Report of The Economic, Social and Environmental Impact on Mauritius of Abolition of Internal ...

137 Pages·2015·0.87 MB·English

The Economic, Social and Environmental
Impact on Mauritius of Abolition of Internal
Quotas of Sugar in EU Market

Report for:
Ministry of Agro Industry and Food Security
Mauritius

May 2015
Research and analysis to inform your business decisions

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Table of Contents
Contents
Section 1: Introduction ........................................................................................................... 1
1.1 The imminent erosion of preference ........................................................................................................... 1
1.2 New rules and practices .................................................................................................................................... 1
1.3 Environment .......................................................................................................................................................... 2
1.4 Efficiency is paramount ..................................................................................................................................... 3
1.5 Measures ................................................................................................................................................................. 3
1.6 Timeframes ............................................................................................................................................................ 4
Section 2: Stocktaking – Implementation of the MAAS ....................................................... 5
2.1 Plus points .............................................................................................................................................................. 5
2.2 Negative points .................................................................................................................................................... 6
2.2.1 Environmental issues ......................................................................................................................... 8
Section 3: Timeframes .......................................................................................................... 10
3.1 The MSS’s commitments ............................................................................................................................... 10
3.2 New collective agreements .......................................................................................................................... 10
3.3 Timetable for implementation of measures ........................................................................................... 10
3.4 Timetable ............................................................................................................................................................. 11
Section 4: Market Outlook ................................................................................................... 12
4.1 The outlook for sugar prices in key export markets ............................................................................ 13
4.1.1 The outlook for world sugar prices ............................................................................................ 13
4.1.2 The outlook for sugar prices in the EU ..................................................................................... 15
4.1.3 The outlook for prices in regional markets ............................................................................. 20
4.2 Ex-Syndicate sugar prices from sales to different markets ............................................................... 22
4.3 Planters’ price..................................................................................................................................................... 24
4.4 NOS sugar ............................................................................................................................................................ 24
4.5 Derivation of ex-Syndicate prices ............................................................................................................... 27
4.5.1 The EU market .................................................................................................................................... 27
4.5.2 The regional market ........................................................................................................................ 29
Section 5: Business as Usual ................................................................................................. 32
5.1 Mauritius’ sugar production potential ..................................................................................................... 32
5.1.1 The outlook for cane area and sugar production ................................................................. 33
5.2 Planters’ and millers’ costs ............................................................................................................................ 38
5.2.1 Ex-Syndicate prices to cover costs ............................................................................................. 39
5.3 Environmental issues ...................................................................................................................................... 41
5.4 Conversion and abandonment of cane land ......................................................................................... 41
5.4.1 Managing ‘difficult’ areas .............................................................................................................. 46
5.4.2 Uncontrolled cane burning .......................................................................................................... 47
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5.4.3 Small planter agri-environment best practices ..................................................................... 48
5.4.4 Water conservation and management .................................................................................... 49
5.5 Social issues ........................................................................................................................................................ 51
5.5.1 Cane land abandonment ............................................................................................................... 51
5.5.2 Cane land abandonment ............................................................................................................... 53
5.5.3 Small planter livelihoods ............................................................................................................... 53
5.5.4 Retirement schemes for sugarcane industry workers ........................................................ 56
Section 6: Measures .............................................................................................................. 58
Introductory comments ........................................................................................................................................ 58
The sugar industry is an essential public good ................................................................................ 59
Quantifying the challenge ahead ......................................................................................................... 60
6.1 Sugar sales: new markets and value addition ........................................................................................ 62
6.2 Employment ....................................................................................................................................................... 64
6.2.1 Voluntary retirement schemes .................................................................................................... 65
6.2.2 Collective agreements, strike and arbitration ....................................................................... 68
6.2.3 Industrial relations and conditions of employment including the small planter
aspect .................................................................................................................................................... 71
