HomeIndustry SectorsEnergy EfficiencySweet connection that SA cannot afford to pass up

Sweet connection that SA cannot afford to pass up

23rd October 2008- What is a spoonful of sugar worth? Yesterday’s Business Day quoted the spot price as $0,115 a pound, which is several spoonfuls, but not much money.

Sugar cane – source of bagasse that is used to generate electricity

The South African sugar industry would rather see its products measured in energy terms, in joules and megawatts. With the spectacular increase in world energy prices, it is not hard to see the opportunity in recasting an increasingly oversupplied commodity as a sustainable solution to SA’s fossil fuel dependency.

Sugar certainly is not what it was. New York’s world indicator price — indicator because the world market is by no means free and because domestic prices will vary — has dropped relentlessly, if unsteadily, from a high of more than $0,20 a pound in 1989 to a recent record low of just more than $0,05 in 2005.

The latest price of about $0,115 is, in fact, a modest spike on a dismally dwindling value line.

While other commodity prices, particularly agricultural commodities, rose sharply over the past two years, sugar prices remained relatively low. This is simply a function of a world oversupply, which by the admission of industry champion and South African Sugar Association (Sasa) executive director Trix Trikam, is caused by production subsidies and corresponding protection.

In the US, the European Union (EU) and Japan, protectionism has maintained domestic prices of up to three times more than the world sugar price, though indicators are that protectionist countries are acknowledging that their policies cannot last indefinitely. The EU, for instance, has started implementing a degree of liberalisation, but, as Trikam puts it, a 39% subsidy cut is still a 61% subsidy.

In SA, cane farmers enjoy no such protection, yet it contributes about R7bn a year to gross domestic product and a threat to that should be incentive enough for the industry to diversify its production. The table sugar business may not be in trouble yet, particularly with consumption set to rise in China and India, but it is clear that it is unlikely to survive in its current form.

So what are South African producers to do?

In Brazil, says Sasa external affairs director Johann van der Merwe, sugar is a by-product. It may still be the cheapest way to acquire dietary carbohydrates but, to the Brazilians, the measure of a teaspoon of sugar is 50KJ. That industry’s main products are ethanol and fuel bagasse.

Ethanol supplies about 30% of Brazil’s motor fuel and the combustion of bagasse — the fibrous residue of the cane plant after the juice has been extracted — supplies about 3% of Brazil’s electricity needs with a process called co-generation. Brazil’s co-generation now generates about 1800MW, which is expected to rise to about 11500MW, or 15% of that country’s electricity consumption by 2015-16.

The Brazilian model is the way SA’s sugar industry wants to go. But there are important differences and constraints. First among these is the massive difference in scale. Much of Brazil has the climate and conditions conducive to cane farming, whereas cane growing in SA is limited to the KwaZulu-Natal coastal area and a small part of the Mpumalanga lowveld.

In Brazil, the industry (controlled by a handful of grower-miller families) is almost fully vertically integrated. Its output of about 31-million tons a year is expected to increase to about 41-million tons by 2015-16. SA, about 10th in the world, produces about 2,2-million tons a year.

Perhaps the most important difference is that the Brazilian sugar cane industry is maintained by a mandatory petrol-ethanol blend. Mandatory blending started in 1975, but by 1991 the blend was set at 20%-25% of anhydrous ethanol, and since July last year it was at 25%.

This regulation, combined with the scale of the industry, has led to the development of an automotive innovation, the flex-fuel internal combustion system. Now more than 90% of Brazil’s 200000 new vehicles sold every month are fitted with the flex-fuel system.

When South African sugar producers suggested a similar mandatory ethanol blending, the government gave the industry a flat “no” on free market grounds.

An alternative might have been a voluntary, incentive-based blending system, but Sasa seems sceptical, since it would require the co-operation of the petroleum industry with a potential competitor. The industries are talking to each other, says Trikam, but nothing has come of it yet.

The important spin-off of mandatory blending in Brazil was that it permitted the industry to develop its co-generation capacity, thus advancing the whole industry towards being self-sustaining.

In SA, sugar mills have been electricity co-generators for a long time, says the executive director of Tongaat’s technology unit, Dave Meadows. Some of SA’s 14 mills have capacity beyond their power needs and export about 5MW into the national grid at the exceptionally low price of 10c/kWh.

This can be increased to a large-scale contribution to the national grid, but requires a capital investment of about R10bn, if all 14 mills participated. Such capital upgrades would maximise the conversion efficiency of bagasse into steam, minimise the energy usage to manufacture sugar and optimise the conversion of steam into electricity.

The co-generating potential is now at 800MW a year, but with improved efficiencies in agronomy, this could increase to 5000GW a year, which is about half of the government’s renewable energy target for 2013.

Co-generation has other advantages, too, in that its dispersed generation avoids distribution losses, strengthens the grid and matches higher winter demand when cane co-generation peaks.

The industry assures us also that this form of bio-energy poses no threat to food security by competing for land.

That is a compelling case, and one that has been received well by Minerals and Energy Minister Buyelwa Sonjica, says Trikam, although no commitment has been made.

The trouble is, the industry is unwilling to singly or co-operatively invest in increasing its co-generating capacity. To do that it would have to secure the co-operation of the state-owned power monopoly Eskom but, again, as a bio-energy supplier, the sugar industry is seen as a competitor which Eskom is unwilling to help.

In light of the global energy crisis and SA’s persistent and long-term power shortage, the reluctance of the government, the petroleum industry and Eskom seems shortsighted, if not downright antisocial.

In the way the sustainability of the sugar cane industry in Brazil depended on a market for ethanol, the South African industry depends on co-generation for the development of an ethanol industry and its ultimate survival.

It is conceivable to contemplate its demise, but the consequences may not be worth allowing it to happen. Chief among these is the uniquely South African circumstance, in which rural economic development is inextricably associated with the success of land reform and the development of small-scale emerging farmers. Sugar cane is a proven entry-level crop, as the cane growers have demonstrated in private sector initiated land reform.

Also, the upstream and downstream beneficiation industries are well developed and fully integrated in rural sugar towns where they make a social and economic contribution far beyond any other agricultural sub-sector in the country. The industry directly employs about 77000 people, with another 350000 indirectly employed. About a million people depend on the industry for a living.

While government interference is abhorrent to the free market, it is clearly in the national interest to see the sugar cane industry thrive. If that means the government has to apply more incentives coupled with a degree of coercion on SA’s arguably underperforming energy industry, so be it.

Originally published in Business Day, 22nd October 2008. Written by Neels Blom, agriculture and land affairs editor.