Liberalization Programs in the Sugar Industries of Asia/Pacific
Liberalization Programs in the Restructuring of the Sugar Industries of the Asia/Pacific Region
A report to the IUF Asia/Pacific Sugar Seminar. Ahmedabad, India, 28-30 September 1998
ICCSASW-CCSTAM 2084 Danforth Ave. Suite 2 Toronto, Ontario. Canada M4C-1J9 Tel: (1+416) 467-8621 - Fax: (1+416) 467-9143 - E-mail:
[email protected] On the Internet: http://www.web.net/sugarworker/ September 1998
ICCSASW
0
September 1998
Liberalization Programs in the Sugar Industries of Asia/Pacific
Table of Contents Introduction
p. 3
I. The Asia/Pacific Regional Sugar Industry 1. The Diversity of the Asia/Pacific Regional Sugar Industry 2. Asia/Pacific Sugar Industries in the International Context (1975/76-1995/96) Production Consumption International Trade Exports Imports Preferential markets International prices 3. A Look at the Asian Regional Sugar Statistics
p. 4 p. 4 p. 5 p. 5 p. 6 p. 6 p. 11 p. 11 p. 11 p. 12 p. 13
II. Restructuring and Liberalization of the International Sugar Industry
p. 15
III. Liberalization Programs in the Sugar Industries of Asia/Pacific 1- Future Changes in the Sugar Industry of India Liberalization Proposals in the Indian Sugar Industry State Controls Production Exports Recommendations of the Mahajan Committee Outlook for the Indian Sugar Industry 2. The Australian Sugar Industry in the Post-Deregulation Era Deregulation in the 1990s Concentration of the Industry The Australian De-regulation 3. The Thai Sugar Industry After a Successful Story 4. Can the Filipino Sugar Industry Recover? 5. Pakistan 6. Indonesia 7. Taiwan 8. Vietnam 9. General Comments on Liberalization Programs and Restructuring of the Asia/Pacific Sugar Industries Market Liberalization Corporate Participation
p. 17 p. 17 p. 18 p. 18 p. 18 p. 19 p. 20 p. 21 p. 21 p. 22 p. 23 p. 24 p. 25 p. 26 p. 29 p. 29 p. 31 p. 32 p. 34
IV. Comments on the Liberalization of the International Sugar Industry 1. Liberalization under the Uruguay Round of GATT 2. Restructuring of the International Sugar Industry
p. 36 p. 36 p. 37
p. 34 p. 35
V. On Workers and the Liberalization and Restructuring of the Sugar Industry: A View p. 39 from ICCSASW’s experience.
ICCSASW
1
September 1998
Liberalization Programs in the Sugar Industries of Asia/Pacific
Bibliography
p. 42
List of Tables Table 1 - Preferential Sugar Markets 1973-1993 Table 2 - Asia Regional Sugar Statistics: 1975/76-1997/98 (Selected Countries)
p. 12 p. 14
List of Charts Chart 1 - World Sugar Production by Regions 1975/76 - 1995/96 Chart 2 - World Sugar Consumption by Regions 1975/76 - 1995/96 Chart 3 - World Sugar Exports by Regions 1975/76 - 1995/96 Chart 4 - World Sugar Imports by Regions 1975/76 - 1995/96 Chart 5 - International Sugar Prices 1972-1996
p. 7 p. 8 p. 9 p. 10 p. 13
ICCSASW
2
September 1998
Liberalization Programs in the Sugar Industries of Asia/Pacific
Introduction Dealing with the sugar industries in the Asia/Pacific region, as defined by the organizational work of the International Union of Food Workers (IUF), requires the reader to be aware of the enormous differences present in these diverse industries. Such diversity is present even when seeing the industries from the more traditional and statistical viewpoint of the “Asia-only” regional sugar industry. An additional factor to the diversity is the recent economic and financial crisis experienced in Asia, and its impact on the regional sugar industry and the sugar position of the individual countries involved, especially those that are the subject of this report. Although it is still early to identify any structural change in the industry’s fundamentals as related to the economic and financial crisis, it is also true that some sugar policies in some countries have been modified as a result of it. The report examines basic aspects of the liberalization programs proposed for the sugar industries in India, Australia, the Philippines, Thailand and Pakistan; and includes some notes on Indonesia, Vietnam and Taiwan. The first five countries were selected because of their relevance in the international and regional sugar industry, and the importance they have for the sugar sector activities of the IUF Asia/Pacific regional office. The report gives an overview of the regional sugar industry and the main trends in recent developments. There is little statistical data in the report beyond some basic information (e.g., production, consumption, areas, etc.). It is expected that the readers will have access to more detailed information from a variety of national sources. Sources consulted. The F.O.Licht International Sugar and Sweetener Report (published 36 times a year) and the F.O.Licht Sugar and Sweetener Yearboo, both from the German sugar information group F.O. Licht, have been the main source for international sugar statistics and news on the industry. Other valuable sources are the Sugar Year Book and the monthly ISO Market Report & Press Summary from the London-based International Sugar Organization (ISO). Units used in the report are the metric tonne or “mt” (2,204.6 lb.) and the US dollar ($) with exchange rates provided by Canadian banks at the moment of writing. Jorge Chullén from the ICCSASW secretariat wrote the report.
Toronto September 1998
ICCSASW
3
September 1998
Liberalization Programs in the Sugar Industries of Asia/Pacific
I. The Asia/Pacific Regional Sugar Industry
1. The Diversity of the Asia/Pacific Regional Sugar Industry Attempting to define an Asia/Pacific sugar region reflects the organizational challenges and activities of the IUF rather than the reality of the sugar industry. When compared to the more homogenous regions of the English-speaking Caribbean or Latin America (even when the very special case of Brazil is included) or to the complex structure of the European Union, the Asia/Pacific area presents a great variety of sugar situations, different composition of the national groups involved in sugar, and some marked historical differences in the cane growing and sugar manufacturing. All these require a readjustment of some traditional concepts. In the sugar industry’s traditional understanding, the Asian region corresponds to the space stretching from the Middle East in the west to Japan in the far east, and from Mongolia in the north to Indonesia in the south. The so-defined Asian region includes over 40 countries (as listed by the ISO), and it is possible to identify several sub-regions: the Middle East, the Indian sub-continent, the South-East Asian countries, the republics of the ex-Soviet Union, etc. The Pacific region, which corresponds to Oceania, comprises one big country (Australia) and several smaller country-islands like Fiji and New Zealand. Before describing the position of the Asia/Pacific region in the international sugar industry, it may be useful to briefly introduce some notes on the sub-regions to allow a finer understanding of the regional industry. The Middle East is basically a net importer of raw sugar, although it is necessary to add that the sub-region has been at the centre of an international recovery of the raw sugar imports during the 1990s because of the setting-up of four new refineries. The growth of raw imports from this sub-region is a new factor influencing the trend that has favoured the refined sugar over raws in the international trade in the past 20 years.The new refineries will process an annual 1.5 million tonnes (mln mt) of raw sugar when in full operation expected in the next four to five years. The Indian sub-continent has known sugar for millennia. It includes one of the world largest producer (India) and involves a huge number of agricultural workers and smallscale cane producers, which are counted by the millions. Along with the economic weight carried by the industry (and the corresponding social importance), the industry has a special characteristic: a significant amount of cane is destined to the manufacture of traditional sugar (gur and khandsari) in contrast to the modern or centrifugal sugar. For instance, India still devotes between one quarter to one third of the total cane output to traditional sugar. The South-East Asia region is a quite mixed group of countries. The Philippines has a colonial past similar to the Latin American countries (first a Spanish colony, then an U.S. ICCSASW
4
September 1998
Liberalization Programs in the Sugar Industries of Asia/Pacific
colony); Thailand is a relatively new comer that has sustained a meteoric growth in production over the past 15 years. Vietnam is a country that seems to have an industrial over-capacity that, if fully utilized, could easily double current production levels providing that enough cane is available. Most of the sugar developments in Vietnam are foreign companies’ investments. Farther east China accounts for a fifth of the world’s population with a very low sugar consumption per person (6 kg compared to the world average of 20 kg per year). In China, a small increase in the per-capita consumption represents a considerable amount of sugar needed. The Chinese government favours a self-reliance in sugar from beet and cane. The Pacific region is Australia, that presents a very different structure in its sugar industry when compared to the countries mentioned above: it relies on family-owned and heavily mechanized farms for the production of cane, while the industrial facilities are being restructured by large corporations tending towards a centralized control and ownership. The Australian sugar technical and marketing abilities are well known in the international industry, while the appearance of very large vessels able to transport three to four times the traditional ships’ cargo of 10,000-12,000 mt is also redefining some of the international marketing strategies.
2. Asia/Pacific Sugar Industries in the International Context (1975/76-1995/96) The “fundamental” aspects of a sugar industry relate to an individual country’s position in the production, consumption and international trade (import/export) of sugar. What the next five charts present is a summary of the twenty-year period between 1975-1995 from a regional perspective and a reference to the movements of the international price. Production World sugar production grew from 82.8 mln mt in 1975/76 to 123.4 mln mt in 1995/96, an increase of over 40 mln mt at a 2.4% rate of annual growth. Production growth in Asia is quite noticeable: from 17.3 mln mt to 41.1 mln mt at an outstanding annual rate of 6.8%. In part this is due to two very important sugar countries (India and China) and to the performance of Thailand, which became a sugar dynamo in the 1980s. Another important sugar producing region is South America, which increased production from 11.4 mln mt to 20.1 mln mt at an annual rate of 3.8%. The most important factor here is the explosive rise in the Brazilian production directly related to the implementation of Proalcool, the national alcohol program since 1975.1 The next two
1
Proalcool was designed to improve the Brazilian balance of payments by replacing imported fuel with domestic ethanol (fuel alcohol) produced from sugar cane. Massive subsidies and heavy investments helped to develop a large infrastructure for cane production, and government policies helped to make more attractive alcohol-powered cars to the consumers. The sugar industry benefited from the economy of scale and the technological advantages under Proalcool. In 1997 Brazil produced about 15 mln mt, compared to the 5 mln to 6 mln mt range of the 1970s. In 1997/98 Brazil is expected to produce betwen 305 mln to 325 mln mt of cane, about 70% of which goes into alcohol production. (If the whole amount of cane is processed into sugar, it would result in 30 mln to 32 mln mt.) Although the Brazilian sugar industry has some versatility to switch from alcohol to sugar and vice-versa, to devote all the cane to only sugar is a theoretical possibility. By ICCSASW
5
September 1998
Liberalization Programs in the Sugar Industries of Asia/Pacific
regions, Oceania and Africa, also display a growth rate above the world average (3.7% and 2.5% respectively), although their growth in absolute terms is somewhat marginal to the global industry: an extra 2.4 mln mt in Oceania (mainly Australia) and 2.6 mln mt in Africa. Regions below the world’s rate of growth are west Europe (1.7%) and North & Central America (0.3%), while east Europe has a negative rate of growth (-1.02%).2 The 1975/76-1995/96 period shows a major geographical shift of the sugar production center from Europe (west and east) and North America to Asia and South America. Consumption World sugar consumption grew from 80.5 mln mt to 117.4 mln mt at a 2.2% rate of annual growth (to the say of analysts, production follows consumption). Again, the performance of Asia is remarkable: consumption there skyrocketed from 18.6 mln mt (23.2% of world consumption) in 1975/76 to 44.4 mln mt (37.9%) in 1995/96, growing at a 6.9% annual rate. This reflects the performance of sugar giants like India and China, and also the newly developed countries of South East Asia: Thailand, Taiwan, South Korea, Singapore. South America grew at a 2.6% per year (close to the world average) while Africa reach a 4.2% rate (but again the absolute volume is rather small). Oceania grew at 1.2% per year; while both the North & Central America and west Europe show a 0.5% rate of annual growth. East Europe decreased at a rate of -0.6% per year. International Trade International sugar trade has become a very complex business. The differentiation between raw and refined sugar has become a thing of the past, with the former being more a standard reference to what actually is sugars of different qualities. A market analysis needs to consider aspects such as the net trade position of a country or region (imports over exports); the market segments (preferential, free trade regional markets, free international market); the quality of sugar (raw, refined or white, plantation white, crystals, specialty sugars, even organic sugar); the tolling-arrangements (imports of raw to export refined); prices (future deliveries, premium markets, etc.); special arrangements (e.g., the U.S. re-export program to allow the importing of raws at world prices with the condition that the refiner will re-export an equivalent amount of white sugar), etc. It is also worth mentioning that market analysts tend to speak of a “sweetener” industry rather than a “sugar” industry to account for a wide range of products: sugar manufactured from beet and cane, starch-based sweeteners (like the High Fructose Corn Syrup or HFCS), high intensity artificial sweeteners, low-calorie natural sweeteners, and others.
