Transforming to a diversified value-adding platform is a necessity for Australia’s raw sugar industry.
#WKS Consulting# believes Australia’s sugar industry can diversify if the industry and government want it badly enough. Indeed, there are compelling reasons for the Australian sugar industry to diversify. For a start, in a single dimensional industry like Australia’s - where raw sugar offers the only real revenue stream - the only road to long-term survival is to continuously boost productivity. Multi-dimensional industries in contrast, have additional revenue streams and a greater ability to face and endure volatile sugar markets.
The “penny has dropped” for the Australian Sugar Milling Council. The Organization in its Sugar Policy Insights – February 2019 issue declares that the Australian sugar industry has no plan and no supportive policy framework to fight deteriorating terms of trade via diversification. The Council notes that milling revenues need to grow by more than 2 % each year to improve profitability, competitiveness and resilience. In 2017, 90 % of the almost AUD2 bln in revenues earned by the Australian sugar manufacturing industry were derived from raw sugar production alone.
The ASMC plans to meet industry stakeholders and government over the coming months to stimulate development of a revitalisation strategy, including a discussion on how diversification (ethanol, co-generation and other bio-products) as well as increased cane acreage and improved yields can be best achieved.
This is a laudable initiative!!
WKS Consulting believes there are potent drivers for Australia’s sugar industries to move beyond sugar to embrace renewable energy (bioenergy), amongst other opportunities. In terms of G1 value-adding the key opportunities are biomass power exported to the national grid, and fuel ethanol. In terms of next generation value-adding, we move to cellulosic ethanol, drop-in advanced fuels, and bioplastics/biochemicals.
But there are considerable potential stumbling blocks. Whilst the Brazilian model proves that sugarcane can sustain a far more diverse and multifunctional role beyond sugar production, there is sometimes a surprisingly slow rate of diversification in other countries. Why?
Reason 1: Technical-economic justification is not always straight forward. Sugar industries around the globe embrace a wide range of production systems over a large spectrum of agro-climatic conditions, socio-economic conditions and ownership structures. The economics of ethanol production is heterogeneous and location-specific: feedstock availability and cost are the most important drivers. These factors in turn hinge on land availability and quality, agricultural productivity, labour costs and so on. Operating costs hinge upon plant location, size and technology. There may also need for investment in storage infrastructure. The second important determinant of viability is ethanol’s competitiveness with rival fuels in the transport sector. This is a function of the cost, demand and availability of these other fuels, which fluctuate around global petroleum prices, foreign exchange rates and domestic refining capacity.
An overriding consideration for fuel ethanol from sugar cane is opportunity cost – the value of the sugar foregone. For countries that are net exporters of sugar to regional and world markets, in some cases the opportunity cost of producing ethanol would be higher than for sugar production, meaning it would be unlikely those sugar industries would divert sucrose to ethanol production. Instead, ethanol production would be largely limited in the near term to production from molasses for local fuel consumption and some regional export markets.
Reason 2: the absence of enabling policy and regulatory frameworks. This is the most contentious issue impacting sugar industry diversification. Both need to be provided by governments.
Experience elsewhere in the world, including in the United States and Brazil shows that implementation of a biofuel blending scheme requires supportive government policies. Stronger policy incentives such as blending mandates as well as some financial incentives, such as carbon credits or loan guarantees, would be needed in order for national and regional markets to move towards a scale that is economically sustainable.
Similarly, investment is required to unlock sugarcane’s biomass power potential. That investment will only take place if there are clear and well formulated regulatory frameworks to assure investors. To make cogeneration commercially viable, millers’ power generation costs including capital costs have to be covered. Ideally, any private power purchase agreement would have to include the provision of renewable energy feed-in tariffs (FIT), and an incentive structure to encourage the adoption of renewable energy.
A Final Compelling Reason to Embrace Diversification
Finally, and just as importantly, there’s another compelling reason for Australia’s sugar Industry to diversify. In the future, competitiveness levels will be increasingly defined amongst sugar producers and sugar producing countries that are, and those that are not, engaged in full utilisation of sugarcane as a renewable resource.
All industries need to extract the full value from sugarcane to improve resilience against commodity cycles and weather. This means sugar manufacturers need to go boldly into the future, often with the right partner to understand the business and the technology; but beyond that, governments need to accept that they are also a key stakeholder in any sugar industry’s roadmap into a sustainable diversified future.