Reports

Impact Of Industry Structure On Pakistani Companies: Sugar Industry

by Ravi Magazine · Published 1st December 2016 · Updated 1st December 2016

sugarcane

The sugar industry is a fully regulated industry with its share of subsidies and support prices granted by the government. Due to the excess of regulations by the government, be it for the development of the industry, sugar industry has suffered. The suffering is due to the fact that the growers do not invest in the sugarcane production as they would get the price through the flat rates set by the government. Most of the variety grown in the Punjab region is the Indian variety which formed almost 70% of the cane grown in the upper Punjab region.

This variety has totally degenerated and was so diseased that in some mills of Punjab the average annual recovery has gone down to almost 6.5% making the mills sick. The reason for this continued deterioration is that there is no incentive for the sugarcane growers to improve the quality of their cane. The government fixes a flat rate per 40 Kg. For the cane and the growers get this guaranteed price irrespective of the quality of the cane. Thus the grower supplying cane with a recovery of 4% will be getting the same price as the grower with cane recovery of 10%.

The Pakistan Sugar Mills Association is of the opinion that the growers should have some reward for the growers of good quality cane in order to discourage the growth of bad quality cane. Despite being the tenth largest sugar producer in the world, neither the industry nor the farmers are satisfied with the current situation.

Sugarcane and other regulated inputs form almost 90% of the price of the sugar. The prices of these are fixed while the price of sugar is not. This anomaly has caused distortions and losses to the sugar industry.

The pressured from the authorities to pay the growers outstanding dues promptly has forced the industry to make distressed sales to raise funds since the banks are imposing unnecessary and hostile conditions for releasing the working capital.

The industry in turn has taken advantage of the economic power it holds over poor growers to deny them payment for their crops, sometimes up to three years at a time.

During the last two decades, political influence was employed by some well-entrenched sugar industry moguls to waive the previous policy restricting the number of sugarcane mills in conformity with what could be considered a viable catchment area.

Nevertheless, it would be in the interest of the industry and the economy as a whole if the government were to find rational solutions for these anomalies and problems so as to strike a balance between the interests of both the farmers and the sugar mills.

The impact on the industry has been the same with Fecto Sugar Mills Limited and Baba Farid Sugar Mills both incurring losses and their share price dwindling to a mere Rs.6 and 7 respectively. Fecto Sugar Mills Limited did produce a record amount of sugar due to a bumper crop however Baba Farid Sugar Mills could not achieve greater productivity due to the low sucrose recovery which is because of the inherent problem in the system.

TECHNOLOGICAL ELEMENT AND IMPLICATIONS ON THE COMPANIES:

Efforts have been made to incorporate both technological changes in the production processes of both the mills to bring them in line with the current and latest technology. The boilers first used were of 18-ton pressure and 40-ton pressure which has now been changed to 80-ton pressure. Bagasse, a by product is not only being used as a fuel for the boilers but also as a raw material for the Fecto Bemisal Board Industry where MDFB or medium density fiber boards are being made which is directly competing in the market with Lasani Wood, a leading and a known name in the market.

Abiding to the pollution control laws prevalent in the industry, a Fly Ash Removal System is also being installed so that the spread of the soot particles, which may cause health problems are completely eliminated.

Fecto Sugar Mills Limited and Baba Farid Sugar Mills both are using polypropylene bags of 50 Kg for packaging. Export bags require a transparent lining of a specific colour. Both the above packagings are food-graded.

The sugar production process is the same as the one used in the other mills. The process involves the following steps:

washing the sugarcane received by the farmers
crushing the sugarcane under giant rollers
filtration of the sugarcane juice
heating and evaporating of the sugarcane juice for saturation
treating the limestone for removing impurities
sulphating process to whiten the sugar
crystallization through centrifugal system
sorting of sugar by size
storing the sugar in the godowns.

ECONOMIC ENVIRONMENT AND IMPLICATIONS ON THE COMPANIES:

GOVERNMENT REGULATIONS:

The sugar industry is the second largest industry in Pakistan. The industry has remained highly regulated as the government’s sugar policy is driven by political considerations and economic realities have often been ignored.

