A year-old sugar tax has severely gouged South Africa’s sugar industry because the tax immediately forced sugary drink manufacturers to reformulate by dumping sugar and boosting use of alternative sweeteners. Sugar industries elsewhere may also be vulnerable to a sugar tax, especially those which rely to any significant extent on their domestic market and have yet to embrace diversification opportunities.
A tax on sugary beverages in South Africa went into effect in April 2018, slashing sugar use by the beverage sector. Adding to the pressure, in February 2019, the Minister of Finance announced a 5% increase in the tax on sweetened beverages from 2.1 cents to 2.21 cents per gram of sugar content that exceeds 4 grams per 100 ml. The “sugar tax” impacts both domestic and imported beverage products equally. The Health Promotion Levy adds 2.1cents per gram of sugar over 4g 100ml, representing an estimated 11% price increase on a standard can of Cola.
According to the Beverage Association of South Africa (BevSA), the beverage manufacturing sector has undertaken several measures to either avoid or minimize the impact of the sugar tax via “low” or “no” sugar products, reducing packaging sizes, and reformulating products to reduce the sugar content by combining with other sweeteners, including artificial sweeteners. The reduction in sugar usage by the beverage sector is calculated by the South African Sugar Association and South African Canegrowers Association to be over 30% (200,000 tonne) since April 2018.
The beverage sector has also reported a reduction in demand of some re-formulated products, and gradual uptake of newly introduced products, as consumers have been slow in adapting to these new tastes and products. Decreased demand may also be due to the growing anti-sugar sentiments and awareness that high sugar consumption is linked to obesity, diabetes, stroke and heart diseases.
As a result, the beverage industry has reported that the sugar tax could result in massive job losses. Recently a media outlet reported that Coca-Cola Beverages South Africa intends to retrench over 1,000 employees due to reduced production caused by the sugar tax.
South Africa’s sugar industry is not well placed to adapt to such a catastrophic slump in local sugar demand. Over recent years it has been struggling with low margins, low global sugar prices, competition from imports, and frequent droughts. So far, there has been little potential to diversify away from sugar into the production of biofuels (fuel ethanol), biogas, biomaterials (plastics), or the cogeneration of electricity from cane bagasse, as the government has yet to introduce sufficiently supportive measures and policies to convince the industry to take a wholesale plunge into green energy and bioproducts.
Looking ahead, the extent and success of adaptation and structural change over the medium to long term in response to the viability challenges the sugar industry is facing – in part due to the “king-hit” of the sugar tax - will significantly depend on the level and nature of government support. In particular, the industry’s fortunes will be dictated in considerable part by whether or not the government commits to providing sufficient incentives for the sugar industry to diversify away from sugar, particularly into green energy. With sufficient incentive, milling companies can embrace new technologies for sugarcane and conversion pathways. Energy cane, with yields up to twice those of conventional sugarcane, and second-generation conversion plants, which can produce ethanol not only from the sugar portion of the cane but also the bagasse and trash, are two key technology vectors that can potentially boost commercial viability.
Authors note: Material has been drawn from USDA: GAIN Report Number SA1904, South African Sugar Industry Crushed by Not So Sweet Tax , 3 May 2019.