comparison, India, the world’s second largest cane producer, produces from 250 mln to 280 mln mt of cane per year. 2
The North and Central America’s reduced share of the global sugar production reflects production problems in Cuba and in a series of smaller countries like the Dominican Republic, Barbados, and Guyana in the Caribbean. The decline of East Europe relates to the collapse of the Soviet Union and the ensuing economic and political turmoil in the region. ICCSASW
6
September 1998
ICCSASW
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
AFRICA
ASIA
NORTH & CENTRAL AMERICA
7
SOUTH AMERICA
EAST EUROPE
Chart 1 World Sugar Production by Regions Campaigns 1975/76 - 1985/86 - 1995/96 (thousands of tonnes)
Liberalization Programs in the Sugar Industries of Asia/Pacific
WEST EUROPE
September 1998
OCEANIA
1975/76 1985/86 1995/96
ICCSASW
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
AFRICA
ASIA
NORTH & CENTRAL AMERICA
8
SOUTH AMERICA
EAST EUROPE
Chart 2 World Sugar Consumption by Regions Campaigns 1975/76 - 1985/86 - 1995/96 (thousands of tonnes)
Liberalization Programs in the Sugar Industries of Asia/Pacific
WEST EUROPE
September 1998
OCEANIA
1975/76 1985/86 1995/96
ICCSASW
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
AFRICA
ASIA
9
SOUTH AMERICA
September 1998
NORTH & CENTRAL AMERICA
EAST EUROPE
Chart 3 World Sugar Exports by Regions Campaigns 1975/76 - 1985/86 - 1995/96 (thousands of tonnes)
Liberalization Programs in the Sugar Industries of Asia/Pacific
WEST EUROPE
OCEANIA
1975/76 1985/86 1995/96
ICCSASW
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
AFRICA
ASIA
10 -
NORTH & CENTRAL AMERICA
EAST EUROPE
September 1998
SOUTH AMERICA
Chart 4 World Sugar Imports by Regions Campaigns 1975/76 - 1985/86 - 1995/96 (thousands of tonnes)
Liberalization Programs in the Sugar Industries of Asia/Pacific
WEST EUROPE
OCEANIA
1975/76 1985/86 1995/96
Liberalization Programs in the Sugar Industries of Asia/Pacific Exports The 1975/76-1995/96 period shows South America’s exports exploding from 2.0 mln mt to 6.5 mln mt, as a direct result of the Brazilian performance. West Europe -for practical purposes the European Union (EU) -, reached maturity as a refined sugar exporter, thanks to its sugar regime (the EU was a net importer until the early 1970s). Asian exports were powered by Thailand; while India, with the potential to become a consistent exporter, suffered from the well-known Indian “roller coaster”: in recent years, India’s international trade has fluctuated from imports of 2.6 mln mt in 1994 to exports of 0.9 mln mt in 1996. (ISO figures.) Imports Closely related to the rise in Asian consumption is the growth in Asian imports, which more than doubled from 5.7 mln mt in 1975/76 to 14.4 mln mt in 1995/96, growing at an annual rate of 7.6%. Asia’s participation in world imports became even more important as other areas declined (i.e., North & Central America, and east and west Europe), and the region accounted for 40% of the world sugar imports in 1995. Africa, another dynamic area, tripled its imports (1.6 mln mt to 4.7 mln mt). A finer analysis would show how the increase in Asia and Africa reflects the growing participation of developing countries as importers, replacing the industrialized countries importers of raw sugar of the past. Preferential markets Preferential markets give special treatment to certain products through guaranteed prices (above the international free market price) on relatively constant volumes over long periods. In the 1970s, there were three main preferential sugar market arrangements: the United States sugar quota; the Lomé Sugar Protocol between the European Union (European Community) and the Asia, Caribbean and Pacific (ACP) countries; and the barter agreement between Cuba and the Soviet bloc. In the 1990s, preferential markets have lost importance in the international trade. One factor was the ending of the CubaSoviet bloc agreement after the demise of the Soviet Union; other factors include the liberalization programs and other processes (regional free-trade agreements). The continuation of the remaining two preferential arrangements is under pressure. 3 (Table 1.)
3
The U.S. domestic sugar program was renewed in 1996 and will be in force until 2002/03. Some U.S. domestic groups (the refining sector, industrial users and consumers groups) are pressing for significant changes in, if not for the elimination of, the sugar program, which includes the import quotas. Additionally, the free-trade agreement with Mexico and Canada (NAFTA) may result in an unworkable U.S. domestic sugar program, if Mexico actually achieves very high amounts of exports under quota. In the case of the Lomé Sugar Protocol, the import quotas are for an “indefinite” period but the guaranteed price may be significantly reduced. In the long-term, other factors might also come into play; for example, if as result of the liberalization and regionalization, new markets and opportunities appear and the preferential markets lose their price advantages. Or, if due to deregulation, domestic prices improve and become more attractive than exports to foreign markets.
ICCSASW
11
September 1998
Liberalization Programs in the Sugar Industries of Asia/Pacific
Table 1 Preferential Sugar Markets 1973-1993 (million tonnes) 1973 United States 4.8 European Union 1.3 Cuba-Comecon 2.5 Total Preferential 8.6 Total World Trade 22.5 % of preferential trade 38 Source: IPC, August 1996, p.3
1983 2.4 1.3 4.3 8.0 27.3 29
1993 1.2 1.3 0.0 2.5 29.5 8.5
If something is clear about the 20-year period between 1975 and 1995 is the emergence of the Asian region as a major force in the international sugar industry. Asia gained a pivotal role as a sugar producer, became by far the largest consumer in the world (almost tripling the consumption of North & Central America), replaced the North & Central America region as the leading exporter (if we add the Pacific countries - Australia -, the difference is even larger). Nowadays Asia accounts for almost 40% of the world total sugar imports. International prices For several years - until the mid 1980s -, the sugar “free market” international price was considered one of the most volatile prices of all basic commodities. Several factors are mentioned in relation to this: First, the residual nature of the international market as several countries dispose (“dump”) their production surpluses there after covering the domestic and the preferential markets. As the latter two tend to cover fixed costs, producers are not greatly affected by the sale of surpluses “at a loss” in the free market. Second, the predominance of industrialized countries (as raw sugar importers) meant consumers with a relatively inelastic demand (they continue buying even though prices increase). Third, an element of speculation in the sugar futures market is also mentioned, especially in relation to the 1974/75 boom price. The erratic behavior of the international sugar price is shown in the period between 1974/75 and 1984/85. In November 1973 the International Sugar Agreement (ISA) raw sugar price averaged 10.14 c/lb; a year later, in November 1974, the price was 56.14 c/lb (some days the daily spot price was as high as 66 c/lb). The roller-coaster started again in 1979, it reached its peak in October 1980 with 40.56 c/lb followed by the dramatic fall of June 1985 when the ISA price collapsed to 2.78 c/lb, the lowest real price in the modern history of sugar. From 1987 onwards, however, the international sugar price has been remarkable stable moving in a relatively narrow band between 7.5 to 15 c/lb. Analysts say that sugar might have reached a price stability and that a return to the violent fluctuations of the past is not probable. (See Chart 5.) In arguing this point, analysts cite the changes in the international trade and in the fundamentals of the industry as explored above, especially the growing participation of developing countries - which react very quickly to changes in price - as sugar buyers. ICCSASW
12 -
September 1998
Liberalization Programs in the Sugar Industries of Asia/Pacific
Chart 5 International Sugar Prices 1972-1996 (Raw sugar ISA annual averages) 30 25
US cents/lb
20 15 10 5
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
0 Years
3. A Look at the Asian Regional Sugar Statistics To finalize this section we shall look at the statistical position of some of the most important sugar industries in the Asia region from 1975/76 to the present and will present some estimates for the 1997/98 campaign. (Table 2) The rise in the Asian sugar production is supported by four countries: India, China, Thailand and Pakistan. The first two account for approximately 60% of the total regional output; and all four show an extraordinary pace in their production growth. On the other hand, the Philippines went through a severe crisis in the 1980s, and still faces serious problems to recover production that fell from 2.8 mln mt in 1975/76 to the current 1.75 mln mt. An interesting case, even when production figures are modest, is the decline in Taiwan, a country that implemented a policy to move sugar production overseas beginning in the late 1980s. In terms of consumption India is by far the largest consumer in the region while China comes in second place. Here we appreciate some of the dynamics of the diverse Asian sugar industries: Indonesia and Japan are also important sugar consumers, while Japan has stabilized its demand Indonesia’s domestic production covers only two thirds of the country’s demand and needs imports to cover the balance. Pakistan’s growth in production seems to follow the increase in domestic consumption. ICCSASW
13 -
September 1998
Liberalization Programs in the Sugar Industries of Asia/Pacific On the international trade, Japan, South Korea and Malaysia (besides Iran in the Middle East) are the largest net importers. Thailand’s meteoric rise in production has been successfully transformed into an active export business. Thailand is responsible for about half of the region’s total exports and it shares top export positions with India and Pakistan. Table 2 Asia Regional Sugar Statistics: 1975/76-1997/98 Selected Countries (1,000 mt) Country
Production Consumption Imports 1975/76 1997/98 1975/76 1997/98 1975/76 1997/98 Bangladesh 95.0 153.2 430.1 258.3 China 2,200.0 7,930.0 3,000.0 8,450.0 500.0 700.0 Hong Kong 176.6 96.0 281.8 India 4,630.0 13,028.4 3,923.0 15,448.5 476.1 Indonesia 1,126.0 1,928.7 1,280.0 3,200.7 170.0 814.4 Iran 96.0 788.7 1,250.0 1,938.2 584.0 1,005.0 Iraq 10.0 2.0 400.0 563.8 365.0 565.4 Israel 406.5 150.0 456.8 Japan 223.0 868.9 3,092.0 2,455.6 2,401.0 1,624.7 Korea South 235.0 1,198.4 335.0 1,459.0 Malaysia 47.0 110.7 363.0 1,073.7 317.0 1,048.3 Pakistan 641.0 3,547.7 690.0 3,145.7 237.6 Philippines 2,875.0 1,750.0 840.0 1,920.0 240.0 Saudi Arabia 533.7 602.4 Singapore 90.0 260.0 122.0 307.7 Syria 97.0 617.0 177.0 534.9 Sri Lanka 25.0 20.8 499.0 49.0 462.2 Taiwan 817.0 369.0 360.0 540.7 148.5 Thailand 1,710.0 4,600.0 572.0 1,774.2 Other 107.0 711.4 1,747.0 1,888.7 941.0 1,985.2 TOTAL 14,602.0 35,906.3 17,842.0 46,521.0 6,207.0 13,208.5
Exports 1975/76 1997/98 35.0 1,164.0
35.0 100.0 1,179.0 20.0
380.0 98.6 320.0 4.3
48.7 10.6 233.2 94.5 325.0 175.0 68.3 15.8 13.5
480.0 22.9 1,049.0 2,931.0 52.0 902.0 4,136.0 5,643.3
(*) Estimates 1997/98. Source: F.O.Licht World Sugar Balances
ICCSASW
14 -
September 1998
Liberalization Programs in the Sugar Industries of Asia/Pacific
II. Restructuring and Liberalization of the International Sugar Industry The description of the fundamental aspects of the international sugar industry points to some structural changes that have occurred in the past two and a half decade. In the analysis of the industry that ICCSASW developed in recent years, the restructuring process appears a complex phenomenon, the result of the amalgamation of several individual developments. Even though in the 1990s the so-called market reforms (which includes liberalization) appear as the most prominent aspect of the restructuring, other structural changes are actually independent from them. Therefore, before discussing the liberalization programs, we shall briefly review some of the structural changes taking place in the international sugar industry. First in the list are the changes in the fundamentals of the industry (explored in the preceding section): the geographical shift of the “center of gravity” from North & Central America and Europe to Asia and South America (Brazil); the predominance of developing countries in the international trade (exemplified by the rise in Asian consumption); the changes in the international trade patterns (the refined and raw sugar “seesaw”); the stability in price supported by these changes; the introduction of sugar substitutes (especially in the industrial applications of sugar), etc. Second, there is the modernization of production with the introduction of new technologies, modern machinery and equipment, new labour force management strategies, closure of obsolete plants, increasing processing capacity of the new factories (fewer in number but bigger in capacity), etc. It is common for a restructured sugar industry to witness a drastic reduction in the number of workers that parallels an increase in labour productivity, thanks to the mechanization and automation of production processes. A clear example is the restructuring of the sugar industry in the former East Germany promoted by west European companies after the German reunification. Between 1989 and 1995 the number of factories was reduced from 43 to 9, the number of workers dropped from 15,000 to 1,500, the annual sugar production increased from 800,000 mt in 1989 to 850,000 mt in 1995, and the average of processing capacity of 1,500 tdc in 1989 jumped to over 10,000 tdc. Third, there is a process of concentration of ownership and control of the industry, closely related to the point before, and important when dealing with fewer plants that have larger processing capacities.4 The concentration of ownership and control is 4
“Ever since the beginning of the modern age of sugar manufacturing over 100 years ago, technical advances and economies of scale have made it possible to produce more sugar in fewer factories and with fewer workers. The process of industry concentration continues unabated. Only some countries - notably India - have more sugar factories now than 20 years ago. All of Europe from the Atlantic to Siberia, for instance, had a total of 925 sugar factories and refineries in 1975. The average European beet sugar factory in those days could slice 2,665 tonnes of beets per day. By 1995/96, the number of European sugar factories and refineries was down to 716, but average slicing capacity had risen to just over 4,000 tonnes a day. Much the same picture is presented by the United States. The number of US beet sugar factories shrank from 56 in 1975 to 34 in 1994, while average daily slicing capacity increased from
ICCSASW
15 -
September 1998
Liberalization Programs in the Sugar Industries of Asia/Pacific especially true in areas like the Americas (North, Central and South), Europe (the central European countries), and Africa. In the Asia/Pacific region, the case of Australia (as we shall later see) also exemplifies the concentration in the industry. Transnationals corporations are the main actors in this process, not always as direct owners (as it used to be the case in the past) but increasingly as partners in joint ventures sometimes developed with local private-sector groups, sometimes with state-owned agencies (as it is the case in several Asia and African countries) or even sometimes as managers of stateowned industries. Last but not least are the proper market reforms of the 1990s, a set of processes that include the liberalization of production and trade of goods and services (domestically and internationally); deregulation (reduction of the state’s intervention in the economy); privatization (sale of state-owned companies); reform and/or elimination of sugar policies; reform of labour legislation; regionalization as a result of the pressure for globalization, among others. These reforms are being introduced in the sugar industry world-wide. It is difficult for a national sugar industry not to be under pressure to accept a liberalized market, or to accept that market forces should determine how production is performed and resources allocated and, sometimes, even to decide if an industry is to survive or not (“able to compete internationally”).