There are restrictions on setting up a new sugar mill, because of a high number of sugar mills and the large installed capacity. The Government has given some powers to PSMA (Pakistan Sugar Mills Association) to coordinate with the Government for allocating import and export quotas to selected sugar mills. The Government has also lifted the zoning system and now sugar mils can acquire sugarcane from any part of the country.

The production was acquired by the Government at a fixed price and sold to through their own distribution systems till 1983 which was a cumbersome process and it was also difficult to get the sugar from the various inefficient public distribution systems. Quotas were fixed and per capita sugar consumption was restricted to 10 Kgs.

The process of deregulation started in 1983 when the Government allowed free sale of sugar. By 1994-95, per capita consumption had reached 20 Kgs. And the utilization of canes factories increased by 75%.

SUGARCANE POLICY:

The Government raised the support price for sugarcane crop in the Punjab and the NWFP from Rs.24 per 40Kg and for Sindh and Baluchistan from Rs.24.50 to Rs.35 and Rs.36 respectively for the 1997-98 crop, thus giving an increase of 46 and 47% in the order mentioned.

While announcing the price policy, the authorities did not give any background justification or the objectives to be achieved through the implementation of these policies. But it could be guessed that this rise in price of such a high order in one-go seems to have been dictated by the necessities to increase sugarcane and thus sugar production so that it should not only help eliminate the input of sugar, a phenomenon occurring each year, in order to save foreign exchange but also to enter into the export market provided surplus sugar over the domestic demand becomes available.

As a result of such lucrative incentives provided to the sugarcane growers, the showed, positive response by increasing their area under the crop by 11% approximately.

Punjab 13.5%
Sindh 4.2%

Because of this expansion in area and favorable weather conditions during the crop growth, the production of sugarcane registered an increase of 26.4% from 42m tons in 1996-97 to 53.1m tons in 1997-98—the highest production ever recorded. Sugar production resulting from large sugarcane production also set a record, reaching the level of 3.55m tons in 1997-98, an increase of about 27% over the previous year. Thus the country became surplus by about 700,000 tons.

With the expected domestic demand of about 2.8m tons. As the price in international market plummeted considerably, the mill owners found themselves in a dilemma to export their output as they were unable to compete in the international market. PSMA pressurized the Government to provide enough subsidies to make it worthwhile to export sugar. The Government therefore allowed a subsidy of Rs.4,500 for every ton exported. It is reported that by October 31, 1998 that is the end of the sugar season about 590,000 tons of sugar was exported. This means that the Government exchequer has paid subsidy of about Rs.2,655 million. The year end stocks with the mills were reported to be 2,250,000 tons. This unprecedented rise in support price of sugarcane, though helped the expansion of sugarcane and of sugarcane production, had adverse effects also. The expansion in sugarcane cultivation took place at the cost of other competing crops, which compete, directly for land, water and labor. Cotton is the most important of these crops especially in Punjab most of the area that has been brought under sugarcane cultivation is at the cost of cotton. In 1997-98, 190,000 hectares as compared to the previous year reduced the area under cotton. As the requirement of water for sugarcane crop is about 2 to 2.5 times to those of cotton, the sugarcane planted on additional area in Punjab over the previous year was limited by the availability of water that was saved from the use of decreased area under cotton.

In Sindh, practically number area under cotton seems to have been diverted to sugarcane but it seems that the increase in sugarcane area was at the cost of rice area, which showed the decline almost of the same order as the increase in the sugarcane area. However it is very necessary to analyze whether the export earnings and foreign exchange savings through import substitution of sugar has compensated the loss incurred through less production of cotton and thus export earnings.

For the 1998-99 crop, the Government did not change the sugarcane support price. It was applicable for the 1997-98 crop. Despite the problem faced by the farmers, the area under sugarcane in 1998-99 further increased by 9.3% over the previous year and reached the level of 1.15 million hectares. Mainly this increase was due to remunerative prices the farmers were expected to receive and also because the cotton crop was considered rather risky because of the fear of disease and insect attack. However, due to lack of rainfall during the crucial growth period of sugarcane crop, the yield at the national level decreased by 5.6% with the result that the total production increased only by 3.3%, 54.85m tons against 53.1m tons.