6.2.4 7-day working week ........................................................................................................................ 74
6.2.5 Seasonal labour ................................................................................................................................. 74
6.2.6 Representations by Trade Unions .............................................................................................. 75
6.2.7 Sustainability indices ...................................................................................................................... 75
6.2.8 Absence of interaction with employees. ................................................................................. 76
6.2.9 Recommendations: package to adapt to new circumstances ........................................ 76
6.3 Small and medium planters ......................................................................................................................... 78
6.3.1 Major drop in numbers in spite of entitlements and incentives .................................... 78
6.3.2 Survey of the Sugar Insurance Fund ......................................................................................... 79
6.3.3 Redeeming features ........................................................................................................................ 81
6.3.4 Other forms of assistance to small and medium planters................................................. 85
6.4 Environment & Social ...................................................................................................................................... 88
6.4.1 Environment ....................................................................................................................................... 88
6.4.2 Social ..................................................................................................................................................... 90
6.5 Institutions .......................................................................................................................................................... 92
6.5.1 MCIA ...................................................................................................................................................... 92
6.5.2 SIFB ........................................................................................................................................................ 97
6.5.3 MSS ........................................................................................................................................................ 99
6.5.4 Re-engineering of institutions ................................................................................................... 105
6.6 By-products ...................................................................................................................................................... 106
6.6.1 Molasses ............................................................................................................................................. 106
6.6.2 Bagasse ............................................................................................................................................... 109
6.6.3 Other environmental issues ....................................................................................................... 117
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6.6.4 Land development and land abandonment ........................................................................ 118
6.6.5 Water availability ............................................................................................................................ 120
6.7 Measures to contain costs ........................................................................................................................... 120
6.7.1 Outlook for cane and sugar yields ........................................................................................... 121
Section 7: Outcome ............................................................................................................. 123
Key conclusion ........................................................................................................................................................ 123
7.1 Business as usual outcome ......................................................................................................................... 124
7.2 Impact on industry revenues and costs of implementing measures .......................................... 127
7.2.1 Employment ..................................................................................................................................... 127
7.2.2 Seven-day harvesting and milling ........................................................................................... 128
7.2.3 Sales and marketing ...................................................................................................................... 128
7.2.4 By-products ...................................................................................................................................... 129
7.2.5 Cess ...................................................................................................................................................... 129
7.2.6 SIFB ...................................................................................................................................................... 129
7.2.7 Outlook for the gap between the ex-Syndicate price and the viability price
with implementation of measures ........................................................................................... 129
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List of Tables
Table 4.1: Projected EU sugar prices, delivered customer, and EU preference ................... 19
Table 4.2: Projected sugar prices in the regional market ............................................................ 20
Table 4.3: Ex-Syndicate prices associated with sales to different markets ............................ 22
Table 4.4: Derivation of planters’ price, 2005-2013 ....................................................................... 24
Table 4.5: The cost of importing and refining NOS sugars .......................................................... 25
Table 4.6: Profit from refining NOS sugars for sale in the EU ..................................................... 26
Table 4.7: Profit from refining NOS sugars for sale in the domestic market ......................... 26
Table 4.8: Profit from refining NOS sugars for sale in the world market ................................ 27
Table 4.9: Derivation of ex-Syndicate prices for refined sugar sales to the EU .................... 28
Table 4.10: Derivation of ex-Syndicate prices for refined sugar sales to the EU –
if EU prices reflected a 5% EBIT margin .......................................................................... 28
Table 4.11: Derivation of ex-Syndicate prices for special sugar sales to the EU .................... 29
Table 4.12: Derivation of ex-Syndicate prices for special sugar sales to the EU –
assuming increased competition pushed down prices ........................................... 29
Table 4.13: Derivation of ex-Syndicate prices for brown sugar sales to Kenya ...................... 30
Table 4.14: Derivation of ex-Syndicate prices for brown sugar sales to Kenya –
assuming prices were bid down to the cost of imports from southern
Africa ........................................................................................................................................... 30
Table 4.15: Derivation of ex-Syndicate prices for refined sugar sales to the region ............ 31
Table 4.16: Derivation of ex-Syndicate prices for refined sugar sales to the region –
assuming prices were bid down to the cost of imports from southern
Africa ........................................................................................................................................... 31
