portfolio committee on trade & industry briefing by …• risk of loss of sugar sales would be...

Date: 4 September 2018

Portfolio Committee on Trade & Industry Briefing by ITAC on sugar tariffs

Presented by: Meluleki Nzimande

Chief Commissioner

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1. Policy Framework – Variable Tariff Formula

2. Sugar industry: Categories of imports

3. Sugar industry: Import trends

4. Sugar industry: Market share analysis

5. Tariff Investigation: Balancing act

6. Tariff Investigation: Price impact

7. Process followed in terms of implementing duty triggers in terms of the variable tariff formula

8. ITAC timelines of SASA sugar investigation

9. Stakeholder responses to implementation of US$680/ton DBRP level for sugar

PRESENTATION OUTLINE

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• The overall Government industrial and trade policy approach is, amongst others, to protect strategic upstream sectors/industries because their collapse has the potential to undermine the agricultural and industrial base of the country. Care is taken not to harm downstream players and consumer welfare. Therefore, ITAC has to strike a delicate balance in applying its instruments in line with Government’s industrial and trade policy objectives.

• In tariff investigations and recommendations, careful consideration is given to the value chain of which the products under investigation are a part. The interests of primary producers are taken into account, together with those of downstream manufacturers which manufacture value added products.

• The possible inflationary effects of import tariffs for the consumers, in particular the poor, are also

taken into account. Food security and affordability are an important factor in respect of agricultural products.

• Parties along the value chain may have differing, possibly opposing, interests.

POLICY FRAMEWORK – Variable Tariff Formula

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• In order to support local production of sugar and to mitigate volatility in respect of the price of sugar, a policy was adopted in terms whereof a “floor price” would apply to this commodity. The same policy approach is adopted in respect of wheat and maize.

• When these commodities are imported at lower prices than the prices at which

they are produced locally, local producers are harmed or are exposed to a real threat of harm, which places the country at risk of being totally dependant on the importation of these commodities.

• Accordingly, in order to support local production and to bring the prices of

imported goods to a level which enables local producers to be competitive, intervention in the form of tariff protection is provided.

POLICY FRAMEWORK – Variable Tariff Formula (Cont.)

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• The instrument applied to the three commodities is the “variable tariff formula”. It is designed to take into account various factors, including distortions in the international prices (e.g. subsidies), production costs for local producers, ocean freight costs, exchange rate fluctuations and inflation differentials between South Africa and certain of its trading partners.

• The import duty determined using the variable tariff formula is levied on the

import price in order to raise such price to the “floor price”. • The “floor price” is referred to as the Dollar-Based Reference Price (“DBRP”).

The DBRP is currently set at US$680/ton. This level was introduced on 03 August 2018, when it was increased from its previous level of US$566/ton.


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• If the difference between the average price of imported sugar (“Initial Trigger Price”) and the DBRP reaches or exceeds a certain amount (“Prescribed Amount”) for a set period (“Trigger Period”), then an import duty equal to such difference is levied. The subsequent change in the import duty will occur when the difference between the average price of imported sugar and the Initial Trigger Price reaches or exceeds the Prescribed Amount for the following Trigger Period.

• This mechanism repeats itself continuously – See Chart 1 below.


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Chart 1


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• It is clear from Chart 1 that if the average imported price measured over the Trigger Period is higher than the DBRP, then no duty would be levied, as the local producers of sugar would then be able to compete. In such scenario, SA sugar exports should also be competitive both in the domestic and export markets.

• Two categories: Duty-free imports and Duty-paid imports.

• Duty-free imports: For the period 2015/16 - 2017/18, imports from Eswatini (Swaziland)

and sugar producing countries in the Southern African Development Community (“SADC”) accounted for approximately 45% of total imports into South Africa.

• It is clear that duty-free imports account for a significant volume of imports in the South

African market.

• Duty-paid imports: These imports originate from countries, which are not in the Southern African Customs Union (SACU) and the SADC. Note that imports from non-sugar producing SADC countries are subject to duty. For the period 2015/16 - 2017/18, duty paid imports into the SACU accounted for 55% of total imports. Brazil and United Arab Emirates (UAE) accounted for approximately 76% of these duty-paid imports and other countries accounted for the remaining 24%.