By the beginning of the sugar year that begins on November 1, 1998, the sugar mills had an inventory of about 225,000 tons of sugar with them. In view of this stock position and the expectation of the large crop, the sugar mills delayed the crushing of sugarcane. In Punjab, all but four of the 39 mills started crushing after 20th November. Similarly in Sindh, out of the 29 mills, all but one started crushing in the second week of November. In 1998, the two started as late as first of December although all of these were supposed to start in the middle of October at the latest. While this late start of crushing, the farmers would not get their land vacated in time for planting their wheat.

It is expected that though the production of sugarcane in 1998-99 is larger than the last year, the production of sugar might not touch the same level. After meeting, the domestic consumption of 2.9m tons, there would be a surplus of about 70,000 tons. The indicators are that the price in the international markets are showing a decreasing trend with the situation, the subsidy involved would not be greater than Rs.4,500 per ton of sugar.

SUGAR TRADE POLICY MOVES:

Proper advance planning be made in consultation with PSMA for smooth disposal of sugar to be implemented in the ensuing season.

Exportable surplus be earmarked well ahead of the commencement of the crushing campaign and the sugar industry be authorized to make advance sales transactions which is the norm governing the global sugar trade.

Efficient infrastructure support be created and required resources be mobilized in facilitation of the sugar exports.

Raising sugar import duty and relevant levies structure at regulatory level above the payments applicable on domestic sugar production at the federal, provincial and the local levels. This will lay down proper operational scope which is a prerequisite keeping in view the tight cost jacket of the national sugar industry.

Sugar industry be ensured a fair market price keeping in view its production cost plus economic return on equity as sugar production cost is influenced to the extent of about 80% by the Government policy framework. Sugarcane costs sales tax and the central excise account for as much as 72% of the cost of sugar production.

The sugar imports, if required, to be lined and to enter in after a reasonable interval to the end of crushing spell by the national sugar industry.

COMPETITION:

The sugar industry is a perfectly competitive industry, with number player actually dominating the market or its prices. The production of sugarcane in recent years has not been promising. The installed capacity of the 78 sugar mills in Pakistan is about 53.1m tons, whereas the highest production of sugarcane was seen last year at about 42m tons. Even, out of that, almost 30% was utilized for seeds and ‘gur’, leaving about 29m tons for sugar production. Hence there is a tug of war for the procurement between the sugar mills. This is the reason why Fecto Sugar Mills Limited and Baba Farid Sugar Mills are facing stiff competition in sugarcane procurement. The following table gives the comparison of the various competitors of the companies:

MILLS	MARKET SHARE (%)
Al-Noor sugar mills	1.35%
Habib sugar mills	1.4%
Dewan sugar mills	2.86%
Baba Farid Sugar Mills	1.4%

MILLS	CANE CRUSHING (ton)	CANE CRUSHING
Al-Noor sugar mills	557,699
Habib sugar mills	586,307
Dewan sugar mills	1,036,314
Baba Farid+Fecto	831,287

MILLS	RECOVERY RATE
Al-Noor sugar mills	8.5
Habib sugar mills	8.84
Dewan sugar mills	10.32
Baba Farid+Fecto	7.39

MILLS	SUGAR (tons)	MILLS	MILLS
Al-Noor sugar mills	47,355
Habib sugar mills	51,745
Dewan sugar mills	106,900
Baba Farid+Fecto	97,297

MILLS	CAPACITY UTILIZED(%)
Al-Noor sugar mills	204%
Fecto Sugar Mills Limited	73%
Habib sugar mills	73%
Dewan sugar mills	111%
Baba Farid Sugar Mills	93%

MILLS	EXPORT (tons)
Al-Noor sugar mills	NA
Habib sugar mills	40,755
Dewan sugar mills	57,697
Baba Farid+Fecto	18,717

Source: Annual accounts and VIS

The above figures show that the performance of Fecto Sugar Mills Limited and Baba Farid Sugar Mills are not very promising although they have undergone a BMR restructuring in the recent years. They should therefore be on the lookout for competitors vying on their little market share of 0.7% each and should try to grab a little more market share so as to become stronger companies.