Table 5.1: Derivation of the EU price that provides producers with a break-even
take-home sugar price of MUR16,000 per tonne ....................................................... 40
Table 5.2: Island-wide change in land-use from sugarcane 2001-2010 ................................. 41
Table 5.3: Summary of environmental issues .................................................................................. 42
Table 5.4: Extent of accidental/illegal cane burning in Mauritius ............................................ 47
Table 5.5: Summary of social issues ..................................................................................................... 52
Table 6.1: Comparison of sugar and other sectors in terms of retirement or
redundancy packages ........................................................................................................... 66
Table 6.2: Impact of double compensation for purchasing power loss ................................. 71
Table 6.3: Remuneration package comparison ............................................................................... 72
Table 6.4: Comparison of entitlements .............................................................................................. 78
Table 6.5: Estimated FT cane production by area ........................................................................... 82
Table 6.6: Fairtrade cooperatives distribution ................................................................................. 83
Table 6.7: Example FORIP Yield Data ................................................................................................... 84
Table 6.8: Estimates monthly income from farming two hectares of cane land ................ 86
Table 6.9: Breakdown of abandoned lands by plot size ............................................................... 86
Table 6.10: Evolution of the global cess ............................................................................................... 93
Table 6.11: SWOT analysis of role of MSS ........................................................................................... 104
Table 6.12: Characteristics of different raw materials for ethanol production ..................... 108
Table 6.13: Characteristics of different sources of electricity generation .............................. 116
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List of Diagrams
Diagram 4.1: EU sugar prices versus world white sugar prices ........................................................ 12
Diagram 4.2: Evolution of world raw and white sugar prices ........................................................... 13
Diagram 4.3: Brazil’s raw sugar production costs vs. world raw sugar prices ............................ 13
Diagram 4.4: Evolution of EU imports ....................................................................................................... 16
Diagram 4.5: The relationship between world and EU price once quotas are abolished ...... 18
Diagram 4.6: Estimated composition of EU market supply at different world sugar prices . 19
Diagram 4.7: Premium of Kenyan wholesale prices over duty-free imports from COMESA 21
Diagram 4.8: Projected market balance in COMESA............................................................................ 21
Diagram 4.9: Ex-Syndicate prices from sales to different markets at a world price of 20
cents/lb ....................................................................................................................................... 23
Diagram 4.10: Ex-Syndicate prices from sales to different markets at a world price of 15
cents/lb ....................................................................................................................................... 23
Diagram 5.1: Harvested area and sugar output since 1990 .............................................................. 32
Diagram 5.2: Annual percentage decline in area by farm size, average 2006-2012 ................ 33
Diagram 5.3: Reduction in sugar production by farm size, 2006-2012 ......................................... 33
Diagram 5.4: Annual percentage decline in area by region, average 2006-2012 ..................... 33
Diagram 5.5: Evolution sugar yields per hectare .................................................................................. 34
Diagram 5.6: Evolution of the Ex-Syndicate sugar price ................................................................... 35
Diagram 5.7: Annual change in island area vs. annual change in ex-Syndicate prices ......... 36
Diagram 5.8: Annual change in planter area vs. annual change in ex-Syndicate prices ....... 36
Diagram 5.9: Projected area under cane to 2025 .................................................................................. 37
Diagram 5.10: Projected sugar production to 2025 ............................................................................... 37
Diagram 5.11: Indices of input prices and the ex-Syndicate sugar price ........................................ 38
Diagram 5.12: Future evolution of costs assuming business as usual ............................................. 39
Diagram 5.13: Change in extent of land-use 2001-10 by region ....................................................... 44
Diagram 5.14: Estimated urban sprawl and ecosystem capital in Mauritius, 2000-2010 ......... 45
Diagram 5.15: Assessment of water accessibility and stress in Mauritius ...................................... 50
Diagram 6.1: Outlook for ex-Syndicate prices from sales in potential markets and the
industry’s viability sugar price ........................................................................................... 61
Diagram 6.2: Outlook for ex-Syndicate prices from sales in potential markets and the
industry’s viability sugar price ........................................................................................... 61
Diagram 6.3: Evolution sugar yields per hectare ................................................................................ 121
Diagram 6.4: Evolution of sucrose content of cane during the harvest period,
average 2006-2011 .............................................................................................................. 121
Diagram 6.5: Evolution weekly sucrose yield per hectare over the course of the harvest
period, average 2006-2011 ............................................................................................... 121
Diagram 7.1: Delivered cost of bulk white sugar, beet sugar and imports ............................... 123
Diagram 7.2: Outlook for ex-Syndicate prices from sales in potential markets and the
industry’s viability sugar price ......................................................................................... 124
Diagram 7.3: Outlook for prices in target markets ............................................................................. 125
Diagram 7.4: Outlook for ex-Syndicate prices from sales in target markets ............................. 125
Diagram 7.5: Sales of sugar in target markets ...................................................................................... 126
Diagram 7.6: Outlook for the ex-Syndicate price vis-à-vis the industry viability price ......... 127
Diagram 7.7: Outlook for the ex-Syndicate price vis-à-vis the industry viability price
after implementation of measures ................................................................................ 130
Diagram 7.8: Projected gap between the ex-Syndicate price and the industry viability
price with implementation of mitigation measures ............................................... 130
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Section 1: Introduction
Section 1: Introduction

The TOR of the Study refers to certain key concepts namely the resilience of the sugar cane
industry in the teeth of multiform competition from sugar suppliers and alternative sweeteners;
the importance of the filière approach; the relocation of operations in Mauritius; a bold and
innovative plan in respect of small planters for the continuation of their involvement in sugar
directly or through other means.
