The duties on sugar (and wheat and maize) are calculated with reference to a Dollar-based reference price. If the global price of these commodities falls below their respective reference prices, the duties on these products increase to make up the difference. You can read more about the detail here.

In 2018, the local sugar producers requested the reference price be increased from $566 per ton to $856.32 per ton. They were unsuccessful, but did have the reference price increased to $680 per ton. The higher the reference price, the higher the duties will be and the longer such high duties will remain in place, so this was a big deal. All of this however happened when Tongaat were hitting their maximum levels of creativity in their accounting department and their results looked nowhere as dismal as they now appear.

The sugar tax has been implemented (an excise duty on sugary drinks), which creates pressure on sugar consumption. The current duties on sugar are over R4 000 per ton, which is around 50% of the FOB value of imported sugar. The bound rate, which is the maximum rate sugar duties can be raised to is 105%, so there is still plenty of room for an increase and I would guess this is looking very appealing to government right now. It would be completely ineffective, but this does not mean it will not happen.

Why would a duty increase on sugar be ineffective, yet remain likely?

Insight provided by Stratalyze (stratalyze.com)

The chart above shows the imports of sugar into South Africa for the last 3 years. As you can see, the import volumes have been dropping (high duties have that effect) and most of the imports are from Swaziland, which is part of SACU and so can’t have its duties increased.

Imports are convenient to blame though and it’s far easier to impose a duty than to fix the structural problems in the industry. Most importantly though, the sugar industry employs an astonishingly large number of people in areas which have very little ability to absorb labour. So even though a duty increase will have minimal impact, it will send out a signal that government cares, even if this is nothing more than opportunistic.

Tongaat’s performance may prove to be the spur that gets the next sugar duty increase investigation off the ground.

So what happens if the duties on sugar do increase?

I am not sure if it will have a huge impact on import volumes, but it would likely create pressure for the downstream industry to begin further reformulation of products to reduce their sugar content. Products such as cool drinks already face increased risk from imports, as the sugar duties increase and as the packaging materials (PET and aluminium) are also applying for aggressive duty increases. If those are successful and if we see any strengthening of the Rand, it may very well become attractive to import cool drink from the EU. Those products would then enter duty-free while their constituent raw materials all attract a duty. You think this is far-fetched? Look at the imports of bottled water over the last 2 years.

Insight provided by Stratalyze (stratalyze.com)

It is perfectly conceivable that cool drink imports could increase if it becomes cost-effective to do so, and increasing the key raw materials could prove to be just the path to that destination. Increasing the duties on cool drink from the EU would be both very difficult as well as extremely unlikely to happen.

So will we see another duty increase application on sugar? I think so and I think Tongaat provides the perfect reason to justify this investigation.

Are you impacted by the duties on sugar? Please contact us on info@xa.co.za.

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