Thorts: The business case for producing biofuel from sugar cane in SA

Not too long ago, South Africa’s sugar industry was counted amongst the top cost competitive producers of high quality sugar in the world.

While the outputs from the industry were small compared to those of leading global sugar producers like Brazil and India, the job creation and contribution of sugar producers to the SA economy was significant. In fact, the South African sugar industry creates one of the highest number of job opportunities per R1m in capital investment.

In recent years, however, annual sugar production has declined rapidly. Today, around 25% less sugar is being produced in South Africa than was the case 20 years ago. Unsurprisingly, a major consequence of this production decline has been a reduction in employment opportunities. Of equal concern is the fact that, despite lower production figures, flagging demand for sugar, driven by, amongst others, the Health Promotion Levy (HPL) on sweetened beverages, and a highly competitive import environment, there is still a large annual excess of sugar cane that is either rolled forward to the next sugar season or destroyed. Adding to the problem is the country’s limited milling capacity, which is dominated by a few large players, resulting in profitability challenges for smaller scale farmers where input costs are already high. While there have been efforts by government to address the situation, such as the development of the Master Sugar Plan, there has also been a fair amount of shortsightedness, as evidenced by the HPL, which cost the industry well over a billion rand in the 2018/19 sugar season. It is becoming clear that restoring the relevance and importance of sugar cane growth and processing to South Africa’s economy is going to require lateral thinking and an innovative approach.

One alternative that appears to have the potential to achieve the desired outcomes of industry recovery and sustainability, and meaningful job creation and protection, lies in the still largely unexplored area of biofuels production.

While there has been some preliminary research done into the viability of biofuel production from sugar cane by the Cane Growers Association and other industry players, there still appears to be a lack of industry partnership aimed at laying the groundwork for a South African biofuel made from sugar cane.

This is somewhat puzzling, given the positive economic impacts – over and above the aforementioned industry revitalisation and job creation – that a thriving and growing biofuel sector would undoubtedly deliver. As has been the case with the country’s burgeoning renewable energy sector, biofuels present the potential to unlock massive cost-efficiencies (particularly in a high oil-price environment), unlock opportunities for meaningful publicprivate partnerships, create more employment opportunities, and deliver numerous secondary industries, all of which would contribute greatly to long-term economic growth.

In addition to all of these positive spin-offs, a growing biofuel industry is also likely to deliver tax revenues similar to those that the sugar industry currently does, so the transition should not have any negative implications for the national fiscus. In fact, given the likelihood of a continued decline in demand for sugar in the coming years, an investment today into building a thriving ‘biofuels from sugar cane’ industry in this country will likely deliver far more appealing long-term returns in the form of tax revenues and sustainable economic contributions.

Of course, achieving a viable ‘biofuels from sugar cane’ industry is not without its challenges. For one, the current mills would need to add on facilities to enable biofuel production, or new dedicated biofuel processing plants would need to be built. However, the potential returns of a high-functioning biofuels industry would be well worth the investment required to set it up. The European Union is suggesting that 2% of sustainable aviation fuel should be available at EU airports by 2025. This is to increase to 37% in 2040. Furthermore, South Africa is in a position to benefit from industry profitability with little to no competition from imported sustainable fuels, as the environmental benefit of using sustainable fuels is eroded by the transportation of it.

Biofuels may also be used for road transport by blending them with petrol and diesel. However, this will require willingness from government to implement compelling biofuel subsidies and incentives. The USA offers a good example of how such incentives, coupled with a commitment by government to leveraging biofuels as an alternative to transportation fuels produced from fossil fuels, can drive incremental growth in biofuel usage and demand. Given South Africa’s commitment to reducing fossil fuel-based energy as part of its just transition, a similar approach can and should be adopted in this country. And the result could well be a significant turnaround in the fortunes of existing cane growers, a return to sugar cane farming by those who have sought alternatives in recent years, and a significant injection of employment opportunities, given the highly labour-intensive nature of sugar cane growing and processing.

Possibly most significantly though, a strong biofuels sector, and the associated supply chains and secondary industries, would almost certainly present an appealing proposition for local and international investors. And given the dire need for such investment inflows into South Africa in order to kick-start its economic recovery, that single benefit in itself makes for a very compelling ‘biofuels from sugar cane’ business case.

Aimee te Riele is an Associate, Corporate Finance | Nedbank CIB

This article first appeared in DealMakers, SA’s quarterly M&A publication

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