Executive Summary
Despites its' small economic size, low endowment of natural resources, and remoteness from world markets, Mauritius has proved to be a success story in the African region. Many external factors affect industry worldwide and such was the case with the Mauritius Sugar cane industry which is now more known as sugar industry.
Erosion of trade preferences of price above market prices and guaranteed quota for export for the Mauritian sugar has shaped the industry outlook with its contribution declining in terms of GDP. The challenge imposed with the World Trade Organisation ruling against EU Sugar Regime in 2006 to cut down its sugar price by 36 % has impacted on the Mauritian sugarcane industry. More challenges erupted with the denunciation of the ACP/EU Sugar protocol in 2009 where Mauritian sugar quota of 560,000 tons annually was receiving three times world market sugar prices due to preferential agreements had been reviewed. However, despite the price drastic reduction, EU remained the most remunerative market and Mauritius Sugar Syndicate agreed commercial partnership with Suedzucker, market leader in EU to get the most remunerative package. Further hurdles paved the way ahead when in June 2013 the EU decided to liberalise the production quotas as from October 2017 and thereby amplifying the competition worldwide to align the price with other producers from sugar and beet root quota which now were not restricted. Furthermore, world market price subject to the Euro/US Dollar exchange rate volatility has enormous impact on our revenues we obtain from the export of our sugar.
The Mauritian sugarcane industry had to adapt in the wake of these global external forces for survival. Following the adverse effects of the preferential trade erosion and liberalisation of markets, the firms in the sugarcane industry and government adopted several countermeasures to remain competitive in the global market. The government proposed the implementation of the MAAS (Multi-annual Adaptation Strategy) report for the Mauritian Sugarcane cluster project to increase the competitiveness of the industry drawn for the period of 2006 till 2015 with an array of measures. The aim was to ensure the commercial viability and sustainability of the sector. Incentives were put forward for the conglomerates and sugar estates to adapt accordingly and would cater for severances for job loss and the reduction of production cost of which 50% accounted for labour cost. Measures included centralisation of mills, right-sizing the labour, mechanisation of the field operations and regrouping of small planters, allows for VRS packages to cut down labour cost, increase milling capacity while optimising logistics and transport costs. Moreover, for firms to benefit from the final aid provided by the European Union, firms diversified and reduced their production cost drastically. The implementation plan included the reduction of production land, allows for land conversion to allow creation of Integrated Resort Schemes on less yielding land or rock soil, and also increase the added value by-product from the sugar cane. Bagasse was used to generate electricity while several firms opted to create refineries of raw sugar to produce white sugar for exportation and other special sugars. Some started to create ethanol for exportation and in long term to be used as biofuel. The firms diversified their activities to invest in Hospitality and tourism sector with the creations of hotels, resorts or even leisure activities such as Casela adventure park. Big conglomerates even moved part of the operation for expansion of other markets such as Kenya, Mobassa and Ivory coast where group Terra and Omnicane are present.
Today the sugarcane industry is known as the sugar industry. Not only has it been able to withstand the inevitable doom that surrounded it but it has also paved way for an industry working at near optimal level and still contribute a share in the GDP. The bottom line is that sugar as an industry is not dead but it has survived the new global threats.
Introduction
The profitability of an industry is determined by the strongest competitive force or forces. Each industry has an underlying structure with fundamental economic and technical characteristics which makes it prone to these competitive forces. The sugar industry is one of the industry heavily regulated on the world market to ensure survival of several economies. Many effective models exist to discuss, measure and analyse the external environment which includes Porter's Five Force, SWOT Analysis, PESTEL framework and so on. Suppliers can exert bargaining power on participants in an industry by increasing prices or reducing the quality of purchased goods and services. The power of each important supplier or buyer group depends on a number of characteristics of its market situation and on the relative importance of its sales or purchases to the industry compared with its overall business. World market price volatility, and currency fluctuations are beyond the industry's control although hedging on the latter two could stabilise revenue.
The sugarcane industry in Mauritius, once our main pillar of our economy during the 1970's till 1990's would not have survived without the preferential access to Europe and U.K sugar market with guaranteed price for an established quota. Mauritius exported low value added raw sugar in bulk with a ship of raw sugar to a single destination under the Sugar Protocol of the Lome Convention via the Mauritius Sugar Syndicate. This meant we had access to Europe and higher prices that on global market. Subsequently, the stable revenues not only allowed the development of local sugar industry but also fostered the diversification of the Mauritius economy.