some 3,400 tonnes to 4,900 tonnes. There were 40 cane sugar mills on the mainland and in Hawaii in 1993, down from 62 in 1975, but their average daily grinding capacity rose from 4,000 tonnes to 7,500 tonnes. US cane sugar refineries numbered 11 in 1995 with an average daily melting capacity of some 1,800 tonnes of raw sugar, against 21 refineries in 1982, each on average able to melt somewhat over 1,300 tonnes a day. Along with the processing facilities, concentration has reduced the number but increased the size of sugar companies. Of the 162 enterprises that operated sugar factories and refineries in today’s 15-member EU in 1972/73, only 76 were left in 1995/96 (excluding French overseas departments). Six member states were down to one sugar company each, two others had just two. The 34 beet sugar factories still operating in the United States in 1994 were owned by ten companies, but because of joint ownership or marketing arrangements, there were only seven beet sugar marketing companies. Three companies with all together seven factories were grower cooperatives which jointly marketed their sugar. Two other companies with five factories were direct or indirect subsidiaries of Savannah Foods and Industries, a cane sugar refiner. A further two companies, each running seven factories, were respectively owned by the Imperial Holly Corporation, which also had a cane sugar refinery, and Tate & Lyle, the multinational sugar and sweetener group based in London, England. The four largest beet sugar companies ran 23 factories and accounted for about 70% of US beet sugar production in 1994.” (Hagelberg, 1998:59-60.)
ICCSASW
16 -
September 1998
Liberalization Programs in the Sugar Industries of Asia/Pacific
III. Liberalization Programs in the Sugar Industries of Asia/Pacific In this section we explore some of the basic features of the liberalization programs and the restructuring processes in some of the most important sugar industries of the Asia/Pacific region. The objective is to give a sense of the direction of the changes introduced by the market reforms and to support the workers’ efforts to understand and face them.
1- Future Changes in the Sugar Industry of India To start the description of the regional sugar industries with India is due to several reasons, among them: •
India has consistently ranked as one of the world top-four sugar producers in the past ten years, along with Brazil, Cuba (until the early 1990s) and the European Union (which comprises 15 countries); and has appeared among the top-four consumers, along with the European Union (EU-15), the United States and Brazil.
•
India’s sugar cane production supports two industries: the modern or centrifugal sugar and the traditional sugar (gur and khandsari). The centrifugal sugar sector has shown a steady growth; in the 1990s it accounts for about two thirds of the total amount of cane produced in the country compared to half of the cane in the 1970s.
•
India’s sugar legislation and regulations, “which often seems to require a Ph.D. and a brilliant legal mind to comprehend,” as one of the world’s leading sugar analysts describes it, are among the most complex in the international scene (Fry 1998:1). Some of the features include the obligation of mills to sell 40% of their production to the Public Distribution System (PDS); the presence of the traditional sugar sector (gur and khandsari) that , even when it competes for cane with the centrifugal sugar sector, does not share the same regulations; the state intervention at the central and state level in the fixing of cane and sugar prices; the licensing of new mills, etc.
•
India’s sugar industry has probably the world’s largest concentration of people. It is estimated that 350,000 people work in some 440 sugar mills, while several sources cite up to 35 million agricultural producers (most of them small-scale cane growers and their families). It is not easy to find an industry with similar figures in other countries: the Brazilian sugar industry may involve about 2.5 million people, most of them working in the canefields; while it can only be speculated that the Chinese sugar industry may have another couple of million people in the growing of cane, as this is performed by small-scale farmers.
ICCSASW
17 -
September 1998
Liberalization Programs in the Sugar Industries of Asia/Pacific Liberalization Proposals in the Indian Sugar Industry “India is a large country and in many respects can go its own way without reference to what is happening elsewhere in the world. Nevertheless, when a tide of market liberalism has arrived in so many other parts of the sugar world, it is hardly surprising that Indian producers should now be pressing for greater freedom for their industry in their own country, especially as there is an obvious need for modernisation.” (Licht ISSR, April 1997:282)
The opening quote points to two basic aspects in the current situation of India’s sugar industry: First, it points to the fact that India has so large an industry that it may be easily understood as a world on its own. Second, and somewhat paradoxically, it points to a global phenomenon, a “tide of market liberalism,” from which the Indian industry (or any other industry not matter how large) may not be able to escape. A more subtle statement is that the “need for modernisation” is to be achieved through market reforms and by private corporations. India began an economic deregulation program in 1991, and economic sectors like cement, steel industry, energy, fertilizers, vegetable oil stopped requiring operating licenses from the government. Nonetheless, sugar was kept under the “old system” in which three levels of regulation can be identified: state controls (prices, domestic marketing), production (mills, centrifugal and traditional sugar), and exports/imports. State Controls It is expected that beginning in the 1998/99 season (October to September), a partial deregulation of the sugar marketing will be introduced. Currently 40% of the total sugar output is bought by the government through the Public Distribution System (PDS) to ensure that staple foods are available at inexpensive prices to the poorer sectors of the population.5 It is reported that prices for the “levy sugar” are 25% to 30% below the mills’ production costs. It is proposed that the 40% be reduced to 20%, a decision that may cost the government about Rs 7.5 bln ($176 mln). The remaining 60% is sugar for “free sale quota,” released on monthly installments fixed by the government. Several sugar industry groups, especially the millers, would like to end this dual pricing system. They argue that the price of the so-called levy sugar (bought through the PDS) is so low that the “free market” is set very high to compensate losses by the mills. They also say that the system of monthly releases to the free-market should be abolished, since the millers claim they know best when and how much sugar the market needs. Production The dual pricing system has some ramifications. Two of them are that, on one hand, it adds incertainty in the way the growers decide to what sector to sell their cane
5
The PDS is severely criticized by industry representatives, especially by the Indian Sugar Mills Association (ISMA). They argue that the PDS does not benefit the poorer sectors of the population since a “large-scale leakage” occurs. They cite a World Bank study that says that as much as 30% of the sugar destined for the PDS is actually channeled onto the open market. (Sugar World, June 1998.)