BY-PRODUCTS OF SUGAR—- EQUALLY LUCRATIVE ???

In Pakistan, the utilization of sugar by-products has received almost number attention. It is estimated that if these by-products were utilized fully, Pakistan would be able to earn about $300m annually. The main by-products of sugar industry are:

Molasses
Bagasse
Filter press cake

These products are obtained in varying proportions that range from around 3.5 or 4% for molasses, 25-30% for bagasse and 3-8% for filter press cake of the total quantity of cane crushed in a mill. The following table gives an estimate of the quantity of molasses produced over several years.

Molasses is a dark colored heavy liquid from which number further sugar can be crystallized by regular methods. It is mainly an agricultural product. The main types of molasses are:

cane molasses accounts for about 60% of the total world supply of molasses. It is mostly used for livestock feeding.
Beet molasses is used mainly in the production of yeast, citric acid and other fermentation products.
High test molasses.

Beet molasses has more total sugar than cane molasses. Molasses is used in the fermentation industries for the production of ethyl, alcohol, denatured spirits, rum, yeast, fertilizers and for livestock feeding all over the world. In Pakistan around 70% of the molasses produced is exported. The remainder is used for industrial alcohol and poultry feeds.

Bagasse production amounted to

1991-92 1,243,000 tons

1992-93 1,217,000 tons

1993-94 1,421,000 tons

1994-95 1,461,000 tons.

In the developing countries, bagasse is mostly used in the sugar industry as fuel for the boilers as is the case with Fecto Sugar Mills Limited and Baba Farid Sugar Mills and many others. Other uses of bagasse are:

processing it to make hard boards, cartons and chip boards
as a raw material for Medium Density Fiber Board.
And using this MDFB to make light furniture.

PRODUCTION AND EXPORT OF MOLASSES

YEAR	PAKISTAN	SINDH	PUNJAB	NWFP	EXPORTS
1993-94	1,694,852	676,790	972,827	45,235	1,329,921
1994-95	1,650952	592,068	1,010,891	47,995	1,309,044
1995-96	1,361,471	503,692	821,298	36,481	1,029,768
1996-97	1,313,745	482,636	798,448	32,661	1,056,134

Source: PSMA Annual report 1996-97

SUGAR IMPORTS:

In the year 1994-95, the imports of sugar amounted to 5,188 tons involving an outlay of 68.76 billion rupees. There was a slight decrease 1995-96, with imports falling to 3,480 tons at a cost of 54.3 billion rupees. In 1996-97, however, there was an unprecedented increase in the quality of imported sugar to 624,645 tons costing Rs.9.13 billion.

By following a liberal import policy simultaneously with efforts to intensify sugarcane crushing, the Government disrupted the normal economies enjoyed by the sugar mills and in doing so, threaten their very survival.

REASON FOR IMPORTS:

Sugar industry suffers from an acute short supply of raw material. This does not allow the mills to work at an optimum capacity unless efforts are made to double the sugarcane production. The strategy to provide farmers an incentive to grow more sugarcane by increasing the support price of sugarcane has failed to increase output.

Besides low production, another reason for the low supply of sugarcane is the tendency among big growers of sugarcane to grow ‘gur’ instead. Due to an increased demand in rural areas as well as in Afghanistan and central Asia, ‘gur’ has become increasingly attractive. The PSMA has suggested the imposition of excise duty on ‘gur’ production in order to curtail production.

The rationale offered by the Government of Pakistan for the import of sugar is that it ensures availability and price stability in the domestic market, in the short run. However, the recent experiment proved a futile effort. In spite of import of sugar the Government failed in arresting the upward trend of sugar prices.

The PSMA can not help criticizing what it views as the undue concern of the Governments since 1969 about the sugar prices, when prices of every other thing continues to shoot unchecked. The average per capita consumption is 2 Kg per head per month even if the price goes up by Rs. 2.5 per Kg. It means additional Rs.5 per head per month.