SUGAR INDUSTRY: Categories of Imports

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Trend analysis of imports into South Africa from July 2017 to June 2018

SUGAR INDUSTRY: Import trends

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Trigger implemented

15/09/17

Next trigger 12/04/18

Trigger implemented

08/06/18

Table: Sugar industry market share analysis

(Source: SARS, SASA, SSA)

Since 2015/16 marketing period, importers increased their market share from approximately 5% to approximately 23% in 2017/2018. On the other hand, SACU sugar producers’ market share since declined from 95% to approximately 77% during the same period.

SUGAR INDUSTRY: Market share analysis

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TARIFF INVESTIGATION: Balancing Act

• International obligations: WTO bound rate: 105% ad valorem. • Fine balancing act of upstream and downstream interests. • Investigation process and outcome was reported in ITAC Report No. 588:

ITAC evaluated information in SASA’s application. Factors considered in increasing the DBRP include the following:

the sugar industry is important to the economies of South Africa and Eswatini due to its substantial contribution to national employment, especially in rural areas, manufacturing and agricultural output as well as linkages to other sectors, which require a pricing system that does not render it unaffordable.

the decrease in the domestic sugar industry’s production volumes.

increase in the producers’ production costs (e.g. fuel, fertiliser and employment) and losses suffered.

Increase in total imports over the three year marketing period (2014/15 - 2017/18), in part attributable to a decline in the world average price of sugar.

the cost and price structure for commercial producers and cost information of small scale sugar producers.

DBRP level which is supportive of the upstream producers whilst minimising the adverse effect downstream.

Switch away from sugar by commercial consumers which threatens to significantly reduce local sugar sales to the detriment of the entire industry.

tariff support must be complemented by improving industry competitiveness and productivity. Alternative uses of sugarcane in energy generation and biofuel production should be explored.

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TARIFF INVESTIGATION: Balancing Act (Cont.)

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Considered representations by all interested parties: ITAC received 13 pre-publication and 57 post-publication comments (More than 2 000 pages of written submissions).

Oral presentations: The following 7 parties made oral representations in addition to written

submissions: (i) Sugar Industry Task Team; (ii) Association of South African Sugar Importers (“ASASI”); (iii) Tiger Brands; (iv) Beverage Association of South Africa (“BEVSA”); (v) Coca-Cola Beverages South Africa (“CCBSA”); (vi) South African Sugar Association (“SASA”); (vii) South African Farmers Development Association (“SAFDA”).

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DBRP (US$680/t) = World reference price (6-year period: US$507/t) + distortion factor (40%) - transport costs (US$31/t)


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Brief survey of some of the representations

a) SASA Decline in plantings (70 000ha), market share, revenue (losses) etc., threaten the viability

of the local sugar industry. The continued influx of duty-paid imports displaces locally produced sugar into export

market. Low priced imports, together with an increase in input costs, has caused price suppression

as prices could not be increased commensurately with cost increases.

b) SAFDA Transformation of sugar industry is key to improving livelihoods of rural communities. The sugar industry is in crisis and transformation will be meaningless in absence of a

viable industry. Increase in imports have undermined sugar production and have reduced prices for

sugar cane to unviable levels. Small Scale Growers cannot make ends meet and cannot even pay employees.


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c) Tiger Brands: is a South African food producing company focussing on rural development working

with the Department of Agriculture, Forestry and Fisheries (“DAFF”). It is developing emerging farmers and has set up a fund for this purpose.

uses sugar as one of its main ingredients in the production of value added food products – e.g. yeast production - yeast is used in bread manufacture.

has plants in small towns with sugar mills, which supply them directly with sugar (Glenhow Sugar Mill, Umfolozi Sugar Mill and Tongaat in KZN).

supports a viable sugar industry but is mindful of impact on downstream producers. is already adversely affected by the Health Promotion Levy (“HPL”) and has reduced

its sugar purchases significantly in relation to the Oros product as it has had to undertake reformulation away from sugar to optimise costs and remain competitive.

TARIFF INVESTIGATION: Balancing act (Cont.)

d) BEVSA, Coca-Cola Beverages South Africa (“CCBSA”)

Sugar price increases are a burden that impedes industry. Risk of reformulations away from sugar by downstream commercial sugar users e.g.

Coca-Cola (largest off-taker of sugar for commercial use is exploring alternatives to sugar).

Committed to assisting emerging sugarcane growers but hard to identify their sugar from commercial sugar.

Price elasticity: For every 1% price increase = 2% volume decrease. Volumes already decreased by 8%.