ICCSASW
18 -
September 1998
Liberalization Programs in the Sugar Industries of Asia/Pacific (centrifugal or traditional sugar), on the other, it contributes to the fluctuations in the amount of cane supplied by the growers to the centrifigal sugar. An additional factor is the fixing of prices for cane and sugar by the central and state governments: there is the “statutory minimum price,” and then the prices paid by processors of traditional sugar. To further elaborate this point. The cane grower has the choice to continue or not growing cane. Then, when the cane becomes available, the grower has the possibility to choose between the two different markets: the centrifugal sugar or the traditional sugar. At the moment of selling the cane, the grower can compare between the “market” prices for cane to the “statutory minimum price” fixed by the government. His decision might also depend on whether payments are in cash or not. When there is an oversupply of cane, growers tend to sell their cane to the millers at the statutory minimum price (therefore guaranteeing some income), however, when there is a tight cane supply, farmers look to sell to the processors of traditional sugar, since they may pay higher prices (and in cash) than the millers. The result is that the supply of cane to the centrifugal sugar sector tends to be irregular. Such fluctuations influence the so-called “Indian cycle.” In mid-1994 a Gur Control Order (GCO) was introduced to prevent any significant “diversion” of cane from the centrifugal to the traditional sector. Although the GCO was withdrawn at the end of the same year, it was re-introduced again on 1 November 1997 to prevent a “massive cane diversion to gur and khandsari units, especially in Uttar Pradesh, Karnataka and Tamil Nadu.” It was reported that the decision was related to the possibility that in the 1997/98 harvest almost 50% of the cane would be diverted to traditional sugar due to “the sharp decline in cane production and cane payment arrears.” (Licht ISSR 1997:641). Another relevant aspect is the licensing of mills. India’s sugar industry may be one of the few traditional industries in the world where the number of mills has increased in recent years: from about 140 in 1950 to over 400 in 1996. Such growth, however, had its price: the mills’ average processing capacity is about 2,100 tdc, with 160 mills with a capacity below 1,250 tdc. By comparison, some Indian sources lament, Thailand mills have an average capacity of 11,000 tdc. The facts that India’s industry has tended to set-up rather small mills (by international standards) reflects the state’s intervention (licensing system) while, at the same time, it seems to help the millers to avoid the dual pricing system. As a sugar analyst puts it: “As long as the dual sugar market... continues to exist, and, as long as the holders of new licenses are entitled to a period in which to sell all of their output on the free sale market (80% in the case of expansion in the mill’s capacity), there will be a strong incentive to obtain a new license, even if the new mill has higher costs than existing, well-established factories. This creates a strong bias towards over-investment in new mills.” (Fry 1998:5. Parenthesis added.) The relatively small size of the mills prevents the Indian sugar industry from receiving the benefits of the economy of scale and, paradoxically, represents also an underutilization of the milling capacity (Fry 1998:5). This in turn produces high factory costs in the industry. In recent years over 200 already licensed mills were not built because they were deemed to be non-profitable. At the time of writing, it had been announced that the licensing of mills was to be lifted in 1998, and the only requirement that the state governments will impose is a minimum distance of 15 km between two mills. Exports
ICCSASW
19 -
September 1998
Liberalization Programs in the Sugar Industries of Asia/Pacific Until January 1997 exporting sugar was a monopoly of the Indian Sugar and General Industries Exports and Imports Corp. (ISGIEC), an agency set up by private millers. In a way, this was a self-imposed regulation. In one of the first moves towards liberalization, sugar exports were put under the Agricultural and Processed Food Export Development Association (APEDA), which acts a coordinating body to receive offers from traders willing to export under the quota set by the government. Apparently, the deregulation of exports was introduced to attract exporters able and willing to trade in smaller quantities and to use facilities available in smaller ports. It is not clear whether these objectives have been achieved or if they are achievable at all. It is known in the international sugar industry that, in practice, India lacks facilities to export its sugar, which is one of the reasons why India’s bumper crops tend to remain “locked” inside the country instead of being exported. Taking into consideration some comments made by a sugar trade house, a likely result of the export deregulation may be to increase the difference in production costs and the financial position of the individual mills. The liberalization may encourage the mills to export sugar trying to avoid carrying stocks, which are a financial burden due to storage costs. This in turn may deepen the differences among mills, and eventually liberalization may benefit only the larger and more economically powerful units. (E.D.&F. Man quoted by Licht ISSR, Jan. 1997:83) Finally, another element of the international trade was the decision to keep the government-financed “buffer stocks.” With the liberalization of exports, however, the responsibility to maintain the stocks will be passed onto the industry. According to an industry source, storage costs are about $60 per metric tonne; the total stocks are 1 mln mt. The source adds that normally the sugar remains at the mills for about 8 months, and some mills may need up to 18 months to clear stocks. (Kansal 1998:24) Recommendations of the Mahajan Committee In March of 1997, the central government set up a committee led by B.B. Mahajan, a former minister of agriculture, to review the sugar policy and make recommendations for future development. In mid 1998, the committee submitted its recommendations that propose a phase-out of price regulations over a two-year period, at the end of which the mills will sell their entire production on the open market. If the price deregulation takes place, it will change the entire structure of the Indian sugar industry. For instance, it may prevent the wide fluctuations in the supply of cane, since both the centrifugal and the traditional sugar sectors will compete on an open market following the same rules. Also, if the government continues to distribute sugar through the PDS, it will have to purchase sugar (in the domestic or in the international market) at prices that will most likely be higher than what currently pays to local mills. This may eventually increase the amount of government subsidies and expenditure. The committee recommended the continuation of the distribution controls (through the monthly releases) aiming at some stability on an open market. The committee did not favour the elimination of the Commission for Agricultural Costs and Prices (CACP) that recommends the statutory minimum price (SMP) for cane, which is the basis for the calculation of the “levy sugar” prices. The Mahajan Committee recommended fixing the SMP for cane even after deregulation has been introduced. The SMP would be the “floor price,” as is the case with the support prices for wheat and rice. The committee recommended the establishing of a government agency to fix the SMP, which currently varies across the country. It also worked out a price-sharing formula between farmers and the millers. ICCSASW
20 -
September 1998
Liberalization Programs in the Sugar Industries of Asia/Pacific Outlook for the Indian Sugar Industry The recommendations of the Mahajan Committee go well beyond from what is summarized here. In a way, the mere existence of such committee and the tasks it was set to perform signals that the central government is starting to consider the liberalization of the sugar industry. Sugar industry groups have asked that the recommendations be implemented as soon as possible. In 1997 Tate & Lyle, the British sugar company, became the first transnational to enter the Indian sugar industry with the acquisition of a 50% stake in the newly commissioned mill of Shimbhaoli Sugars in Uttar Pradesh. It was reported that Tate & Lyle’s investment will be of $5.7 mln and the mill will have a processing capacity of 2,500 tdc. It is interesting to observe how this particular joint venture is part of the process of liberalization of one of the largest sugar industries in the world; even though it should not be assumed that transnational investments are about to capture the Indian sugar industry. Indian sugar groups seem well established and have the expertise required to carry out the modernization of their industry. (Indian sugar groups work overseas as well. For instance some Indian groups were in conversations with the Guyanese and the Trinidadian state-owned sugar industries in the Caribbean, around possible investments and managerial services.) What should be expected is, as the opening quote says, that is difficult to foresee India escaping the “tide of market liberalism.” The liberalization of the economy and the corresponding retreat of state intervention will probably continue. The delicensing of mills already announced may have no immediate effect in the industry as a whole but it is one step towards liberalization, and will certainly be important when new mills will have to comply with location rules. This may help to reorganize the cane supply into a more organized system. Seen from afar, the key policy decision is the dismantling of the dual pricing system (how soon and how efficient can it be done). As explained, the system is a corner-stone in the structure of the sugar industry, an industry defined by some as “obsolete and inefficient.” However, being a policy matter, it will depend on Indian politics at the central and the state levels. The fact is nothing new: India’s sugar industry is heavily influenced by politics and there may be forces still opposed to free market reforms.
2. The Australian Sugar Industry in the Post-Deregulation Era From more than one angle it looks as if the Australian sugar industry has benefited from the deregulation introduced in the 1990s that transformed some of its basic tenets. Established as a plantation industry based on indentured labour in the 1860s, the Australian cane farming became a family-based structure by the 1890s. This is a key aspect of its organization. Another is that Australian farmers tend to run highly mechanized farms, exploiting economies of scale. At the end of the 1800s Australia had over 70 mills in Queensland and New South Wales, at present there are 29 mills run by 12 companies (compared to 19 companies and 33 mills in 1980s). There are 13 growers’ cooperative mills, which account for about 45% of the total sugar production. (Mulherin, 1998:435)
ICCSASW
21 -
September 1998
Liberalization Programs in the Sugar Industries of Asia/Pacific Australian sugar production increased from a yearly average of 3.5 mln mt in the 1970s and 1980s to 5.5 mln mt in the second half of the 1990s. Australia’s sugar industry is an export-oriented industry that sells about 85% of its production to over 30 countries. This makes of Australian the only industrialized country whose sugar industry depends heavily on exports. Exports are likely to continue to rise and it is expected they may take more than 90% of production in the next few years. In the opinion of several analysts, the increase in production is a result of the deregulation program introduced in the 1990s. Not only the industry received massive investments destined to production facilities and continued developing its technical and marketing abilities, but deregulation also helped to “unleash” some of the potential locked behind a tightly regulated industry. Deregulation in the 1990s Until the late 1980s the Australian sugar industry was based on three main foundations: an embargo on sugar imports, restrictions on production of cane and sugar, and arrangements on pricing, purchasing and exports. The latter two were the responsibility of the Queensland government, the area where the overwhelming proportion of sugar is produced. The embargo on sugar imports lasted from the 1930s to July 1989 when it was replaced by a tariff initially set at A$115/mt. The tariff fell to A$55/mt in July 1992, and on 1 July 1997 the tariff was abolished. Currently there is no obstacle to sugar imports, i.e., no protection policy: Australian producers are exposed to the international market prices. The restrictions imposed on production were a complex matter. A system of land assignment was established and the Central Sugar Cane Price Board approved the area and the location where cane was to be grown by a certain farmer. The sugar obtained from the land so assigned was bought by the Sugar Board at the so-called No1 pool prices. So strict was the regulation that the cane grown outside the system was bought at A$1.00 per tonne! A similar arrangement was the “mill peaks” that refer to the amount of sugar the Sugar Board had to accept from each mill based in Queensland. Every year the Board fixed the amount of sugar to be delivered by each individual mill, after it estimated the needs of sugar (for domestic consumption and exports). The amount of sugar delivered in excess to the fixed amount was paid at the No2 pool prices, which were linked to the revenues obtained from the international market. The logic was to control production in line with the domestic demand and have some surplus of sugar for exports. However, when international prices were high (the boom price in 1975 and 1984, for instance), the No2 pool prices tended to be higher that the No1 pool prices, and would send mixed signals to the growers, who might decide then to increase production. The model was relatively successful as far as there was some control over domestic prices and a significant amount of exports had long-term preferential markets. This was possible until the 1970s when the Commonwealth Sugar Agreement (CSA) between the United Kingdom and its ex-colonies was in place; when the International Sugar Agreement (ISA) included some economic clauses to control supply; and the U.S. sugar quota system was relatively strong. However, the scenario changed for Australia after the accession of the UK to the European Economic Community (EU) in early 1970s, and the elimination of the economic clauses from the ISA in the 1980s: Australian sugar started to face problems in her export markets. Between 1977 and 1996 there were 11 revisions of Australia’s sugar policy. For instance, starting in 1986 there was a series of attempts to reduce the difference between the No1 ICCSASW
22 -
September 1998
Liberalization Programs in the Sugar Industries of Asia/Pacific and No2 pool prices, and pressure was exerted on the single-desk selling role of the Queensland Sugar Corp. This led to a progressively more liberalized sugar industry. The most recent deregulation program was introduced in 1996 by the CommonwealthQueensland Government Sugar Industry Working Party Review which led to: •
a complete abolition of the tariffs on imports of raw and refined sugar,
•
liberalization at mill and farm level; although some regulations - based on mill and area assignments - still persist, there is no obstacle to the expansion or rationalization of mills,
•
the reform of the single desk-selling role of the Queensland Sugar Corporation. The QSC buys all Queensland-produced raw sugar, distributes proceeds to mills, and determines the sharing of returns between millers and cane growers,
•
the phase-out of Pool price differential in two stages by 1999. (Mulherin 1998:434, Licht ISSR 1998:92)
After liberalization was consolidated, the area under cane expanded in 150,000 h from the 1998 figures in Queensland (a 40% increase) and in 4,500 h in New South Wales (33% increase). In Queensland the average size of farms increased from 50 to 70 h. The total milling capacity in Queensland grew from 750,000 tdc in 1980 to 1.4 mln tdc in 1995; and in New South Wales went from 180,000 tdc to 285,000 tdc between 1980 and 1996. Concentration of the Industry A parallel process to deregulation was the concentration of ownership in the industry, especially in the refining sector, as a result of the intense competition from the late 1980s to the first half of the 1990s. The competition involved the two largest processors, Colonial Sugar Refining Co. (CSR) and Mackay Refined Sugars (MRS), and included a $60 mln legal suit by MSR against CSR claiming sales of futures sugar below the cost of production in order to secure market share. 6 After the fierce competition came a settlement. In March 1998 the refining interests of Mackay and Colonial merged into Sugar Australia. (MSR is a joint venture of Mackay Sugar Co-operative and E.D.&F.Man, an international trading house, which controls a 50% stake.) The deal is worth over A$200 million ($129 million). It includes the reduction of production capacity (production is about 45% higher than domestic consumption: 1.21 mln mt produced against 0.83 mln mt consumed) and the pursuing a more aggressive export policy, especially in the Asian region. In a related process both MRS and E.D.&F. Man will have 25% stake each in the New Zealand Sugar Co. (NZCC), with CSR controlling of the remaining 50%. NZCC was formerly a CSR unit. Another corporate news of interest is Bundaberg’s new mill at Arriga in the Atherton Tableland, which began crushing on 29 June 1998. (Tate & Lyle acquired Bundaberg in 1991.) The new mill will process cane grown by 54 growers: 200,000 tonnes in its first year, up to 550,000 tonnes in the third year of operation. The mill will produce syrups
6
For a description of this convoluted period see: “A new lease of life for Australia’s great white hope”, in F.O.Licht International Sugar and Sweetener Report, Vol. 130, No 6, 13 February 1998, pages 91-92.