1.1 The imminent erosion of preference
Since 2009, the price received by Mauritian producers for sugar sold to EU buyers has been
derived from the market price, and its movements have a direct impact on the price received
by Mauritian producers. Under the current quota system, imports are guaranteed a share of
the EU market and this reliance on imports — some of which pay a duty of close to
€100/tonne — has been supportive of prices in most years. This support has been the basis
Mauritius’ preference in the EU market over the world market.
However, the removal of quotas in 2017 will allow producers of beet sugar and isoglucose to
increase sales in the internal market. The challenge facing overseas suppliers, such as
Mauritius, reflects the fact that EU beet growers and processors have made huge strides in
improving the efficiency of their production, allowing them to raise significantly their
competitiveness against imports. Indeed, the most efficient beet sugar producers Europe will
soon be competitive as exporters on the world sugar market.
When quotas are lifted, the beet industry is planning to supply a greater share of internal
market demand at the expense of imports. This year, the sector has emphatically
demonstrated its capacity to raise production, with sugar output expected to exceed quota by
5-6 million tonnes. To gain market share after 2017, sugar prices in the EU will fall to level at
which it is no longer attractive for overseas suppliers to ship sugar to the EU. The implication
of this is that overseas suppliers will no longer earn a preference from sales of raw or refined
sugar in the EU vis-à-vis the world market.
The consequences of greater supply in the EU market can already be seen today. Sugar prices
today are trading at around €400-430/tonne, down from more than €700/tonne two years
ago, reflecting over-supply that has arisen because of a series of “special measures”
introduced by the European Commission between 2010/11 and 2012/13 to boost supplies
when internal market supply was tight and prices were high. Once industry costs are
deducted, Mauritius already earns little preference on sales of sugar to the EU over returns
from the world market.
2014 represents a real wake-up call for things to come and the response to change has to start
now and not in 2017 when it will be too late. On 26 September 2014, MSS estimated that the
ex-Syndicate sugar price for the 2014 crop will drop to just MUR12,500 per tonne, far below
the viability price of producers throughout the sector.
 The threats ahead are so formidable that Mauritius should do away with the shackles of its
sugar history and think in terms of competition in a globalised world.  
1.2 New rules and practices
The Mauritian sugar industry will have to stand up to such challenges. Price forecasts for 2014
and for the next years are lower than what is required to ensure that Mauritian producers
receive a price that is consonant with viability. This is the sine qua non condition for the
maintenance of a sugar industry. These producers will have to reckon with a more
competitive market environment in the EU sugar market and with the strength of the Rupee,
especially in relation to the Euro. A business as usual scenario that focuses on acquis and is
lukewarm to change will spell disaster.
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Section 1: Introduction

As a consequence, the industry must review and overhaul its rules and practices that date
back from the zenith years of the sugar industry and which are neither applicable nor wise in
times when fierce competition is the order of the day. A few decades back, the sugar industry
had a key social and rural stabilisation role. This has significantly dwindled, in that the sugar
industry now employs less than 2% of the labour force and small and medium planters have
over the past 10 years decreased by nearly 40%.
A new sugar industry means new ways of doing things, new paradigms and the shedding off
of past privileges. The Sugar Protocol was said to be of “indefinite duration” and this was raised
to the status of a mantra and hailed by the ACP as being of a permanent nature and the
accord was termed a “sacrosanct” agreement by the ACP. The Protocol has been terminated
and the Sugar Regime, which was also considered as permanent, is being overhauled in its
very foundations. The European sugar industry, traditional ally of the ACP since 1975 on
account of specific circumstances, is gearing up to be world competitive and is ready and
eager to displace imported sugar in the EU as from 2017 now that benefits brought related to
the entry of ACP sugar have disappeared. The “commonality of interests between beet
producers and ACP exporters” is now a thing of the past.