World sugar production costs has been declining by approximately 40 percent since 1980(LMC International,2001) as production grew from low cost producers such as Australia, Brazil, Thailand and so on. The creation of the World Trade Organisation (WTO) in 1995 paved the way for settling trade disputes, and in its ruling. In 2003, Australia, Brazil and Thailand challenged the legality of the EU Sugar Regime under WTO rules. They argued that the EU's officially unsubsidized export of sugar exist only because of the high 'intervention price' guaranteed to domestic producers under the Common Market Organization. They also argued that this quantity included the 1.6 million tonnes currently imported from ACP and India under the Sugar Protocol. The WTO Panel upheld both complaints and this ruling was confirmed by the WTO Appellate Body in April 2005.The ruling of the WTO panel means that the EU would need to reduce its import tariffs resulting in the phasing out of the export of some 5.1 Million tonnes of sugar.
Europe was called upon to rationalise its sugar industry. In an expensive process, European countries paid off the inefficient sugar producers within their own borders to stop production which led to a supply deficit. In addition, quota attributions were revised and prices slashed by 36%. (Oxfam 2002) The reforms purport to the phasing out of all export subsidies and substantive reductions in domestic support would have adverse consequences for Mauritius as stipulated in the Doha Declaration on WTO Agreement on agriculture. Government intervention was a must because of the economic impact and social impact of erosion of trade preferences as EU's Common Agricultural Policy (CAP) was reviewed. The EU (European Union) proposed an assistance program to meet the transition cost of the countries affected by its measured aligned with the WTO ruling over a period of time.
With globalization, the clockwork at national level is being increasingly joined to other clockworks by more and more sophisticated cogs. Mauritius, geographical span makes it the most vulnerable to the globalization process since it's limited physical size does not allow it to enjoy economies of scale (Subramanian et al (2001)). Subsequently, this explains the higher than world prices for raw sugar. Australia, Brazil and Thailand had several advantage to the external factors such as large flat land compared to Mauritius rockiness soil or even hectares of sugar under cultivation. Our competitors had cheaper cost of production in terms of labour and mechanisation procedures already since 1969 in Australia (Norman J. King, 1969).
EU decision on June 2013 for the liberalisation of production quotas as from October 2017 further impeded the survival of the sugarcane industry. Trade liberalization hurt the country's sugar industries, leading to a loss of jobs and a crucial adaptation of sector to survive in this global village. Mauritius main export markets (EU and UK along with US) was geometrically remote which had consequent impact on logistic for transportation and subsequently affected our competitiveness to the sugar sale price. The competition imposed by such developed countries by far outreached Mauritian raw sugar export industry. The aspects of market access were relevant to any justification of the export performance of developing countries such as Mauritius over the past two decades. Furthermore, the developed countries had better technological advancement that allowed them to have an optimised lower production cost such as Australia Train transport system for its sugar cane plantation ,24-hour milling factory running for a longer milling season and an enormous hectares of arable land.
The Mauritian sugar industry was supported by its preferential access to and remunerative prices in key markets. However, it was a high-cost producer, with costs over 50% higher than on the world's leading "free" sugar markets of which labour accounts for some 55% of total production costs of sugar. A major restructuring program was devised to cater for severance payments, reskilling and retraining of workers, rightsizing the number of factories and millers to optimize operation costs among an array of measures. Government had begun to undertake a series of measures meant to promote social and economic reforms. In light of lower revenues for sugar producers; the Multi-Annual Adaptation Strategy (MAAS) 2006-2015 was devised. The latter aimed at ensuring the viability of the sugar industry by reducing production costs while encouraging economies of scale via centralisation and clustering of mills. The European sugar reforms triggered the Illovo deal which paved the way for cheaper land conversion
Response of the Industry
Stiff competition on the EU market lead to the Sugar Sector Strategic Plan 2001-05, in course of implementation in terms of Productivity of Inputs. (Sucrose yield, Factory Capacity, Length of Crushing Season, Sugar per tonne canne) and curbing the former along with price of inputs (Land, Capital, Labour). An action plan was devised on accompanying measures in line with Sugar Protocol countries affected by the reform of the EU Sugar Regime. Moreover, the industry was called to align to the MAAS report produced by the government for the period 2006-2015.
To benefit of economies of scale, there was modernisation and regrouping of mills in a centralised approach. Growing companies invested in field de-rocking with government subsidies on tax. Many adopted mechanised approach to increase productivity and efficiency. Milling capacity was substantially increased to reduce production cost. This also involved the rightsizing of the labour cost to curb operation cost by at least 50 %. VRS (Voluntary Retirement Scheme) was introduced to cater for severances for the labour losing their job during this adaptation phase. Added to that, companies opting for these incentives were offered rebates and exemption of land conversion tax. Sugar companies moved into new fields such as property development (Residential, Commercial, Business Parks, and IRS/RES) given the vast areas owned by the estates. The less fertile land with low yield or rockiness were among the key factors for such developments.
In fact, sugar companies were the pioneers to build Integrated Resort Schemes (IRS). That is the designated gated communities where wealthy foreigners could purchase freehold property. M''dine (MEDL) has Tamarina in the west, Deep River-Beau Champ (DRBC) Anahita in the south-east, and ENL Land (ENLL) Valriche in the south. ENLL is the midst of an ambitious project with the genesis of a new town at Bagatelle on Mon D''sert Alma (MDA) land near R''duit. MEDL is engaged in 'morcellement' and the building of a mall and business park at Cascavelle near Flic-en-Flac.