ICCSASW
23 -
September 1998
Liberalization Programs in the Sugar Industries of Asia/Pacific that Bundaberg’s Babinda and Mourilyan mills, and the Mulgrave Central Mill, will process into raw sugar. (Bundaberg’s Atherton is the first mill built in the area in 73 years.) Bundaberg Sugar is the largest cane grower in Queensland and operates seven mills: Babinda, Mourilyan, Fairymead, Millaquin, Bingera, Moreton and the new one at Atherton. (Tate & Lyle World, August 1998:1) A new mill proposed for the Ord River area in Northwest Australia is in the feasibility study stage. The mill is planned with a 400,000 mt of annual capacity at a cost of A$300 mln ($194 mln). The project involves the West Farmers Limited and Marubeni, a Japanese group. The Australian Deregulation The deregulated Australian sugar industry competes very efficiently in the international market, and it has shown great potential to keep itself among the top producers and exporters. Although the description of the complex Australian industry here presented has been sketchy, it is possible to point out some key factors to understand the success of the deregulation process. The Australian approach to exports is one indication of the way in which the Australian groups have introduced important changes in the international sugar industry: “The way in which Australia differs from almost every other seller, reads an analysis, is that the sugar is sold to final destinations, so that control of it is maintained by the Australian seller until it is in the hands of the final buyer. Furthermore, while the days of the long term contract may have passed, in many cases Australia has arrangements with its buyers so that there is an element of favouritism on both sides.” (Licht ISSR 1998:25) A case in point is the Philippines: both countries are working on an agreement to transfer Australian sugar technology to the Philippines in exchange for ensuring the Filipino purchase of sugar from Australia. Another development is the use of very large vessels in the transportation of sugar. These are three to four times bigger than the normal-size ship of 10,000-12,000 tonnes, and they give the buyer advantages in transportation costs. These vessels require adequate port facilities at the points of origin and destination, and Australia is one of the few exporting countries able to load such ships. Besides the international trade, there seems to be three more relevant factors for the success of the deregulation program. One is the growing of cane in a family-based farm system that relies heavily on machinery. Australian farmers seemed better prepared to face economic challenges (also thanks to the social support provided by a developing country) and be more efficient than the small-scale traditional farmer in a Filipino or Vietnamese setting. A second factor is the ownership structure in the process of concentration and consolidation. The sugar refining sector went through an intense competition, although the end result was a merge of the main competitors and a rationalization of production: some refining units were closed and others will be closed in the future, and the reorganization of the domestic market seems to be within reach. Finally, Australia is recognized as a reliable source of technology and equipment, research and expertise for the sugar industry. Machinery is designed and produced in Australia and used in the local industry. New cane varieties are researched and tested, and recently there was news that Australian scientists were applying biotechnology to the production of plague-resistant cane varieties.
ICCSASW
24 -
September 1998
Liberalization Programs in the Sugar Industries of Asia/Pacific
3. The Thai Sugar Industry After a Successful Story Thailand’s sugar production grew at an explosive pace from 1.7 mln mt to 6.1 mln mt in the twenty-year period between 1976 to 1996. Internationally this is an amazing achievement and a successful story without the many complications of a Brazilian alcohol-sugar complex or an Indian “roller coaster.” The increase in production has been translated into growing exports, and the country has consistently appeared among the world’s five largest exporters in the past ten years, shipping between 2.4 to 4.8 mln mt per year. The Thai industry is a highly regulated industry, with the participation of the government and the private sector. For instance, the government “intervenes through the Cane and Sugar Board to monitor cane and sugar production and the sharing of domestic sugar sale and export revenues between planters, mill owners and exporters.” But also the “planters and mill operators hold several rounds of talks each year to determine total seasonal output and export revenue, which affect the cane price obtained by planters.” (Licht ISSR 1998:87) In the export business, an engine to propels the industry, the Thai Cane and Sugar Corporation (TCSC) plays a key role. Production of the country’s 45 sugar mills is classified in three segments: a white-only quota A for local consumption; a raw-only quota B for exports by the TCSC (which also includes a price reference for planters, fixed at 800,000 mt in the current year); and a tel-quel quota C, or the balance (difference between production and quotas A plus B), which is to be exported by mills and traders to the international market. (Some flexibility in the quality of sugar destined to each segment has been introduced in recent years.) The exports by the TCSC are considered as “government-backed,” since the TCSC is a tri-partite organization comprising millers, producers and the government. The TCSC is “designed to handle long-term contracts, is responsible for pricing and selling the 800,000 metric tons of raw sugar under Quota B. One-half of this amount is allocated to three international sugar brokers. The other half is sold to local millers who export the sugar through ... six exporting companies.” (USDA TH8032:6-7) The Thai industry might be a possible target for liberalization programs; at present, however, regulations and controls in the industry appear to have the support of the private sector while, in real terms, the intervention of the state in the industry is rather marginal. For instance, out of the 45 sugar mills (several of which have a refinery attached), twenty-nine belong to 9 private-sector groups, thirteen are independent mills, and the government runs only three mills. The research done on the liberalization programs found no evidence that major policy changes are expected in the near future, but some signals of the restructuring of the industry were found. On a move towards privatization, the government announced in April 1998 the sale of the Uttradit, Lampang and Suphan Buri mills, the only three stateowned mills in the country. To make the sale more attractive, the buyers will be able to increase their daily crushing capacity from the current 2,000-3,000 tdc to 18,000 tdc. Future owners will have to agree to take over debts of $7.5 mln and agree not to make any worker redundant in the next three years. As it was reported by ICCSASW’s Sugar World (August 1998), the Sura Maharas, a local group based in the alcohol industry, signed a contract to acquire the three stateICCSASW
25 -
September 1998
Liberalization Programs in the Sugar Industries of Asia/Pacific owned mills at Bt 620 mln ($14.5 mln). The group plans to expand the mill’s milling capacity to the maximum allowed; it expects to increase the production of molasses, a by-product of sugar, which is a raw material for the alcohol distilleries. Sura Mahara’s molasses needs are estimated at between 700,000 mt to 800,000 mt per year, which the group currently buys from other mills. The three state-owned mills produce some 50,000 mt of molasses per year. The proposed acquisition of the state-owned mills by the Sura Maharas group announces the possibility of the industry’s vertical integration with other economic sectors: companies not necessarily based in the sugar industry are buying ownership in sugar to ensure reliable supplies - both in quality and in quantity - for other industrial processes. The same vertical integration processes happens in other countries involving the soft drink industry, and the confectionery and candy industries (for example, Mexico, Argentina). It is more interesting, from an Asia/Pacific perspective, the participation of Thai companies in other countries and the joint ventures they establish with international interests. The most clear example is Mitr Phol, a subsidiary of Kiatnakin Finance and Securities, which already controls four mills in Thailand. Mitr Phol is partner to the British Tate & Lyle in a new mill being built in the Nghe An province mill in Vietnam (where it controls a 25% stake); it has also invested in four mills (with a total processing capacity of 22,000 tdc) in Guangxi, China and, due to the economic crisis, it has temporarily suspended its plans to invest in a 3,000 tdc mill in Indonesia. (Licht ISSR 1998:36) In other corporate news, the Mitsui Sugar Co. plans a 50 mln yen ($400,000) expansion at its specialty sugars plant to increase production from 3,000 mt to 4,000 mt a year. The specialty sugar is produced using only the juice from the first pressing of the cane and is entirely exported to Japan. Mitsui Sugar is a joint venture of Mitsui & Co. and Taito Co. (both Japanese companies) with local Thai investors. Although the Asian economic and financial crisis begun with the devaluation of the Thai baht in July 1997, the Thai sugar industry does not appear on the verge of a liberalization program as a result of the crisis. Sugar production might be affected by the baht devaluation, since small farmers are involved in the production of cane; in the medium term, however, Thailand may take advantage of its production capacity to export at the current low international prices. Given the recent downturn in international sugar prices (which fell to 5 c/lb - New York spot price - at the end of the week of 14 September 1998), the international sugar trade may become a very rough road in the near future. On the other hand, the implications of the devaluation of some Asian currencies on the international sugar trade - e.g., Indonesia -, are still to be evaluated.
4. Can the Filipino Sugar Industry Recover? The Filipino sugar industry is a very old industry. Dating back to the XVI century when the Philippines was under Spanish rule, it parallels the development of the sugar industries in some countries in the Caribbean and Latin America, which started at about the same time and under the same Spanish (and Portuguese) rule. Even though its modern development began in the 1900s, after the United States gained domination over the country, the structure of the Filipino sugar industry structure has remained feudal and obsolete. From the years after the World War II, the industry seemed ICCSASW
26 -
September 1998
Liberalization Programs in the Sugar Industries of Asia/Pacific to have thrived on cheap domestic labour and inputs (for instance, easy and inexpensive access to land in a quasi-feudal system) and on the benefits of a large preferential market in the United States, where it sold sugar in hard currency to pay in somewhat deteriorated Filipino pesos. The model plunged into a crisis in the mid 1980s due to the three main reasons: the rapid shrinking of the U.S. preferential market (in part due to the substitution of sugar by HFCS), which reduced the level of sugar imports; the collapse of the feudal social and economic organization that created a highly concentrated land ownership structure; and the crisis of the corrupt and autocratic Marcos regime. Filipino sugar production declined from 2.9 mln mt in 1976 to 1.3 mln mt in 1987; while in 1997/98 production is estimated at 1.75 mln mt. As production plunged sugar workers and the population in Negros island, the Filipino “sugar bowl,” who depended almost exclusively on sugar for their livelihood, paid dearly: hunger, unemployment, death. In the 1980s there was no more dramatic situation in the world sugar industry than the one lived by the sugar workers in Negros. Moving our attention to a concrete corporate episode: in mid 1998, a group of 32 creditor banks agreed to a rehabilitation plan for the Victorias Milling Co., a company carrying debts for 5.5 billion pesos ($132 mln). The proposed plan considers the sale of a 51% stake in the company - by 15 October 1998 - to a “strategic investor,” with enough resources and a proven record in the management of sugar industries. The Victorias Milling is one of the largest and oldest sugar companies in the country, established in 1919. The episode tells the new and basic story of the Filipino sugar industry: after years of severe crisis, the industry is not yet able to recover: it has no money nor expertise. Probably, in the present circumstances, the Filipino industry will become the “acid test” for the effectiveness of any liberalization program to actually achieve the modernization and the streamlining of production, and a case where it could be possible to evaluate the impact of the market reforms on the life of the population. Given the current economic and political conditions, it does not seem an easy task to recover sugar production to the 1970s levels, or to achieve the self-sufficiency goals proposed by the government of 2.4 mln mt by year 2000. Apparently there are two main developments undergoing in the industry: one is the structural changes in response to what is a structural crisis; the other, market liberalism being introduced in the sugar market. Even though there has been news that factories are investing in the expansion and modernization of their facilities, it would seem that the Filipino sugar industry lacks the required resources to undertake a major overhaul of industrial facilities. A likely result would be the closing of old and inefficient mills, and a consolidation of the processing capacity in fewer mills. This, in turn, would lead to the concentration of ownership and control. In fact, it seems that the process has already begun. For instance, early in 1998, the Central Azucarera Don Pedro acquired a 42% stake in Central Azucarera de la Carlota for 175 mln pesos ($4.37 mln) and became the largest sugar company in the country. The Azucarera Don Pedro holds 12.9% of the raw market and 21.3% of the white sugar market in the Philippines. In the case of the Victorias Milling described above, it was reported that JG Summit, which operates three sugar factories, was interested in acquiring a majority stake in the company. However, the process of restructuring (ownership, consolidation, etc.) seems to face other difficulties arising from the agricultural sector of the industry: After ten years of ICCSASW
27 -
September 1998
Liberalization Programs in the Sugar Industries of Asia/Pacific implementation of an agrarian reform program, this is still far from being complete (initially was proposed to end the process by 1998). According to statements by officials of the Sugar Regulatory Administration (SRA), the Department of Agrarian Reform will continue the implementation of the Comprehensive Agrarian Reform Programme (CARP) by covering sugar estates of 24 or more hectares in the next three years. The aim is to have small and medium-size growers supplying cane to the industry: During the Aquino Administration (1986-1991) there were some 100,000 planters cultivating 370,000 h of sugar land and between 80% to 90% of them owned 10 h or less. If the CARP is successful, in three more years no sugar grower will have more than 24 h. (Licht, March 1998:145) The demands of the economy of scale, the need to have access to agricultural inputs and services, banking and credit, in the midst of market liberalism, will likely create some economic and financial pressure on the small- and medium-scale growers. Will sugar cane continue being a crop favoured by the Filipino growers? Yet another importanting factor in the current situation is the implementation of the agreements of the Uruguay Round of the GATT, in what refers to sugar imports. Under the GATT, the Philippines agreed to a “minimum access volume” (MAV) of 45,000 tonnes of sugar to be covered by imports. This is called the “in-quota” sugar, which pays a 50% tariff in 1996-2000. 7 Imports above the MAV is the “out-quota” sugar that pays a 100% tariff in 1996, 80% in years 1997 and 1998, and 65% in 1999 and 2000. However, a 65% of the “out-quota” sugar is made available to countries in the Association of Southeast Asian Nations (ASEAN), imports that could benefit from reduced tariffs according to the regional agreement. (Thailand is among the ASEAN countries. It is also known that even paying a 100% tariff, Thai sugar is still less expensive than Filipino sugar. Thailand supplied more than 50% of the Philippines import needs in 1996.) In the past three years, the Philippines has experienced a shortage of sugar supply: the domestic production decreased while the industrial use of sugar increased and not enough sugar was available in the domestic market. Domestic sugar prices are high, almost three times the international prices, and sugar producers were reluctant to export sugar even to deliver sugar for the U.S. tariff-quota. (The Philippines imported sugar in order to have a surplus to export to the U.S.) The recent Asian economic crises and the devaluation of the Filipino peso, however, have made the U.S. market attractive once again, and probably producers may have less doubts to supply it while imports have become more expensive. If the process continues, the Filipino sugar producers might find in the current economic crisis a “spring board” on which to restructure their industry. 8 Liberalization seems not to be a major source for today’s changes in the Filipino sugar industry. The structural changes experienced at present arise from the industry’s historical configuration rather than from market reforms. Nonetheless, liberalization programs are part of the current process of change, and their implementation and results 7 Industry sources reported in March 1998 that Australia offered the transfer of sugar technology in exchange for supplying the sugar required by the Philippines for the MAV. 8
The impact of currency fluctuations, even in normal periods, affect the financial position of a given industry. For instance, the case of sugar exporters to the European Union under the Lomé Sugar Protocol that receive prices quoted in ECU. The recent revaluation of European currencies against the U.S. dollar affected some of these suppliers (especially from the Caribbean), since they operate on U.S. dollars rather than on European currencies. A revaluation of the ECU means less income in U.S. currency.
