July 2023, which is 75% higher than the price recorded over the same month in 2022, while the average price over the Marketing Year has attained € 751, or 67% higher than that over the previous year. Against these market dynamics, the average price obtained for Mauritius white sugar in the EU almost doubled compared with the preceding year while special sugars have been sold at even higher prices. The rise in these prices resulted in a 20% enhancement in our sales revenue over the preceding year, despite the 9% drop in crop outturn.

The EU has therefore been our preferred export destination for the outgoing crop: it accounted for almost 80% of its total exports compared with 50% in the 2021 crop, and 90% of its white sugar exports, compared with 55% in the previous year. This increase has been at the expense of exports of direct consumption raw sugar to the regional market, usually priced as a commodity, which had accounted for 16% of the preceding crop sales.

Niche market segments

As for the Mauritius special sugars sold in niche market segments, total sales exceeded 136,000 tons, after a rise of 18% over the previous year, mainly thanks to the remarkable growth in the EU market. These changes in the sales mix demonstrate the agility to seek the best value for every ton of sugar while reaffirming the necessity for the industry to maintain flexibility on its product mix. Moreover, after the new positioning of the Mauritius special sugars in 2021, compounded with supply disruption in competing origins, their market share within the EU has increased substantially with sales over the 2022 crop exceeding 100,000 tons, i.e. almost 40% increase over the previous year. Even sales to the US, finalised under the US raw sugar TRQ, have risen, thanks to the TRQ reallocation over the year coupled with extension of the shipment timeframe till December 2022, with deliveries having attained some 16,000 tons compared with 10,200 tons in the previous year.

Meanwhile, after having sold Mauritius white sugar in the EU for a dozen years, the Mauritius Sugar Syndicate (MSS) has identified niche market segments where they can be better valued. Already, with renewal of the commercial agreement with French Cristalco in June 2022 for a further 3 years, and a new 3-year contract with Italia Zuccheri Commerciale to focus on the deficient Italian market, emphasis has been placed on value-added white sugar. In addition to the EU Grade quality, supplies from Mauritius now include, amongst others, bottlers’ grade, low-colour white, extra fine white and Fairtrade-labelled or Bonsucro-certified sugars.

Sustainability certification is no longer simply a differentiating factor but has become a must.

Sustainability certification is no longer simply a differentiating factor but has become a must in the segments where Mauritius sugars are sold, be it from the environmental, social and governance perspectives. After Fairtrade certification among the smaller growers since 2008, Omnicane was the first mill in Africa to have embarked onto Bonsucro certification in 2019 and was followed by Alteo in 2021 while ENL was successfully certified last month. For the 2022 crop, over 45,000 tons Bonsucro-certified sugars were available for sales while 13,600 tons Fairtrade-certified sugars were produced and sold. Though far from the peak of 36,800 tons attained for the 2015 crop, it is hoped that part of the Fairtrade tonnages lost over the previous years will be recovered as the MSS Multi-Purpose Cooperative Society together with a few other independent Cooperative Societies await certification.

The MSS is therefore geared up in seeking the best value for each ton of locally produced sugar, which has become even more relevant after production has fallen to present levels. It is determined to continuously review its operational costs in the meantime to bring the highest net revenue to producers. A confusion sometimes arises on MSS direct expenses, as misinformed people tend to include the cost of raw sugar being imported for refining, which last year accounted for some Rs 2 billion out of the total expense of Rs 5.5 billion. Such operations have become necessary due to the declining crop harvest, while the refining capacity of Omnicane has to be optimized so that it remains sustainable. Likewise, the balance of the Rs 3.5 billion represents mostly operational costs which must be incurred irrespective of who is selling the sugar, while MSS administrative expenses account for less than 3% of these expenses. 

Nevertheless, through a common sales platform like MSS, these operational costs can be minimized. For instance, over the 2022 crop, we have managed to bring down the average sea freight charges by 50% after the general surge imposed in the previous year. With regard to its finance costs, bearing in mind advance payment of up to 80% of the ex-Syndicate price to planters at time of harvest, the MSS has negotiated Money Market Lines with commercial banks and even resorted to Money Market Instruments to bring down the average interest rate payable on its rupee advances to 3%, despite the Key Rate increase to 4.5% in the interim. In the same vein, through a judicious foreign exchange policy, it has earned a net hedging gain of almost Rs 280 million which has contributed almost Rs 1,200 to the ex-Syndicate price. This is a continuous endeavour ascertained by the Directors and the Management of MSS. However, it is essential that, in parallel, we also improve our production efficiency, so we can have a higher cane and sugar output per hectare.