SWEET DREAMS: MOZAMBIQUE'S SUGAR INDUSTRY GROWS

UNCLAS SECTION 01 OF 02 MAPUTO 000958

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EAGR ETRD ENRG ECON EPET SENV
SUBJECT: SWEET DREAMS: MOZAMBIQUE'S SUGAR INDUSTRY GROWS


1. (SBU) SUMMARY: The Mozambican sugar industry is a
significant employer and is expected to double production
over the next three years, targeting duty-free access to the
EU via the Everything but Arms (EBA) initiative. Ethanol
production is under consideration, and may provide a
complementary product to refineries and growers alike, as a
means of hedging against future drops in worldwide sugar
prices. The domestic sugar market is protected by high
tariffs and will remain so until 2012, at which point
Mozambique's sugar industry will face steep competition from
neighboring South Africa, Swaziland, and Zimbabwe. The Port
of Maputo Port continues to benefit from increased South
African and Zimbabwean sugar exports via the Maputo Corridor.
END SUMMARY.

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OVERVIEW OF MOZAMBIQUE SUGAR
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2. (U) Mozambique's sugar production continues to expand to
meet export requirements, principally for the EU. Mozambique
competes with neighboring producers South Africa, Swaziland,
and Zimbabwe; producing an excellent grade of raw sugar
through a 9 month growing season of April to December.
Large-scale sugar production began again in 1999 following
the cessation of the civil war in 1992. Currently the
industry is controlled by a single-desk seller, Acucar
Nacional, the national sugar board which controls the
purchasing and export of the product and manages domestic
supply ensuring that all surpluses are exported, while
closely controlling the domestic sugar price.

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INDUSTRY SUPPORTING RURAL EMPLOYMENT AND SMALL GROWERS
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3. (U) There are three main multi-national companies
involved in the Mozambican industry, and only four raw
sugar-producing refineries in Mozambique (Maragra, Xinavane,
Sena, and Mafambisse). The sugar industry is a significant
rural employer, with a current work force of roughly 27,000.
The industry is also actively supporting small cane growers
who on average hold acreage of about 1/4 hectare and do not
have access to traditional financing. As such, Mozambique's
mills are providing financial support, fertilizer, and access
to machinery, as well as providing expertise in crop
planning. Supporting small growers has added spin-offs for
local communities, with increases in small grower food
production which contributes to rural development.

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SUGAR PRODUCTION GROWING TO MEET EU DEMAND
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4. (SBU) Last year, Mozambique produced 240,260 tons of raw
sugar, and expects to produce nearly 270,000 tons in 2008.
Fifty percent ($65 to 70 million dollars worth) is exported,
mostly to the EU. No Mozambican sugar was exported to the
United States in 2007 due to pricing and transportation
costs, which make Mozambican sugar uncompetitive in U.S.
markets. The country does currently export to East Africa,
Pakistan, and Indonesia; however, thanks to the
liberalization of the EU markets, Acucar Director General
Robert Dean told Econoff on October 2 that he believes the EU
will become the sole market for Mozambican sugar exports in
the near future.


5. (U) Because of tariff liberalization in the EU, the
sugar industry expects to double production to 500,000 tons
over the next three years, creating 3,000 new jobs.
Mozambican sugar will begin entering the EU duty free in
January 2009 via the "Everything but Arms" (EBA) Initiative,
which allows duty free imports into the EU from Least
Developed Countries. Despite recent drops in the price of
sugar on the EU market and rising transportation costs, the
EBA allows Mozambican sugar to be competitive, thanks to the
elimination of duties. As a result of the EBA, the industry
has carried out some $610 million in improvements, expanding
both processing capacity and arable land under cane
cultivation.

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INDUSTRY PUSHES FOR ETHANOL, SUPPORTS SMALL GROWERS
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6. (SBU) Backed by the GRM, which is interested both in
employment generation and greater energy independence, Dean
told Econoff that the sugar industry is planning to begin
biofuel production, specifically in cane-based ethanol.

MAPUTO 00000958 002 OF 002


While profitability concerns still exist, ethanol production
(which could take place in existing sugar refineries) could
prove to be a useful hedge against future drops in the price
of sugar on world markets. Currently there is no port-based
infrastructure to handle potential ethanol exports, but GRM
plans appear to be focused on using ethanol primarily in
domestic markets.

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MOZAMBIQUE'S TARIFF REGIME AND SADC LIBERALIZATION
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7. (U) While the industry is increasingly more efficient,
variable import taxes protect the Mozambican sugar industry
from import-led competition--protection which will continue
until 2012, despite SADC tariff liberalizations. Currently,
if greater competition were introduced into the market, it is
estimated that half of the refineries would close. After
2012, Mozambique expects competition from South African,
Swazi, and potentially Zimbabwean sugar in the domestic
market. Without additional protection from more
efficiently-priced SADC competitors, or significant increases
in competitiveness, Mozambican sugar could face a bleak
post-2012 future.

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MAPUTO PORT BENEFITING FROM S. AFRICAN AND SWAZI SUGAR
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8. (SBU) Roughly 135,000 tons of Mozambican sugar flows
through the Port of Maputo per year, exported in bulk. The
port, and the Maputo Corridor which leads to the border with
South Africa has also become a convenient export point for
South African and Swazi refined sugar, accounting for 80,000
and 85,000 tons respectively of (non-bulk) bagged sugar from
Maputo in 2008. The Port's bagged sugar operations employ in
excess of 90 people in a new $3 million warehouse with a
capacity of 27,000 tons. While theft at the Port used to be
a major problem, increased security under the management of
DP World means that average annual theft has dropped to only
1.4 tons per year. As SADC sugar production continues to
take advantage of new access to the EU market, Maputo Port
will likely continue to benefit from the transit of southern
Africa sugar exports.

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COMMENT: SHORT TERM EXPORT-DRIVEN SUCCESS POSSIBLE
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9. (SBU) Mozambique's sugar industry expects continued
export-led growth thanks to the EU's EBA initiative in the
short term. If Mozambique does not introduce greater
efficiencies and increase its competitiveness however, it
will likely see significant losses of domestic market share
from SADC competitors after 2012, negatively effecting rural
employment. Maputo Port however, should continue to profit
from South African and Swazi sugar exports as the EU and
other large markets liberalize tariff and non-tariff
barriers. The viability of sugar-based ethanol production in
Mozambique, a country with vast expanses of unused arable
land, is theoretically possible; however, profitability is
still in question. If large scale cane-based ethanol
production becomes feasible, it may be a key to success for
Mozambican sugar, rural employment, and the country's goal of
energy independence.
Amani