Unplanned and excessive sugar imports:

Imports in the beginning of the season led to slow lifting adding extra financial burden on the mills. As the lifting of sugar slowed down, the mill owners were unable to pay the growers unless stocks of sugar were sold. This led to an increasing sense of insecurity faced by the growers as they were unable to buy inputs for the next year’s growing season. It is feared that since growers can switch over from the sugar cultivation to cotton, next year the area under cane may reduce substantially.

In addition, huge inventories were causing financial problems for the mills. The liquidity crunch due to slowdown in sugar lifting and higher inventory was to the extent of Rs. 605 billion. Heavy borrowing to finance the increased inventory significantly increased the financial costs which reflected in the higher sales price. Mills were not able to pay dividends to stockholders and share prices of the listed mills were adversely affected.

Concessional sugar import policy:

The Government’s policy of allowing sugar imports at concessional rates has put the domestic sugar industry at a major disadvantage. A comparison of the taxes and duties levied on local and imported sugar reveals that the local sugar mills have to pay an additional Rs. 1,830 per ton as compared to the importers.

In addition, the transportation and other expenses for imported sugar are also low. For import of sugar, margin on the letter of credit is from zero to five percent, depending upon the clients. In case of the local production the huge amounts are required for mobilization of production services network. Regulatory duty of 10% was also waived on all shipments, thereby depriving the exchequer of Rs. 900 million. However, it was re-imposed from July, 1997.

Under the existing Government policy, sales of imported sugar guarantee a definite profit, while number such assurance is given to the local industry. It is obvious that unless the Government formulates a clear cut policy that gives equitable treatment to local and imported sugar, the sugar industry will not be able to achieve its fullest potential.

Alternatives to imports:

after facing a wheat crises and a possible sugar crises the Government has allocated Rs. 1 billion for the import of sugar but number efforts are being made to increase the sugarcane output. There are various factors for the lower yield, which include the shortage of irrigation water, improper use of fertilizers and poor farming practices. Yields per hectare can be improved by undertaking extensive research work for evolving high yielding varieties of sugarcane which are also resistant to insect and pest attacks besides containing higher sucrose content.

Poor availability of credit is another reason for the low sugarcane production. Growers get their payments late and lending by ADBP and other commercial banks is on a constant decline. The result is that the farmers now get lesser credit for buying agricultural inputs which is affecting yields of different crops. Therefore, instead of spending millions on import, efforts should be made to increase the availability of credit to the growers.

A peculiar problem prevalent is the extent of trash (leaves, roots, soil) provided by the growers to the mills to increase the weight of the sugarcane. What it actually does is that it absorbs the sucrose from the sugarcane leaving it deficient in the sugar content. In effect, the recoverable sugar which should have been bagged, ends up in the bagasse and gets burnt in the boiler stacks. it also chokes the cane cutters resulting in costly stoppage. Trash also reduces the recovery by 0.12%. Trash last year exceeded 15% whereas the world acceptable rate is 2%. Nearly 200,000 tons of sugar that should have been produced was lost in bagasse and subsequently in the boilers. The same had to be imported for $80 million in precious foreign exchange.

‘Gur’ production:

another alternative is to move away from the ‘gur’ production to sugar production. Studies have revealed that in the production of gur, only 50% of the sugar in the cane is extracted, the remainder being left in the fiber. Compare this low extraction to an average extraction of 93% extraction in the sugar mills. Even if half the cane is diverted from gur manufacturers to the sugar mills, the gap between current production and demand for refined sugar can easily be bridged without wastage of foreign exchange.
DEMOGRAPHIC CHANGES:

the demand for sugar changes with the change in population to the extent that each person’s per capita consumption of sugar is about 2 Kgs per month. There is also the effect of the rural population consuming more gur than sugar. This has affected both the demand and supply of sugar explained under the effect of sugar production.

LABOR INTENSIVE OR CAPITAL INTENSIVE:

Although the sugar industry employs more than 60,000 workers, it is not a labor intensive industry. The companies are basically involved in investing in the plant and the procurement of cane.. hence the companies stand as having capital intensive operations.