Analysts say manufacturers’ alarm over an import-induced glut in the market is short-sighted and may sow the seeds of the next sugar crisis
When Uganda Revenue Authority’s Assistant Commissioner, James Kisale, announced the end of the 6-months tax waiver on sugar imports on January 31 and the return of the 100% duty, manufacturers were expected to jubilate.
According to Kisale, the waiver had achieved its objective and increased sugar supply, cooling prices and stabilising the market.
Gone were the days of bribing supermarket attendants to call when the sugar trucks came. Today a kilo of sugar costs an average Shs 3,500 at retail, a long drop from the Shs 8,000-10,000 of August 2011.
But there was a flipside.
Manufacturers said so much imported sugar had flooded the market, leaving them stuck with stores full of locally made product they couldn’t sell.
Jim Kabeho, chairman of the Uganda Sugar Cane Technologists’ Association and a director at the Madhavani Group of Companies, told The Independent that Kakira Sugar Works had over 25,000 tonnes in its stores, with 8,000 tonnes of import still in transit from Mombasa. Kinyara Sugar Works had at least 10,000 tonnes in storage. Sugar Corporation of Uganda Ltd (SCOUL) in Lugazi was stuck with at least 5,000 tonnes.
“We have nowhere to sell this sugar. The local market is not sufficient for our supply,” Kabeho said.
“Since the government allowed importation of duty-free sugar the market quickly got filled up with imports and as a result, we have piled up surplus stock in storage,” said a Kinyara official.
With many of the regular distributors lost to imports, The Independent has learnt that the companies have now been forced to load the sugar on their own trucks to distribute in rural areas - a sharp contrast to a few months ago, when wholesalers used to line up at factory gates and manufacturers behaved like kings.
Flood of imports
It is ironic and symptomatic of the sugar sector that manufacturers – notably Kakira – were some of the first to line for duty-free import licenses. Indeed some of the imports they claim have flooded their market are their own, validating accusations that they have long been in the habit of importing and re-bagging sugar to pass off as local produce.
Under the import waiver, the Ministry of Trade licensed about 30 companies to import what had been intended to be 40, 000 tonnes of sugar, but turned out to be 50,000.
“We expect another 25,000 tonnes before February 23, which has already been ordered but hasn’t reached here,” said Francis Koluo, the ministry’s Senior Commercial Officer meaning that total imports would go up to 75,000 tonnes.
“We had authorised only 20 companies but some were slow, others never imported or sold the licences to other companies, and others imported then re-exported the sugar to South Sudan where the market was more profitable,” Koluo said. This, he said, made it difficult for the ministry to estimate how much import would be enough to stabilise the market.
One of the 30companies was AKHOM, a subsidiary of Kakira Sugar Works. Another was Mukwano Industries. Rwaboogo. B.W, who works at Mukwano Industries, told The Independent that they had been given a quota of 2,000 tonnes to import but had only managed 1,996 tonnes.
Other companies licensed included; Kengro, General Agencies, Kingstone, Olam Uganda Ltd, among others. Reports say that many licenses ended up with the manufacturers, either sold to them, or under the understanding that they would bulk-import for other traders. Late last year, failure or delay of such delivery caused protests from KACITA.
Industry experts argue that long years of duty protection have nurtured an unhealthy monopoly, leaving Uganda’s sugar manufacturers spoilt and un-innovative, with no marketing/distribution mechanisms of their own, highly inefficient in production, and unable to compete in a challenging and increasingly global environment.
This time it appears not much can be done, except wait for the imported sugar to be slowly cleaned out of the market. But even that is no guarantee, as a complex set of factors has converged to influence the developments in the sugar market.
Regional crisis
The sugar crisis last year did not only occur in Uganda but cut across the region. With the EAC’s blessing, all the countries took the same measures to counteract the product shortage and crazy prices – a six-months window of duty-free imports. In Rwanda, a key market for Ugandan sugar, a consortium of six companies was mobilised to import 50,000 tonnes of sugar. Tanzania issued duty-free import permits for 120,000 tonnes and instituted an export ban on sugar.
The region is now flooded with imports. Inside EAC, this should be only a short-term problem. Once the six months expire, it should only be a matter of time before the imports are cleaned out and local millers have their market back.
Not so for non-EAC markets like South Sudan and DR Congo, of which the latter constitutes Uganda’s largest sugar export market. Having experienced lower prices on the international market, and possibly entered long-term supply relationships, they are likely to be more reluctant to return to Uganda’s higher prices and uncertain supply.
