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The East African : Oct 27th 2014
The EastAfrican OCTOBER 25-31, 2014 STATE OF SUGAR INDUSTRY IN EA Special advertising section 1 A woman picks sugar off a supermarket shelf. It is a relatively expensive commodity in the region. Picture: File Sugar is a political commodity in East Africa Sovereign govts have been major shareholders in various sugar milling companies across the region ing about 15 pe≥ cent to the ≥egion’s ag≥icultu≥al G≥oss Domestic P≥oduct (GDP). The indust≥y is a st≥ategic T secto≥ fo≥ c≥eating employment th≥oughout the ≥egion and it fo≥ms an impo≥tant pa≥t of ag≥icultu≥al and development policy Ove≥ the past th≥ee decades, suga≥ consumption in East Af≥ica has g≥own steadily outpacing domestic p≥oduction. East Af≥ica’s suga≥ facto≥ies have combined installed capacity to p≥ocess mo≥e than 72, 000 tonnes of cane pe≥ day. If this capacity we≥e fully exploited, the indust≥y could meet the national demand fo≥ suga≥. Howeve≥, facto≥ies continue to ope≥ate at a capacity utilisation of only 55 pe≥ cent to 60 pe≥ cent because of significant technical and management limitations. East Af≥ican count≥ies have been at the fo≥e f≥ont of p≥otecting the suga≥ indust≥y against high cost, domestic cane and o≥ beet indust≥y with high ta≥i≠ ba≥≥ie≥s and impo≥t quotas, as an SUGAR SALES IT IS MORE BENEFICIAL FOR A MILLER TO SELL INTO THE DOMESTIC MARKET THAN TO EXPORT, WHICH AT LEAST INCREASES THE LIKELIHOOD THAT MILLERS MAY COMPETE ON THE BASIS OF THE PRICES AND DISCOUNTS THAT THEY OFFER TO DOMESTIC RETAIL AND INDUSTRIAL CUSTOMERS. he suga≥ indust≥y plays a significant ≥ole in the East Af≥ica’s economy, cont≥ibut- ext≥eme example of thei≥ mo≥e gene≥al policy of p≥otecting thei≥ ag≥icultu≥al indust≥ies. The ≥esults have sometimes been quite pe≥ve≥se. Suga≥ has always been a “political” commodity. It is not st≥ictly essential to people’s diet but it has many of the cha≥acte≥istics of an addictive d≥ug. The c≥aving fo≥ sweet food is so st≥ong, and suga≥ is ≥elatively a≠o≥dable, that cont≥ol of the t≥ade in suga≥ has histo≥ically been an impo≥tant sou≥ce of pe≥sonal wealth, taxation and political powe≥, simila≥ to salt and tobacco. Sove≥eign gove≥nments have histo≥ically been majo≥ sha≥eholde≥s in va≥ious suga≥ milling companies ac≥oss the ≥egion although the≥e is a p≥og≥essive move towa≥ds p≥ivatising these fi≥ms. The wo≥ld suga≥ ma≥ket has in the past been highly disto≥ted by p≥otectionism. An impo≥tant featu≥e of the global suga≥ indust≥y is that 70 pe≥ cent of the wo≥ld’s suga≥ p≥oduction is consumed within the count≥y of o≥igin and the ≥est is t≥aded in wo≥ld ma≥kets. Howeve≥, fi≥m consolida- tions and equity t≥ansactions have ove≥ time ≥esulted in the c≥eation of two main multinational fi≥ms in the ≥egion. These multinational fi≥ms have pu≥sued st≥ategies to take advantage of investment incentives and p≥efe≥ential access to luc≥ative fo≥eign ma≥kets. This aspect is impo≥tant in so fa≥ as milling fi≥ms, as monopsonistic buye≥s of suga≥cane, act as the fulc≥um of the domestic suga≥ value chain. Thei≥ ≥elationships with gove≥nments, thei≥ cont≥ol ove≥ investment patte≥ns in the indust≥y, and thei≥ ma≥ket powe≥ (whethe≥ held by a single fi≥m o≥ a g≥oup of fi≥ms in the fo≥m of tacit co-o≥dination) can a≠ect the p≥icing and supply of suga≥. Conce≥ns a≥ise whe≥e fi≥ms in this position have the incentive to abuse this ma≥ket powe≥. Regional competition can se≥ve as an impo≥tant competitive discipline to la≥ge fi≥ms in those small economies whe≥e ma≥kets a≥e concent≥ated. This is pa≥ticula≥ly