ICCSASW
28 -
September 1998
Liberalization Programs in the Sugar Industries of Asia/Pacific may be a test of what they can actually achieve for the recovering and streamlining of sugar production in a developing country.
5. Pakistan By comparison with other industries in the region, the research for this report found no evidence that sugar industry in Pakistan is implementing a liberalization program. The following are general comments on the present situation. Pakistan’s sugar production in the 1997/98 season is estimated at 3.55 mln mt, representing a 38% increase over the previous season. A report from the U.S. Department of Agriculture (USDA) attributes the increase to an expansion in the area under cane (a 18% increase), a rise in agricultural yields, and an increase of the cane processed by the centrifugal sugar sector because of a reduction in the amount of cane used by the traditional sugar sector. The government fixes the support price for cane that the millers pay the growers. The country’s 75 sugar mills have a crushing capacity of about 400,000 tdc, which is largely under-utilized due to the shortage of cane. It is reported that the shortage of cane has prompted some millers to pay twice the support price for the cane. As the cane prices paid by the centrifugal sugar sector increased, the sector becomes more attractive for growers: Pakistan achieved a record sugar production in 1997/98 of 3.55 mln mt (against 2.39 mln mt in 1996/97) but even this record is below the estimated production capacity of 4.5 mln mt of sugar. An important reason for the apparent over-capacity is that most mills are relatively modern in design. When the country was created in 1947, there were only 2 mills. In the following years, 73 mills were set up. (Pakistan is also a manufacturer of equipment for the sugar industry.) Sixty-six mills are run by the private sector with a total crushing capacity of 268,000 tdc (an average 4,000 tdc per mill), and nine are in the public sector with 32,100 tdc (an average of 3,500 tdc). As of March 1998, the government banned the construction of new mills for a three-year period. The 1997/98 record production can translate into 1 mln mt surplus, and the government said that any exporter can sell to any destination, with the exception of the central Asian republics and Afghanistan, which are the markets directly served by the mills. The pressure to reform the export policies could increase if production forecasts for 1998/99 are correct: Pakistan may reach 4.0 mln mt, adding more to the surplus. In some recent corporate news it was announced that Transition Management, an U.S.based company, plans to set up a refinery at a cost of $30 mln. The production capacity of the refinery will be 500,000 mt per year of crystal white, destined solely for export to markets in eastern Europe and the Middle East. The firm was looking for five-year deals in raw sugar supply with local mills.
6. Indonesia From the regional viewpoint Indonesia’s sugar industry seems to be the most affected by the Asian economic and financial crisis. From July 1997 to March 1998, the Indonesian ICCSASW
29 -
September 1998
Liberalization Programs in the Sugar Industries of Asia/Pacific rupiah lost an 80% value against the U.S. dollar. With the drastic devaluation, the economic and financial crisis exploded in the country, and a deal with the International Monetary Fund for a $40 billion “rescue package” was negotiated in early 1998. Among the conditions to contract the loan was the introduction of liberalization policies, including in the sugar industry. Given the political structure of the Indonesian society (Suharto’s hold of power for almost 30 years is a classic example of authoritarian regimes) and the structure of the sugar industry, the IMF accord may become a powerful tool for the liberalization of the industry. The IMF calls for the dismantling of BULOG, the National Logistics Agency, setup in the 1970s, and the end of BULOG’s monopoly on staple foods, including sugar. BULOG sets the farm-gate price for cane that the mills pay the growers, then buys most of the sugar from the mills and distributes it domestically; it is also the sole sugar importer in the country. 9 Indonesia is a net sugar importer withing a range between 1 mln to 1.5 mln mt a year and a domestic production of about 2 mln mt. Although the IMF deal specifies that BULOG’s monopoly on sugar imports was to end in February 1998, the Indonesian government placed high priority on maintaining a steady supply and stable prices for rice and sugar, in order to lessen the possibilities of social unrest. Therefore BULOG’s intervention in sugar still continues. The decision gave rise to some “contradictory” cases. For instance, against the background of the massive devaluation of the rupiah, it was to be expected a more “cautious” government approach to sugar imports. Nonetheless, by mid 1998 it was known that the new Indonesian administration had ordered the importation of 500,000 mt of raws and 200,000 mt of whites “as soon as possible,” in order to meet the domestic demand. The move is more political than economic in nature. The government also ordered BULOG to intervene in the sugar market to keep domestic prices within the range of $120 to 180 per metric tonne. (Taking as a reference that Brazilian sugar is offered at $270/mt, the Indonesian government would need to subsidize the sale of imported sugar in the domestic market at an average of $120 per mt.) On the domestic production front, BULOG receives close to 96% of the Java sugar production, 50% of west Indonesia, and 25% of east Indonesia. It was reported, in relation to the IMF deal, that sugar producers would be allowed to sell their sugar directly on the domestic market, without negotiating through BULOG. This may open the possibility of a new wave of investment to modernize the old industrial facilities (dating from colonial times), closely linked to the concentration of sugar production in the Java region that accounts for about 70% of the national production. In recent years, mainly due to the competition from other crops, there are plans to move the sugar cultivation out of Java and into new areas like East Timor. For instance, there are plans to close down 27 small and old mills in Java and replace them with new ones in other islands. Also, PT Trali Gula Timtim will build a new plant in East Timor at a cost of $225 mln, to produce 680,000 mt per year, processing cane from a 160,000 h plantation.
9
The “all-inclusive” model is close to the Mexican state-agency Azúcar S.A., which in the 1980s completely dominated the life of the sugar industry in that country. Mexico was a case of a socalled market economy, by contrast to a centrally-planned economy, with a strong state intervention in key economic sectors. The state intervention in the Mexican economy has been greatly reduced in the 1990s. In the sugar industry, Azúcar S.A. was dismantled and all the stateowned mills (48 out of the country’s 64) were sold to the private sector between 1988 and 1992.
ICCSASW
30 -
September 1998
Liberalization Programs in the Sugar Industries of Asia/Pacific Probably Indonesia is the country that, as a result of the Asian economic and financial crisis, will introduce more changes to the sugar industry than any other country in the region. It is clear that the pressure to implement liberalization programs (and the political opening as well) will continue; that the international financial institutions (like the IMF) and the impact of the crisis will play a major role in furthering the economic and political reforms. In the sugar industry it should be expected that BULOG will be dismantled sooner rather than later, a move that will leave the field open for private groups to enter the industry. The Indonesian sugar industry seems able to increase production if investment for the modernization of mills, the improvement of agricultural practices (irrigation, new varieties), and the move of sugar plantations away from Java is available. The tasks will probably depend on foreign investment sources, once the political situation reaches some stability. As an example, in July 1998, it was known that Kuok Investment (Hong Kong) was interested in acquiring the remaining shares in the PT Gunung Madu Plantations, which runs a 12,000 tdc sugar mill and plantation and is property of the Suharto family.
7. Taiwan In the decade of the 1980s, Taiwan’s sugar production fluctuated in the range of 770,000 mt (1981/82) to 512,000 mt (1989/90) and then continued to decline to approximately 369,000 mt in 1997/98. Consumption fluctuated in the 470,000 mt to 550,000 mt range during the same period, with sugar imports making up for the steady decline in domestic production. This configuration seems to be the result of a policy implemented by the Taiwan Sugar Corporation (TSC), the sole sugar producer in the country, to move the production of sugar overseas given the intense competition for land in the island, the high production costs (estimated at 78 c/lb.), and annual losses of about $210 mln. (USDA TW8016, 1998:1) Towards the end of the 1980s, Taiwan was actively looking to buy production facilities in the Caribbean and Central America. At that moment, officials from the TSC said that domestic sugar production had become very expensive and they had plans “to buy or build sugar mills overseas and export the production back to Taiwan.” (Mundo Azucarero, Dec. 1990) Not surprisingly, land under cane decreased from 108,092 h in 1980 to 58,525 h in 1995. The TSC closed nine mills in the 1980s and announced the closure of another three by 2001, reducing the number of mills to 14. By 2002, domestic production is expected to reach 310,000 mt (the minimum set by the Council of Agriculture’s Five Year Plan). Taiwan has two refineries that process raws and a new 300,000 tonne-refinery in Kaoshiung will enter operation in July 1998. In the 1990s, the policy of investing in other countries has continued. The most recent information on this regard: •
A TSC joint venture in Vietnam (operational since May 1997) produced 10,000 tonnes in 1997, and it is expected to increase to 100,000 tonnes when completed in the next two years.
•
The TSC will relocate the 2,000 tdc sugar mill from Pintung (southern Taiwan) to northern Vietnam, and will also relocate the Taitung mill to
ICCSASW
31 -
September 1998
Liberalization Programs in the Sugar Industries of Asia/Pacific Vietnam. Production from the two mills targets the Vietnamese domestic market and the balance will be exported to Taiwan. •
TSC has plans to invest in the Philippines and Australia, but no details have been made public. (Licht ISSR 1998:64)
The restructuring of the Taiwanese sugar industry, a small industry by international standards, is not directly related to a domestic liberalization program but to the country’s economic development, which has made sugar production very expensive compared to other alternatives: either producing sugar overseas to be exported to Taiwan or to other uses of land. What is interesting is how Taiwan’s restructuring matches the restructuring in other industries brought about by liberalization.10 Judging by some news, Taiwan’s exploration of possible sugar locations in the western hemisphere (Caribbean and Central America) of the late 1980s-beginnings of the 1990s coincided with the wave of liberalization and privatization programs introduced in those economies at that time. In the second part of the 1990s, however, Asian countries, especially Vietnam, seem to have become a more attractive alternative for the relocation of the Taiwan Sugar Corporation’s activities.