1.3 Environment
The role of the sugar industry in the protection and preservation of the environment has
increased and can increase. The MAAS lengthily elaborated on the positive role of cane
cultivation in respect of the environment and explained the risks of the disappearance of this
crop. The MAAS also underscored the importance of the cane sector for the tourism industry,
ensuring pristine lagoons and maintaining a soothing and appealing landscape.
Additionally, the sugar sector provides some 15% of the country’s electricity production
through the use of bagasse, thereby avoiding the import of some 200,000 tonnes of coal or
some 80,000 tonnes of high sulphur heavy fuel oil, also containing carcinogenic
poly-naphthalenes. The establishment of a mandatory framework for the blending of gasoline
(or mogas as it is termed in Mauritius) would allow the country to move to an E10 mode and
thus allow it to move away from zero use of renewable energy in the transport sector. Already
the entry into operation of bagasse/coal plants has enabled the country to generate nearly
20% of its electricity from renewables, a status that many developed countries have not yet
attained; step up private sector participation in energy generation to some 55% of the total;
and diversify the energy base and move away from risky and volatile oil.
In time, a performing industrial set-up can allow the country to enhance its share of
renewable energy if needed. In the transport sector, the economics of oil may one day justify a
diversion of cane juice to ethanol and call for a higher use of cane biomass, in particular high
biomass cane varieties, for the generation of electricity that does not involve imports of fossil
fuels nor the emission of additional carbon dioxide and the obnoxious sulphur dioxide
considered by the US Health Department as being a key factor in respect of asthma and
broncho-restriction diseases.
Thus, cane and the preservation of land are not only for sugar production and the tourism
industry but also for the energy sector, now and in the future. In this respect, the sugar sector
has to be a guardian of land. In spite of its low relative importance in the GDP, it is a public
good that has to be preserved for future generations, and policies should be tailored
accordingly. Large-scale abandonment of cane plantations by small and medium planters
mainly has brought in a serious risk factor for the sugar, tourism and energy industries.
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Section 1: Introduction

In most countries, the price paid, or received, for a renewable source of energy is higher than
that of fossil fuels. Even in Mauritius, solar and wind energy are priced higher than
high-sulphur heavy fuel oil. The reverse applies to bagasse energy; it is priced lower than fossil
fuel energy and, in certain cases, price mechanisms act as a deterrent to the higher use of
biomass.
It is noted that the difference between the price of electricity sold by sugar companies and the
cost of generation of the CEB is more or less equal to the subsidies afforded by the CEB to the
export manufacturing sector. This was possible in the heydays of the Sugar Protocol. The
challenges of the future call for a revision of biomass pricing policies. The cane biomass
industry is very often, for so many reasons of expediency, viewed with the blinkers of a long
foregone history, and there has been a great reluctance to foster this activity. This is even less
understandable given the fact that all power companies using bagasse have small planters
and employees as shareholders via the Sugar Investment Trust.
1.4 Efficiency is paramount
The challenges confronting the sector call for the country to have an efficiently performing
and highly competitive industrial set-up that is able to stand up to competition. In particular,
it must be able to compete with the EU sugar majors, who have already undertaken major
upgrading and are backed up by efficient and lean research that has allowed them to make
continuous productivity gains. Equally, as most of these producers operate in an internal
market, with the EU market absorbing more than 90% of their production, they are shielded
from currency fluctuation, which is not the case in Mauritius.
This means that it will be important for Mauritius to become an even more efficient producer
if it is to remain a competitive and sustainable supplier to the EU. Flexibility to supply different
markets will also be important as, when market conditions are unattractive in the EU, there
can be opportunities in other markets, such as the African continent, which the Mauritian
industry could take advantage of.
1.5 Measures
In the past, the proceeds from Mauritius’ preferential access to the EU allowed the sugar
industry to make important and valuable contributions to Mauritian society. The current price
drop, a foreteller of the post-2017 situation, calls for a different approach. Transfers are made
in many countries to support agriculture and ensure that land remains under commercial
production; it is time now for Mauritius to embark on such a venture.
The measures recommended by this report refer to:
 The preservation of land under cane in difficult areas, a measure recommended in the
MAAS but never implemented.
 Reform of institutions to lower the charge (cess) on industry proceeds and grant greater
freedom in sales and marketing.
 Alignment of terms of employment with those in other sectors of the Mauritian
economy.
 A more attractive payment for bagasse and cane biomass.
 The mandatory blending of ethanol and gasoline with a premium for ethanol.
 A higher contribution by distiller-bottlers for potable alcohol used for the home market.
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