The economic feasibility of producing ethanol from sugar-cane in South Africa.

Abstract

The study is an evaluation of the economic feasibility of producing ethanol from sugar-cane in South Africa. With the depressed state of the sugar market and recent substantial increase (40% in January 1985) of liquid fuel prices linear patterns in South Africa, the study is of a topical nature. A regional linear programming model is used which simulates current production patterns in 22 areas of the South African Sugar Industry. The model incorporates demand functions for crops, substitution in demand between crops, supply functions for labour and variance-covariance matrices to account for risk in production. The model is used to evaluate the effects of alternative sugar policies, namely a pool scheme and a free market for sugar, with particular emphasis on ethanol production. Results show that the total ethanol cost (including opportunity cost) per litre in an industry producing one billion litres a year was over twice the refinery-gate or pre-tax petrol price around 1979/80 but similar to the pump price of petrol. More recently (1985) petrol prices have increased relative to ethanol costs due to the weakening of the rand against other major currencies. Ethanol costs are now (1985) about 25% above the refinery-gate petrol price and below the pump price of petrol. SASOL's petrol costs at present appear to be similar to fuel costs based on crude oil and below ethanol costs (from sugar). For new SASOLs the capital cost is expected to increase substantially due to the relatively weak rand. This may make ethanol production from sugar-cane more competitive. A strong positive correlation is evident between sugar-cane production and labour employment. With a subsidized billion-litre ethanol industry labour employment is estimated to increase by 45 000 (34%) under a pool scheme and by 25 000 (19%) under a free edible sugar market compared with current employment. Development costs per worker are estimated to be about R30 000 compared with over one million rand per worker for a new SASOL plant. In a free market the area under sugar-cane is estimated to decrease by about 50% and labour employment by 26%. Areas moving out of cane production include Pongola, Hluhluwe, Nkwaleni Valley, Tala Valley, Umfolozi Flats, Zululand hinterland, South Coast, Natal Midlands (North and South). No sugar would be exported. The local equilibrium sucrose price is estimated to be about 9% below the producers' price under the current policy (that is, up to and including the 1984/85 season) and 17% below the A - pool producers' price under the pool scheme. Social costs of the current policy are estimated as 6.8% of total sucrose value compared with 4.7% under a pool scheme with A - pool quotas transferable only within Mill Group areas and 2.3% where A - pool quotas are transferable between regions. Ethanol production would add to social costs.