the case if fi≥ms a≥e able to expand thei≥ capabilities to compete in new geog≥aphic ma≥kets eithe≥ th≥ough c≥oss-bo≥de≥ investments o≥ impo≥t penet≥ation. Howeve≥, this potential fo≥ c≥oss-bo≥de≥ ≥ival≥y can be disto≥ted when fi≥ms divide ma≥kets o≥ seek to adve≥sely influence t≥ade and investment patte≥ns on a ≥egional level. Whe≥e suga≥ ma≥kets a≥e highly concent≥ated, and the≥e a≥e fi≥ms with significant ma≥ket powe≥, it is inc≥easingly likely that the≥e could be adve≥se e≠ects on competition. Fo≥ instance, in Kenya the≥e a≥e a la≥ge numbe≥ of suga≥ p≥oduce≥s who we would expect to d≥ive p≥icing downwa≥ds. Howeve≥, we see that p≥icing ≥emains high due p≥ima≥ily to ine∞cient p≥oduction, st≥ong p≥otections against impo≥ts, un≥eliable and insu∞cient suga≥cane supply, and st≥uctu≥al const≥aints to g≥owth in p≥oductivity. Ove≥ the past decade the≥e has been a cont≥olled g≥eenfield suga≥ cane ent≥y into the East Af≥ican ma≥ket at the milling level, and ma≥ket sha≥es have ≥emained ve≥y stable ove≥ this pe≥iod. Additionally, it is no≥mally expected that the incentives to invest in technology and capacity a≥e likely to be lowe≥ in a ma≥ket whe≥e the≥e is a dominant milling company. Howeve≥ ba≥≥ie≥s to ent≥y and expansion at the mill- ing level of the suga≥ indust≥y a≥e widely known to be high although seve≥al of the la≥ge fi≥ms have been able to g≥ow within the ≥egion. Some of the commonly identified ba≥≥ie≥s to ent≥y include high capital and maintenance costs fo≥ establishing a new mill. Suga≥ milling is a high fixed cost business ≥equi≥ing substantial economies of scale in cane c≥ushed to b≥eak-even. The ≥egulato≥y envi≥onment in each count≥y, including ta≥i≠ and non-ta≥i≠ ba≥≥ie≥s to ent≥y, can se≥ve to dete≥ ent≥y to this level of the ma≥ket, existing ≥elationships of pat≥onage between gove≥nments and la≥ge milling companies se≥ve to align the incentives of gove≥nment and mille≥s such that new ent≥ants would find it di∞cult to compete with incumbents and obtain the same benefits, sho≥tages of suga≥cane supply seem to affect the milling ope≥ations in seve≥al count≥ies. Most suga≥ p≥oduced globally is consumed within the count≥y of o≥igin behind p≥otective ba≥≥ie≥s, and expo≥t ma≥kets occu≥ only unde≥ ag≥eements. Thus by dive≥sifying p≥o- duction within suga≥ deficit East Af≥ican count≥ies, fi≥ms enjoy the p≥otection and incentives a≠o≥ded to domestic p≥oduce≥s in each count≥y, and this can be used as a st≥ategic benefit to maximise p≥ofits which compensate the fi≥ms fo≥ the costs of ove≥coming initial ba≥≥ie≥s to ent≥y. Competition autho≥ities have a≥gued befo≥e that the ≥egulato≥y envi≥onment in the East Af≥ican suga≥ indust≥y has p≥ecipitated a ma≥ket which is not highly competitive at the milling level. Tractors delivering cane to a crushing miller machine at Butali Sugar Mills in Kakamega. Milling is very expensive Picture: File Barriers to fair competition Some of the commonly identified barriers to entry include high capital and maintenance costs for establishing a new mill. Sugar milling is a high fixed cost business requiring substantial economies of scale in cane crushed to break-even. The regulatory environment in each country, including tariff and non-tariff barriers, can serve to deter entry to this level of the market, existing relationships of patronage between governments and large milling companies serve to align the incentives of government and millers such that new entrants would find it difficult to compete with incumbents and obtain the same benefits.
Oct 20th 2014
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