8. Vietnam The Vietnamese sugar industry is a case where the opening of a centrally planned economy has attracted the interests of foreign capital and, at the same time, the transition to a market economy faces some basic problems. Vietnam’s sugar production fluctuated around the 500,000 tonnes mark (all consumed internally) during the past ten years, and the country has imported between 30,000 mt to 188,000 mt a year (ISO figures). In the short-run Vietnam seems to be capable of doubling its sugar production to about 1 mln mt, which is the official self-sufficiency goal for year 2000. There has been an impressive rise in the number of mills: from 14 in 1994 to 24 in 1996/97 and an expected 51 by year 2000. (Only ten mills are state- owned, accounting for one third of the sugar output.) Current area under cane is about 250,000 h that can be expanded to 350,000 h. Vietnam’s yearly per capita consumption is about 7 kg per year, compared to the world average of 20 kg per year. While the investment in industrial facilities (see below) seems to offer more than enough capacity to achieve the self-sufficiency goals, the bottle-neck appears in the supply of cane. It has been reported that mills are running at 50% capacity due to the lack of cane. Vietnam’s vice-minister for Agriculture describes this situation as follows: “In its haste (to increase sugar production, the government) overlooked the increasing shortage of sugar cane.... (and foreign investors) have lost millions of dollars after extending loans to farmers for fertilizer and seeds, only to find the farmers unable, or unwilling, to sell the cane to the mills that had financed their crop.” (Licht ISSR, June 1998:303, parenthesis added.) Farmers seem to harbour doubts about committing themselves to the long-term investment implied by the growing of cane, on one hand; on the other, it also seems that 10
The U.S. Department of Agriculture (USDA) reports that Taiwan will have to comply with some GATT-WTO regulations on a minimum access volume, and that in preparation for it the government wants to introduce a program to encourage farmers to switch to other crops or to leave farming altogether. However, the national legislature is still to approve funding for such program.
ICCSASW
32 -
September 1998
Liberalization Programs in the Sugar Industries of Asia/Pacific the creation of market practices during a transition period (e.g., the fulfilling of contracts) is not as easy as it may appear. The end result is that the total cane production of 4.2 mln mt does not cover the 8 mln mt required by the mills. (Rather uncommon plans were proposed to import sugar cane but then they were discarded because of the deterioration of the cane - which needs to be processed as soon as is harvested -, and because none of the neighboring countries had any cane surplus!) Foreign investment in industrial facilities has been very active. The following are some of the investments since January 1997: •
The Indian KCP Group (India’s biggest manufacturer of equipment for the sugar industry) started a new 2,500 tdc mills (to be expanded to 5,000 tdc) in Phong Dien district in October 1997, through its subsidiary KCP Vietnam Company Ltd. Costs are estimated at $30 mln. The company also made $2 mln available to growers in Phong Dien, Quang Dien and Houng Tra districts to supply cane to the mill.
•
The Tri An Sugar refinery (with French capital) was reported on the verge of bankruptcy. The mill was to process 106,000 tonnes of cane into 8,000 mt to 9,000 mt of raw sugar but in the 1997/98 crop it received only 22,800 mt of cane to produce 1,000 mt of sugar. (It would seem that besides not receiving the amount of cane expected, the mill’s recovery rates were also half of those planned!) The mill has temporarily ceased operations. Investment was reported at Vnd 160 billion ($12.3 mln).
•
Lam Son Sugar Co. (a Vietnam-Taiwan joint venture) is building a sugar factory in the northern province of Thanh Hoa. The yearly capacity is 60,000 tonnes of sugar from a 4,000 tdc mill, at a cost of Vnd 450 billion ($34.5 mln). It will employ 450 workers and will increase the company’s total production to 100,000 mt per year. Trush Shima Kikai Co. of Japan is supplying the equipment.
•
A joint-venture of Taiwan Sugar Corporation (TSC) opened a 6,000 tdc mill at a cost of $60 mln. TSC holds 40% of equity while the Taiwanese firms King Car Food Industrial Co. and I-Mei Foods Co. hold 17.5% stake each; the remaining stake is hold by the Vietnamese state-owned First Sugar Co. It is planned that production will increase to 99,000 mt of sugar by 1999.
•
The Singapore-based Kecepe Investment Private Ltd. will invest $30 mln on a 3,000 tdc sugar factory in Thua Thien-Hue province.
•
The French Sucrières de Bourbon will build a second mill in Gia Lai province, where it will hold a 51% stake with the local Gia Lai Sugar Refinery in control of the remaining 49%. The plant will increase capacity to 2,800 tdc from the current 1,000 tdc by 1999. The other Bourbon mill, the Tay Ninh Sugar Co. is located in the southern province of Tay Nin and has a 8,000 tdc capacity.
•
The Indian Dhampur Sugar Mills will build a new 2,500 tdc factory in the central province of Ninh Thuan ($30 mln) to be completed by the end of 1998.
ICCSASW
33 -
September 1998
Liberalization Programs in the Sugar Industries of Asia/Pacific •
Tate & Lyle’s investment in the new mill in the Nghe An province will be in the order of $71.5 mln. The mill is set-up in joint-venture with the Thai group Mitr Phol that controls a 25% stake.
9. General Comments on Liberalization Programs and Restructuring of the Asia/Pacific Sugar Industries As this survey underlines, the Asia/Pacific sugar industries conforms a very diverse group; and the diversity would have been made even clearer if a key sugar player were included (China) along with two major importers (Japan and South Korea). Nonetheless, in the midst of this diversity, there seems to be a general trend towards the reform of sugar policies with the introduction of some liberalization measures on one hand, and the need to restructure obsolete industries on the other. Market Liberalization The industries described have known regulatory schemes imposed by the state (India, Indonesia) or by the industry itself with the participation of the state (India’s exports through ISCIEG, Thailand’s tri-partite Thai Cane and Sugar Corporation, the Australian single-desk selling model). All these schemes are in a process of significant reduction if not towards complete disappearence - in the general “tide of market liberalism.” However, one factor to have in mind is that sugar is usually considered a staple food and as such very susceptible to government control. The latter normally responds to social goals or political necessities rather than economic-only objectives. For example, the hesitation of Indonesia’s new administration to dismantle BULOG in the middle of social unrest; or the not-yet-taken decision by India about the future of the “sugar levy” for sale through the Public Distribution System. In several cases, the liberalization of the domestic market is an indication of a larger process that may eventually restructure the whole industry. For instance, liberalizing domestic prices is usually accompanied by a corresponding liberalization of the international trade (imports). Given the advances in the international trading of sugar (Brazil, the European Union) and the presence of large exporters in the Asia/Pacific region (Australia, Thailand, Pakistan, India), the opening up of domestic markets will have a great impact in the structure of several of the industries in the region. The Filipino industry is an obvious example: an obsolete industry going along a very difficult recovery path from a severe crisis that faces an uncertain future due to the country’s commitments to open the domestic market - under the GATT-World Trade Organization (WTO) agreements - and the likely decrease of the U.S. preferential market. The recent economic and financial crisis in the region will play its role as well, although it is still too early to weigh its impact on the industry. A basic question is to what extent the massive devaluation of the Asian currencies will affect the financial position of the sugar industries, when talking about domestic and imports prices. For example, increasing revenues from sugar exports, which are paid in hard currency, may effectively help the financial situation of some industries, especially if it benefits from preferential arrangements and the industry buys inputs (labour, cane) with a devalued national currency (Thailand, the Philippines). By the same token, industries that depend on foreign inputs (equipment, machinery, financial resources) may see their position weakened. In the middle some domestic markets may see the prices of imported sugar ICCSASW
34 -
September 1998
Liberalization Programs in the Sugar Industries of Asia/Pacific rising due to the devaluation, which may be an opportunity to introduce structural changes in the industry (Indonesia?).
Corporate Participation Although efforts were made to identify some of the multinationals operating in the regional sugar industry, it is somewhat difficult to document their participation and presence. This may have two main reasons: first, by comparison with other areas (Europe and North America) hard information on Asian companies is very scanty in international sources; second, their development and structure appears to be different from the classic/western model of a transnational corporation, reflecting more the Japanese-style conglomerate (a group of companies rather than one big company). Also, national groups in Asia tend not to depend heavily on foreign investment as they seemed to have direct access to resources (Thailand) or have direct access to sugar expertise (India, Australia). An example of corporate participation in the region is Tate & Lyle, the largest sugar company in the world. Tate & Lyle has plans to expand into new geographic areas for the company (India, Vietnam, China), plans that are normally developed through jointventures with local groups. The latter have the required expertise and knowledge of the local markets and conditions as to launch the new investments (language capabilities being a clear example). These factors outline a situation quite different from other sugar producing areas like the Caribbean, some countries in Latin America, and in central and east Europe, where local groups do not have access to financial resources or lack expertise and knowledge. They come to depend on foreign participation to develop new projects or to modernize their sugar industry.
ICCSASW
35 -
September 1998
Liberalization Programs in the Sugar Industries of Asia/Pacific
IV. Comments on the Liberalization of the International Sugar Industry
1. Liberalization under the Uruguay Round of GATT Sugar analysts coincide that the Uruguay Round of negotiations (implemented since 1 January 1995) “left the sugar industry untouched.” However, the GATT introduced some changes that may affect the position of a given country and may allow for the modification of some policy matters: a- Under GATT all non-tariff measures will be converted into tariffs, which then will be reduced by 20% in the 1995-2000 period. Developing countries will reduce their tariffs by 24% in 1995-2004. agricultural imports will have a minimum access of 3% of the domestic consumption (to be raised to 5% in 2000/2001). There is a possibility to introduce special mechanisms to protect the domestic market under exceptional (international) market conditions. b- Domestic support will be reduced by 20% in developed countries in 19952000 (13.3% by developing countries by the end of 2004), with some exceptions like the EU accession programs and deficiency payments to producers. c- Subsidies to exports will be reduced by 36% (in value) and 21% (quantity) by developed countries in 1995-2000; and developing countries in 24% and 14% respectively by 2004. Effectively, these proposals did not modify the protectionist policies of some major sugar players like the United States and the European Union. In the case of the United States, the main commitments under GATT were: a- A minimum importation of 1.134 mln mt of sugar per year. b- A gradual reduction of the “second-tier” tariff (applied to imports outside the sugar quota). c- A reduction of 20% in the domestic price support. In real terms, the U.S. tariff-rate quota has usually been set above the guaranteed minimum of importation; the reduction of the “second-tier” tariff, which makes out-ofquota imports prohibitively expensive, is significant only if international prices were to be consistently below the 6 c/lb mark; the 20% reduction in domestic support applies to a large group of agricultural commodities and the sugar support price (about 18 c/lb for cane) remains unaffected. The import quota became a “tariff-rate quota,” and imports under it receive a nominal or zero tariff in the context of international cooperation programs. The European Union has modified several times its sugar regimen, and to comply with the GATT the following changes were introduced: ICCSASW
36 -
September 1998
Liberalization Programs in the Sugar Industries of Asia/Pacific a- A system of variable tariffs on agricultural imports became fixed tariffs, that will be reduced by 20% by year 2001 (an annual rate of 3.3%). However, EU producers are able to benefit from some protection mechanisms if the international prices fall below certain level or imports rise above certain volume. (The protection mechanism was applied to the importation of molasses in 1998.) b- The reduction in the subsidies to agricultural exports that might affect the EU ability to export. Estimate the impact of this measure on sugar producers is difficult due to the EU quota structure: the quota “A” at guaranteed prices covers domestic consumption; quota “B”, a portion of “A”, also receives guaranteed prices; and quota “C” is exported to international markets with no subsidies. However, quotas “A” and “B” are profitable enough as to protect the EU sugar producers from major losses in the sale of quota “C”. For the majority of other countries, the impact of the GATT agreements relates to the portion of the domestic consumption covered by imports and the starting point of the fixed tariffs. For instance, the World Association of Beet and Cane Growers (WABCG) says that some 20 countries presented a tariff quota at a low or zero rate duty but “[a]bove these..., tariffs on sugar remain very high. On raw sugar, the average tariff after reduction will be 97 per cent ad valorem equivalent, and on white... 81 per cent.” (King 1997: 630) Most likely then, for these 20 countries a reorganization of their international sugar trade (depending on volume, prices, etc.) will be possible, while for the great majority of consumers and importing countries the GATT agreements may not have any real impact in the short-run. (The WABCG adds that in 1997 close to 40% of the world sugar imports were purchased by non-WTO members as China, Russia, and Saudi Arabia.)
