What Next For Kenya’s Beleaguered Sugar Industry?
Kenyans love sugar.
The East African country has one of the highest per-capita consumption rates in Africa — about 400 grams per week, or the equivalent of around ten 12-ounce cans of Coca Cola. It’s also a sugar producer, so you would think the price of the sweet stuff would be acceptably affordable.
Unfortunately, that isn’t the case.
“It’s no exaggeration to say that the sugar sector in Kenya is in crisis,” says Edward George, head of group research at Ecobank.
The problems start in the fields. Kenya’s sugar fields have half the productivity of Zambian and Malawian sugar producers, and crops take about 50 percent longer to harvest. A reliance on rain for irrigation contributes to the instability, as there’s nothing a grower can do to make up for a bad season.
Sugar millers are in a similarly difficult spot. Aging factories and a high concentration of mills in particular regions have led to widespread maintenance shutdowns and fierce competition for sugar stock among millers.
“The problem with the mills is that there are too many in an area producing sugarcane and they’re basically fighting over feedstock… Management has been a problem, very often all of the mills will go into maintenance at the same time, so you’ll get a drop and then a surge [in production], and there’s what we call cane poaching, which is really actually very aggressive buyers going into areas where they’re not authorized to and buying the cane there, which has been pledged to someone else.”
The simultaneous shut-down of plants for maintenance also causes problems. “Earlier this year we had four companies all closed for maintenance,” says Joseph Rohm, portfolio manager for Investec Asset Management’s Africa public equities fund. “One of those was Mumias Sugar, which produces about 60 percent of Kenya’s domestically produced sugar… So there was a spike in prices and a scarcity in sugar, and imports increased again.”
These problems are compounded by the sector’s importance. “It’s a big employer of people and a big contributor to the economy,” says Rohm, who notes that sugar directly and indirectly supports up to 25 percent of the Kenyan population.
Thus, the Kenyan government has taken great pains to help the industry, partly by trying to improve the competitiveness of farms themselves. Rohm says that Kenya’s strategic plan for the industry was one such effort. “One [area of the plan] was to iprove the competitiveness of the farms themselves, with harvesting, and improving the product base, to incentivize co-generation, to make ethanol and other sugar products,… and lastly, to have better control of imports.”
It was, in other words, an ambitious plan. Unfortunately, it has thus far had little effect.
In October, Kenya bailed out several large mills to help pay off debts to growers. While Kenya’s contribution to the country’s biggest mill, Mumias Sugar, remains undisclosed, the company has reportedly sought about $11 billion to settle debts in this year alone.
“Many other sugar producers have developed in the last 20 to 30 years which are much more efficient… So Kenya is trying to protect its sector while it reforms it. Unfortunately, we’re at the stage now where because of the problems in the sector that most of the milling companies are bankrupt, the big existing private one is struggling, and there’s a real question mark over the future of the sector.”
Given the severity of the situation, the government’s move has been criticized as a stopgap measure. Between inefficient and costly production, regional concentration, and a lack of irrigation, the industry’s structural problems will require more than just debt settlement.
End of COMESA Safeguards
It’s a problem because the exemptions afforded to Kenya under COMESA, a regional trade pact, are set to expire next year. This will institute free trade rules within the region, and considering Kenya’s lack of competitiveness it could put the industry into serious distress.
The reforms needed are radical and politically costly. Sugar is a major employer in the nation, and reform would almost certainly need to involve consolidation to take advantage of economies of scale and reduce inefficiencies.
“What needs to happen is consolidation, but that of course means probably shutting some of the mills, and there are huge implications there, politically, socially, jobs, etc. So it’s a very difficult situation to turn it around,” explains George.
So what’s next? With the expiration of COMESA exemptions, Kenya’s sugar growers and millers could find themselves in deep distress.
“There is a huge opportunity in Kenya. It’s understandable that many investors have chosen not to invest in the sugar mills there because of the current situation, but government is attempting a whole series of reforms so let’s see what happens. There’s no doubt that Kenya should be a very important sugar producer in Africa.”
It’s a prospect that carries a certain amount of opportunity for those with the wherewithal to take on the risks, but many investors might instead choose to observe from the sidelines.