Mathematics

Crystallising Australia’s sugar flow into Asia

Asian consumers are increasingly hungry for sugar, but Australia’s sugar industry will
need to focus on productivity improvements and market access if it is to continue to
effectively compete in these key export markets, according to a report.

The report, Crystallising the Sugar Flows in Asia, by agribusiness banking specialist
Rabobank, says Australia’s sugar industry is heavily reliant on strong demand out of
Asia, with our export industry relying on the gap in sugar production and consumption in key Asian markets for decades.

Accounting for 90 per cent of Australia’s raw sugar exports, Asian markets will continue to present medium-term growth opportunities, the report says, with the structural gap between production and consumption expected to widen by more than four million tonnes over the next decade.

Report co-author, Rabobank commodity analyst Georgia Twomey says the supply gap in Asia is critical to the future of Australia’s $1.3 billion sugar export industry, however increasing export volumes out of Brazil and Thailand have seen competition in key Asian markets intensify over the past 15 years.

While the outlook for Asia’s consumption growth is positive, the report says Australia’s four largest sugar markets – Korea, Indonesia, Japan and China – are all characterised by different growth patterns and government policies.

“On face value, Indonesia has the strongest growth potential for Australian sugar, with consumption expected to increase by an annual rate of 3.5 per cent over the next
decade – however market access currently sits as an obstacle to the potential there,” Ms Twomey says.

While China offers some, albeit constrained, scope for export growth for Australian
sugar, Ms Twomey says it will continue to absorb large volumes of Brazil and Thai origin sugar, creating opportunities for Australian product in other markets.

“Meanwhile, while consumption growth is likely to slow in the more mature markets of Korea and Japan, the strong market share held by Australia (particularly for product with specific quality demands) together with consistent import demand should see us retain, if not grow, market share,” she says.

Driving competitiveness through productivity

The Rabobank report says the world’s two largest exporters – Brazil and Thailand –
account for more than half of the world’s sugar trade, with output increasing substantially  due to capacity expansion and productivity gains – albeit, the rate of growth has slowed.

“After almost doubling milling capacity and cane production over the 10 years to 2010, Brazil’s production of cane has shown only a modest rise,” Ms Twomey says. “While sugar is currently more remunerative than ethanol, and even if sugar prices remained around current levels, it is unlikely that we will see a substantial amount of investment in the Brazilian milling sector, at least.”

Meanwhile in Thailand – which competes more directly with Australia in key export
markets – production and exportable surplus is expected to increase, Ms Twomey says, as the Thai government focuses on the expansion of cane acreage and mill
infrastructure.

Ms Twomey says in comparison, Australia’s production has stalled under the weight of disease and weather events.

“Potential for growth in supply in Australia, and indeed in maintaining export
competitiveness is reliant on continued productivity improvement – as the yield gap with our competitors has closed significantly over the past few decades,” she says,
“highlighting the need for R&D into new cane varieties, efficiency gains and soil health.”

Putting a price on free trade

In addition to productivity growth, the report says “market access and a level playing field for tariffs” will be critical for the Australian industry if it is to maintain competitiveness into Asia.

“Since 2013, Australia has negotiated free trade agreements with three of its four largest sugar markets and, although they have fallen short of meeting the industry’s demands, they have resulted in improved market access into Japan, and in the case of Korea brought Australia back to a level playing field with Thailand,” Ms Twomey says.

“It is a different story in Indonesia, with the ASEAN AEC placing Australia at a trade
disadvantage to Thailand, and this is expected to see Australia’s exports into Indonesia fall significantly in 2016.”

Ms Twomey says while trade agreements, along with consumption growth and
production shifts in destination markets would largely dictate Australia’s trade into Asia, the sector also needs to increasingly adhere to sustainability standards – as regulators and customers increase demands on the industry to minimise its environmental footprint.

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