Moreland’s dream was kept alive by another English settler, WJ Mirrlees, who merged his company with Edward Saunders’s Tongaat Sugar Co in 1892. And it’s that sugar firm — once the largest in Africa — which is a disaster zone today.
Tongaat Hulett has been in business rescue for eight months. In recent days business rescue practitioners (BRPs) Peter van den Steen, Trevor Murgatroyd and Gerhard Albertyn released their “rescue plan”.
The plan includes shrinking Tongaat’s costs, but the bottom line is that to stay afloat it needs a deep-pocketed investor. The good news is it has shortlisted eight “strategic equity partners”, who will submit final offers this month.
It’s all very hush-hush, but the FM understands they include large foreign industrial firms, partnering with local sugar cane growers. Fingers crossed, Tongaat will survive — vital for 500,000 people in KwaZulu-Natal who depend on it.
But the most revolutionary idea lies in an innocuous annexure to that plan, titled “sugar industry considerations”. Here, the BRPs target the outdated structure of South Africa’s sugar industry, described by one critic as “badly implemented socialism”.
Make no mistake: Tongaat’s travails aren’t entirely due to the way the industry is structured. An existential R12bn fraud (for which former CEO Peter Staude is facing charges) nearly wiped it out, while the 2015 sugar tax and 2021 KwaZulu-Natal riots didn’t help. But if people and companies perform according to incentives, it’s no wonder the sector is in such a mess.
The industry is made up of 23,000 sugar cane growers who deliver cane to six milling companies, dominated by Remgro’s RCL Foods (in Mpumalanga), Tongaat Hulett (in northern KwaZulu-Natal) and Illovo Sugar (in southern KwaZulu-Natal). Those millers take the raw sugar cane and crush it into a syrup. But to get to those neat packets of sugar you get on your table, another step is needed, where that raw sugar is then refined.
They’ve been talking about it for years, and nothing has happened
But it’s the anachronistic “profit sharing model” through which the South African Sugar Association (Sasa) runs the industry that is under fire.
The way it works is that Sasa “pools” the collective proceeds from sugar sales, which it redistributes according to a formula: growers get 64% of this money, while 36% goes to the millers, divvied up according to their share of sugar production.
But as the industry battled — sugar production fell 25% and the number of sugar farmers decreased 60% over the past two decades — this “redistribution mechanism” led to increasingly perverse outcomes.
For one thing, only a few millers have the capacity to refine sugar, with Tongaat the largest (it can refine 600,000t a year, two-thirds of all the sugar sold locally). Yet all the millers are allocated a pro rata share of the refined sugar revenues, with Tongaat (and other refineries) paid a “manufacturing allowance”.
The BRPs explain: “Where a sugar miller sells sugar in excess of its proportional local market entitlement, and is thus an ‘overseller’, it is required to pay Sasa an amount for this excess sugar sold [which is then] redistributed to sugar millers who have sold less than their entitlement, who are undersellers.”
Tongaat, given its refining capacity, has been an “overseller”, as was Gledhow Sugar Co, which is also now in business rescue, as the “redistribution payments” it had to make played havoc with its cash flow. True, it did get a “manufacturing allowance” — but not enough to cover its costs.
“This skewed redistribution mechanism of overselling millers redistributing proceeds they have earned on the local market to underselling millers, with a quid pro quo of a manufacturing allowance that is non-remunerative, is partly demonstrated by both the primary large overselling refining millers now being in business rescue,” say the BRPs.
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This is why, they say, the industry must be overhauled.
So why hasn’t it happened? A cynic might say this is because most of Sasa’s members benefit from this arrangement.
Asked by the FM, Sasa executive director Trix Trikam says the industry “had been discussing restructuring, with a task team mandated to oversee the process” since November 2020, when the sugar “master plan” was signed.
Though Trikam says “progress has been made” (apparently, another task group has been formed), it sounds a lot like an association that wishes it was located inside the slow-burn task team factory of the Union Buildings.
Some insiders aren’t confident Sasa will do anything — “they’ve been talking about it for years, and nothing has happened”, says one.
So what could be done? One option, an executive tells the FM, is to phase out this redistribution mechanism over, say, five years. In that time, Tongaat and its peers could negotiate a “toll fee” to refine sugar for the underselling millers. “That would allow companies like Tongaat to charge a fairer fee for the work they do, while ensuring all parts of the industry can operate sustainably,” he says.
To others, this sounds like rearranging the deck chairs on the Titanic.
Wandile Sihlobo, chief economist of the Agricultural Business Chamber of South Africa, says while the sugar industry is in need of a structural overhaul, this isn’t its big problem.
“The big issue is demand. Consumption patterns have changed, especially with the sugar tax, so we need to talk about how to stimulate demand for sugar on the industrial side — pivoting the industry to biofuels,” he says.
Either way, the BRPs hope Tongaat’s plight may be the “tipping point that can finally get everyone in the industry to sit up and work together to adapt”.
Ignoring this crisis would be catastrophic, they say.
“Ultimately, Tongaat’s sugar mills provide the refinery with a supply of high-quality raw sugar for refining, and it is critical that the refinery continues to operate, to avoid the need for refined sugar to be imported into South Africa,” say the BRPs.
Given how hard the sugar industry has worked to establish itself, that would be an own goal of alarming proportions.