On the international market, a 50kg bag of sugar costs an equivalent of Shs 92,000 (about Shs 2,000 a kg). The same quantity of Uganda-manufactured sugar costs Shs 140,000 (about Shs 2,800 a kg) – a difference of Shs 800 per kilo. Reports say the global price of sugar is declining. A tonne that cost US$ 1,400 (about Shs 4 million) in September 2011 now goes for US$ 800 (about Shs 2 million) andis predicted to fall to US$ 600 in March. A tonne of local sugar goes for Shs 2,800,000.
Prices on the up
In fact, the local trend of prices may be headed up, due to various factors. While imports may keep prices at the average of Shs 3,500 over the next several months, it is not likely that they will fall back to pre-crisis normal of Shs 2,500 per kg.
This is because it is not certain that over the last six months, the sugar companies have undertaken the measures necessary to improve production and avoid the supply shortages that fomented the recent crisis.
Local demand has consistently overtaken supply over the past several years.Local manufacturers produced 259,410.80 tonnes of sugar in 2010, though 269,649 metric tonnes was consumed in Uganda. In 2011 they produced 269,649 metric tonnes, though 259,410.80 was consumed.
USCTA Secretariat Manager Wilberforce Mubiru, claims that this deficit has now been stabilized, but admits that this is largely due to imports:
“We currently have enough stock,” Mubiru told The Independent. “Imported sugar is a lot with traders and the three major local factories are producing optimally. Internationally, Brazil and India have put a lot of sugar, leading to low international prices. However, we haven’t yet projected any problems with local sugar production in 2012.”
First of all, the calm engineered by an emergency and temporary import tax waiver is no stability, as it proves that local manufacturers are still unable to satisfy the market. Secondly, the current price – especially at a time when there is no supply shortage and the product is tax-free - is still too far above the Shs 2,500 per kg price of 2010, and suggests the future trend will be heading up.
This may be partly due to inflation in the key import markets (India, China), or the acute depreciation of the shilling in the months between August and November when most of the imports were ordered. Or the reluctance of consumers who had given up sugar to put it back on shopping lists at a time when inflationary pressures still demand frugality.
The lesson here is that the sugar industry is not independent of the macro-economic factors that initially drove up the general prices of goods – high inflation, exchange rate depreciation, rising cost of production. Now the exchange rate is in reverse – with the shilling getting stronger (up from up to 2,900 to 2,300 against the dollar) – making imports cheaper and local production more expensive. This means that in the long term, even with 100% duty, it may still be more profitable to import.
While the Central Bank appears to be positioned to bring the economic fundamentals under some control, the cost of production will remain relatively high for the foreseeable future and the Ugandan sugar industry will have to do what every other business is doing to survive in a depressed economy – improve efficiency, innovate, reduce costs of production.
This would help them compete not only with international imports, but in the region, where more efficient producers in the EAC and COMESA are off-loading cheaper and larger quantities of sugar, more reliably, at preferential taxes, across the region.
This may partly explain why Ugandan producers have not taken up government’s suggestion to export the surplus sugar in their stores.
The Ministry of Trade’s Senior Commercial Officer, Francis Koluo, told The Independent that on January 30 they met and advised sugar manufacturers to consider exporting surplus sugar to neighbouring countries.
The ministry offered export licenses worth 23,000 tonnes – 10,000 to Kakira, 8,000 to Kinyara, and 5,000 to Lugazi - but by last week none of them had claimed them.
“What they want is to exploit the local market which has higher prices and is more lucrative,” another ministry official said. “Now that the regional markets are deteriorating because neighbouring countries are importing directly from India and China, they have started to speculate.”
It is easy to sympathise with government’s need to protect local manufacturers – it means jobs, income for out-growers, local industry. But that protection has become an unhealthy crutch that rewards inefficiency and makes the sugar consumer pay for lack of innovation in the companies.
For as long as production inefficiencies are reflected in the final sugar price, imported sugar - from international markets, COMESA, and more efficient EAC producers like Kenya – will remain a more attractive option for consumers. That is a fact government cannot protect local manufacturers from.
Subscribe to this comment's feed
written by Michael Kors Outlet, February 17, 2012
-
- +0
-
-
Basically, most brands are offering the same product lines; they only compete with regards to quality and design.