Volume reduction due to a price increase will result in 208 job losses at Logistic Distribution Partners (LDP) & 103 from Coca-Cola.

• Risk of loss of sugar sales would be detrimental to upstream sugar cane farmers & sugar millers. The above risks, in addition to other factors, informed ITAC’s approach when it made its recommendation pertaining to the level of DBRP.

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TARIFF INVESTIGATION - Price Impact • A price impact analysis was conducted to assess the price effect of the DBRP

level on sugar production. • According to this analysis sugar prices have been volatile over the past but, a

moderate increase in the level of the DBRP struck a balance in terms of:

Reducing the level of imports; Increasing levels local production; and Having a slight impact on the local price of sugar over the long term.

• The Genesis Report (2013) also found that although sugar prices have been

volatile over the past, its impact on food inflation in terms of the consumer price increases in sugar-containing products constitutes a relatively small proportion.

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Process followed in terms of implementing duty triggers

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ITAC • ITAC recommendation to Minister of Trade and Industry.

DTI • Minister’s decision and request to the Minister of Finance.

NT • Implementation notice.

Ordinary tariff investigations described above take between 4 and 6 months, down from 10 – 12 months. The sugar DBRP investigation was completed in record time. Trade Remedy investigations take 12 months, down from 18 months.

ITAC TIMELINES OF SASA SUGAR INVESTIGATION

DATE ACTION 15 February 2018 ITAC received a deficient application from SASA. 6 April 2018 SASA cured the deficiencies and furnished ITAC with a properly documented application. Note: In accepting the application, ITAC was mindful of the strategic importance of the sugar industry especially in the Kwa-Zulu Natal and Mpumalanga provinces, as the sector was identified as a priority sector in IPAP. 08 May 2018 Preliminary submission served before the Commission 11 May 2018 Publication in the Government Gazette at an additional cost to ITAC, given that ordinarily this publication would only have been done the following Friday, being 18 May 2018. Note: a) The publication period to solicit comments from interested parties was also shortened to a period of 3 weeks. The normal publication period is 4 weeks.

b) It should also be noted that in order to comply with the Amended Tariff Investigations Regulations, ITAC only made provision for requests for extension for 1 week instead of the normal 2 week period.

26 June 2018 The final submission was tabled at a Special Commission’s meeting. Note: Ordinarily this would have been done in the second week of July 2018 or later. 09 July 2018 ITAC completed its investigation and submitted its recommendation to the Minister of Trade and Industry. 17 July 2018 ITAC’s recommendation approved by the Minister of Trade and Industry. 03 August 2018 The increased DBRP level of US$680/t was implemented in the Government Gazette by SARS. August 2021 Date of review of the DBRP: A 3-year period would enable the Commission to conduct a meaningful impact

assessment of trends in terms of employment, production and investment levels, and downstream effects.

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STAKEHOLDER RESPONSES TO IMPLEMENTATION OF US$680/TON DBRP

LEVEL FOR SUGAR 1) SA Cane Growers Association

“The SA Canegrowers Association, on behalf of thousands of sugarcane growers, is extremely grateful to you for assisting the South African Sugar Industry by providing a higher level of protection from imports in the form of a Dollar-Based Reference Price of $680. We are also very thankful for the swiftness of the tariff application process to be completed in record time. The timeous efforts made will preserve the employment of many South Africans.”

2) SAFDA “I would like to register my sincerest and heartfelt gratitude to you and your team for working tirelessly and under tremendous pressure to assess the sugar industry’s application to increase tariff protection for sugar from $566 to $856. On Friday we learned with great relief that the tariff protection level was revised and increased to $680. This is lower than $856 that we had asked for as an industry but we are grateful that we will now have some relief. We will need to start looking at other interventions that would help to ensure our long term sustainability. On behalf of all our farmers I say thank you very much.”

3) SASA “On behalf of the South African Sugar Industry, I thank you for the work done by the staff at the International Trade Administration Commission in expediting the review of the Dollar-Based Reference Price for sugar. We are aware that this has placed your team under significant pressure, and we are grateful for their efforts in support of our members.”

4) Association of Southern African Sugar Importers “Thank you for your quick and professional investigation and implementation. I fully understand that the commission was under a lot of pressure to slow down the imports and we feel that the recommended DBRP of $680 is on the spot and realistic…”

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