The second strategic measure was to increase energy production from bagasse-only power generators to bagasse-coal generators able, to produce additional on and off-season electricity. Omnicane modelled a complex where there were sugar cane plantations, a mill that produces raw sugar, a refinery to manufacture higher value white sugar, and a power plant that burns bagasse left overs to produce electricity amidst other firms in this segment.
The third move has been into tourism either by way of tourist attractions or hotels. Sugar estates have penetrated the tourism sector and operate attractions such as the Casela Adventure Park in the west (MEDL), L'Aventure du Sucre in the north (HFL), and St Aubin Distillery in the south. In addition, groups like Union Sugar (UNSE) own and operate 3-Star Le Preskil (Listed on DEM as SCT) resort near the airport, and MEDL inaugurated a boutique hotel within its Tamarina IRS. Alteo today owns lux resort.
Companies have duly invested in refineries to process raw sugar into white sugar. Over the last two decades, it has consolidated from 20 small and medium groups into four big groups of companies. Omnicane, Terra, Medine and Alteo and the number of cane planters has shrunk drastically. Today, Omnicane's La Baraque plant, produces refined sugar, a quarter of electricity Mauritius consumes and also has indulged in ethanol production.FUEL also has invested in a refinery of sugar with production capacity of 180,000 tonne yearly. Mauritius expanded into the African continent where Omnicane invested in a plant in Mombasa, Kenya. Terra group is involved with sugar business with Ivory coast under the Terra Mauricia venture. Moreover, it has partnered with Kenyan partners to provide sanitation services across the east Africa. GML (Group Mon Loisir) is actively involved in Tanzania and Kenya in sugar operations and also in a food joint venture in Gabon.
Finally, Government reviewed the Cess tax to ensure the industry viability and though Mauritius Sugar Syndicate still sells the bulk part of sugar, groups like Terra and Omnicane have started to negotiate the sell their production themselves. Nowadays, we sell white refined sugar in containers in multiple locations with a single ship. Moreover, sugar estates have specialised in upmarket where unrefined sugar is used to produce 'Rhum Agricole', bio-ethanol for biofuel and carbon dioxide for beverage industry. Mauritian sugar is being shipped to SADC countries to promote its viability. Labour cost have been drastically cut down by the mechanisations of the sugarcane fields and de-rocking schemes incentives put forward by government. Cane husbandry cost is born and various schemes have been devised to help small planters still contribute to the survival of this industry.
Currently the Mauritius Sugar Syndicate has been successfully able to agree commercial agreement with two major EU distributors a UK based British Sugar and France based Cristal Co along with other buyers for the purchase of refined white sugar with highest price attainable. The supplies to these entities will start as from the year 2015. The planters grouped into 27 cooperatives today also benefits from the Fairtrade agreement [3] that allows additional revenues as a premium to reduce their production cost under defined projects.
Conclusion
The Mauritian economy in recent times despite significant reductions in EU sugar protocol prices, the 2008 food and fuel crisis, and the 2008'09 global financial crisis'Mauritius's sugar sector has displayed strong resilience. Bold moves highlight the existence of this industry. Today, as a result of centralization and modernization, there are 7 big enterprises dealing in the sugar sector.
Sugar is better described today as the cane industry ' in fact, there is much more than sugar in sugar cane. The industry has geared from sugar production to several by-products to add value to the sugar sector. Independent Power Producers(IPP), that is electricity generating companies, have produced over 60 % of the Mauritian electricity requirement since 2008. Firms like Omnicane and Harel Fr''res have been the pioneers in this sector where currently they are making a more efficient use of bagasse along with coal.
The livelihood of small planters and the families who depended directly on sugarcane sector has altered in a more judicious manner. We have managed to reinvent the sugar industry. Today we are talking the advent of the Biomass Industry with Ethanol. Mauritius is now known as a successful and respected exporter of refined sugar to Europe. Research is being carried out to decline production costs of sugar while at the same time incrementing the productivity per unit resource. Sugar Industry today not only sugar but energy development along with property and hospitality developments. Implementation of the reforms under the master plan have accelerated and as such the industry has settled at a new equilibrium and lower production cost.
The bottom line is that sugar as an industry is not dead but it has survived the new global threats. The best prospects for the country currently lies in refining, production of specialised sugars under fair trade agreement and also production of organic or special sugars. On an even brighter side, ethanol production could be boosted up for use as a bio-fuel mixer for gasoline in cars which would certainly boost the area of cultivation and provide stimuli to the sector. The result would be less dependent on petroleum fluctuating prices. Furthermore, electricity generation opens up new avenues for the Mauritian sugar industry.
...(download the rest of the essay above)