2. Restructuring of the International Sugar Industry As liberalization is only one aspect of a major development termed “restructuring,” it would seem appropriate to complete these comments with some reference to other changes in the international sugar industry. Several analysts share the opinion that it is probable that the negotiations under the WTO, to start in 1999, will find a more liberalized sugar industry than what the Uruguay Round of GATT had proposed. This seems to be the truth: There are processes that may not be directly related to the GATT liberalization proposals but are changing the structure of the industry world-wide. As it is difficult for countries to avoid being engulfed by the “tide of market liberalism,” it is also difficult for the sugar industry, in any country, to remain unaffected when other economic sectors are being reformed. In part, this is the case of India and Indonesia in Asia/Pacific, also the case of Brazil (pressure on the fuel alcohol sector, which is the most important part of the sugar-alcohol complex), Argentina, some African countries (Uganda, Kenya, Mozambique), and the central and east European countries after the collapse of the Soviet Union. Important as well is the regional integration with economies and financial systems being merged: the WTO has been informed of the existence of over 60 regional trade agreements. It is somewhat a curious fact that some of the major free trade agreements (e.g., the North American Free Trade Agreement or NAFTA with Canada, Mexico and ICCSASW
37 -
September 1998
Liberalization Programs in the Sugar Industries of Asia/Pacific the United States, and the Mercosur with Argentina, Brazil, Paraguay and Uruguay) initially placed sugar on a list of “special products” to which a longer-than-usual integration period is applied. The irony of the special treatment is that sugar tends to become a subject of trade disputes, once the “harmonization” of customs and tariffs in other areas had progressed far enough as to exert pressure on the “special products.” The European Union (15 countries) is a special case. The Lomé Sugar Protocol guarantees to the ACP countries a certain volume of sugar imports for an “indefinite” period but does not guarantee a price. It is commonly accepted that the preferential prices (as high as 30 c/lb to 33 c/lb) that the ACP countries receive for their sugar, will not last “indefinitely.” In part the reform of the EU Common Agricultural Policy (CAP), among other things, will influence changes in the sugar industry. Another source in the EU changes is the EU enlargement: some central European countries will start the accession process by year 2000 and alredy 10 countries have applied for membership. The ten countries would mean an increase in population of about 500 mln people but only an additional 5% in the total GDP of the European Union. A financial imbalance is to be expected. As a result of the enlargement changes in the EU sugar regime are expected: sugar prices in the central and eastern European countries will have to rise by about 50% to be equivalent to EU prices; sugar beet prices would have to increase by about 25%; the EU intervention price, which define the level of protection for domestic producers, will have to be reduced. (Ahlfeld 1998:364) To judge from what happened to the sugar industry in the former East Germany, the sugar restructuring will be profound, and this time will affect the industry in the west side of Europe as well.
ICCSASW
38 -
September 1998
Liberalization Programs in the Sugar Industries of Asia/Pacific
V. On Workers and the Liberalization and Restructuring of the Sugar Industry: A View from ICCSASW’s experience. The objective of this report is to present information and analysis on the liberalization programs in some of the most important sugar industries of the Asia/Pacific region, within the general framework of their restructuring process. The countries selected are relevant to the regional sugar industry, and are also important to the IUF Asia/Pacific regional office and its activities in the sugar sector. Beyond the diversity of the national situations, the report confirms the general trend of restructuring of the regional sugar industry and the various reasons for the changes. As part of the market reforms, liberalization is one of such reasons. This is clearer in the case of the sugar industries in Australia, India and Indonesia (where liberalization seems to be gaining speed). In other countries, the market reforms probably play a secondary role: the Philippines comes to mind, even Thailand. Other countries (Pakistan) seemed not yet immersed in the liberalization process, but it should be expected that they will join the fray sooner rather than later. Vietnam, the only centrally-planned economy included in the report, presents a special configuration where liberalization appears in a transition toward a market-oriented economy, which counts with the key intervention by the state (probably this is also the case in China). The restructuring affects several sugar groups: cane growers, millers, traders, government agencies, workers, etc. In the Asia/Pacific region these groups present marked differences, that depend on the national situations. The differences are highlighted when the regional industry is compared to other more homogenous regional situations. For example, the European sugar beet processors, although from 15 countries, face the same policy conditions, and all of them belong to what is basically one economic region. Sugar workers in the Caribbean share basic common features that make them react similarly to some economic changes, even though they are from different countries. In the Asia/Pacific region, this kind of homogeneity is far less common. For example, on farm management practices the Australian cane growers may have more in common with the North American beet growers than with their cane-based counterparts in the Philippines, Vietnam or Thailand; or the different ways in which the private-sector groups deal with government policies in India and in Thailand and, of course, between these two countries and Australia. Workers have also a quite diverse background. The classic dichotomy of agricultural and factory workers in the sugar industry reaches new heights in the Asia/Pacific region. It is already a great challenge to create a worker-based common strategy on sugar policies across political frontiers; it is even more challenging to do the same across economic, social and cultural differences (notwithstanding the economic globalization and regionalization processes that tend to draw the labour force from different countries towards one market). A basic element to face the challenge of diversity is to document and analyze the sugar industry at the international, regional and national level. Over the past ten years, the ICCSASW
39 -
September 1998
Liberalization Programs in the Sugar Industries of Asia/Pacific work of ICCSASW has tried to fill an information and analysis gap in the sugar workers international movement, by providing the workers and their organizations with a permanent flow of information and analysis on the trends of the sugar industry. It has tried to help them to see clearer the historical perspective of their industries and to help them to produce a solid and feasible strategy to face the new chanllenges. (ICCSASW’s Sugar World and Mundo Azucarero, incidentally, have been continuously published for the past 22 years!) The challenge to have access to reliable information and solid analysis can not be clearer than in the context of the preparations for the upcoming WTO talks (scheduled for the third quarter of 1999): The World Association of Beet and Cane Growers has been working on topics of concern to growers and has made public its position and recommendations. Large corporations, after expressing their disappointment with the Uruguay Round of GATT, have given support to “think-tanks” to make recommendations on the liberalization of the industry within the WTO. Several countries, whose economies depend on their sugar industries, are busy putting together recommendations on assistance programs and protection mechanisms. International inter-governmental organizations are also voicing their position.11 As far the workers are concerned they find themselves in a peculiar situation. A matter of direct concern to workers is the so-called “international labour standards” that are supposed to be dealt at the tri-partite International Labour Organization (ILO). The WTO has stressed this point. For example in the 1996 Singapore ministerial declaration.12 On its web site, it says: “Strictly speaking, this (labour standards) should not be mentioned here at all because there is no work on the subject in the WTO, and it would be wrong to assume that it is a subject that ‘lies ahead’.” Some industrialized countries would like to link freer international trade practices to the compliance with labour standards and environmental regulations. They claim that their economies are efficient and able to compete on an international open market. They also say that their relatively higher production costs - compared to developing countries - are in part related to the respect of basic labour standards and the compliance to environmental regulations. On the other hand, some developing countries tend to resist such proposal arguing that the cost of improving labour standards or enforcing environmental regulations (to put them at a level comparable to the industrialized world) is simply too high: they would not be able to compete. However, this discussion - of
11
One of the most clear statements coming from international organizations was expressed by A.C. Hannah, head of statistics of the International Sugar Organization, when talking about the sugar industry: “[I]t would be foolish, he said, to sacrifice stability (reached by the international sugar industry) to the god of low cost of production (open competition).” (Hannah 1997:598) 12 The WTO Singapore declaration reads: “We renew our commitment to the observance of internationally recognized core labour standards. The International Labour Organization (ILO) is the competent body to set and deal with these standards, and we affirm our support for its work in promoting them. We believe that economic growth and development fostered by increased trade and further trade liberalization contribute to the promotion of these standards. We reject the use of labour standards for protectionist purposes, and agree that the comparative advantage of countries, particularly low-wage developing countries, must in no way be put into question. In this regard, we note that the WTO and ILO Secretariats will continue their existing collaboration.”
ICCSASW
40 -
September 1998
Liberalization Programs in the Sugar Industries of Asia/Pacific direct interest to workers - happens at government-to-government negotiations, which tend to “water down” labour issues in the midst of political trade-offs. Several international labour organizations are in the process of elaborating their own recommendations for the WTO, even though the latter is a government-only organization. In the sugar industry worldwide and from the point of view of the labour movement, there is an pressing need to produce a clear and independent analysis and recommendations for the industry as a whole, to clearly express the kind of changes needed and the goals to be pursued. There is a need to recognize the changes and their direction to act upon them and to influence their outcome for the benefit of the workers and their families.
ICCSASW
41 -
September 1998
Liberalization Programs in the Sugar Industries of Asia/Pacific
Bibliography Ahlfeld, Helmut. Beet and Cane Sugar Against the Background of Structural Change of the World Sugar Market in F.O.Licht International Sugar and Sweetener Report, Vol. 130, No 22, p. 361-370, Ratzeburg, Germany, 1998. Chullén, Jorge. Reestructuración de la Industria Azucarera Internacional y los Trabajadores Azucareros. CCSTAM, Toronto, Junio de 1997. F.O.Licht International Sugar and Sweetener Report, Ratzeburg, Germany, 1997-1998 F.O.Licht World Sugar Balances, 1988/89 - 1997/98. Ratzeburg, Germany, 19 February 1998. F.O.Licht World Sugar Statistics, 1978/79, 1989/90. Ratzeburg, Germany Fry, James. World Sugar Developments. India’s Competitiveness in the Face of Growing Liberalisation, presented to the India Sugar Markets Conference, 19-20 February 1998, Mumbai, India. LMC International Ltd., Oxford, U.K. Hagelberg, G.B. Continuity and Change in the World Sugar Industry in Sugar World: Information and Analysis for Sugar Workers, 1977-1997. (To be published by ICCSASW, Toronto.) Hannah, A.C. The World Sugar Market and Reform in F.O.Licht International Sugar and Sweetener Report, Vol. 129, No 31, p.595-599, Ratzeburg, Germany, 1997. ICCSASW-CCSTAM. Sugar World and Mundo Azucarero. Toronto, Canada, 1990-1998 International Sugar Organization. Market Report and Press Summary. London, England. International Sugar Organization. Sugar Year Book, 1983, 1989 & 1996. London, England. Kansal, Satish. Indian Sugar: Developments & Its Business Environment, presented to the India Sugar Markets Conference, 19-20 February 1998, Mumbai, India. King, David. Issues Facing Sugar Beet and Cane Growers in the Next Round of WTO Negotiations in F.O.Licht International Sugar and Sweetener Report, Vol. 129, No 33, p. 629-632, Ratzeburg, Germany, 1997. Mulherin, K., Australian Sugar Industry, Structural Changes, Evolution and Outlook in F.O.Licht International Sugar and Sweetener Report, Vol. 130, No 26, p. 433-437, Ratzeburg, Germany, 1998. Tate & Lyle, Tate & Lyle World, 1997-98 various issues, Tate & Lyle, United Kingdom. United States, Department of Agriculture Foreign Agricultural Service (USDA-FAS), U.S. Washington. ------ Pakistan, Sugar Annual Report, 1998, PK8007, 07 April 1998 ------ Philippines, Sugar Annual Report, 1998, RP8010, 10 April 1998 ------ Taiwan, Sugar Annual Report, 1998, TW8016, 09 April 1998 ------ Thailand, Sugar Annual Report, 1998, TH8032, 09 April 1998 Udeshi, J.J. Sugar Industry in India. Maniben Kara Institute, Mumbai, India, March 1998. ICCSASW
42 -
September 1998