13TH DECEMBER 2011

Analysis of Sugar Industry of Pakistan

Analysis of Pakistans Industries
Falak Farooq. Hania Riaz. Noor Un Nahar. Tooba Altaf

2011

SIR SHAHID HAMEED

Contents
Sugar Production Process ....................................................................................................................... 3 Step 1- Processing raw sugar from sugarcane: ................................................................................... 3 Step 2- Harvesting ............................................................................................................................... 3 Step 3- Cleansing and grinding: .......................................................................................................... 3 Step 4- Juicing ..................................................................................................................................... 4 Step 5-Clarifying .................................................................................................................................. 4 Step 6- Evaporation............................................................................................................................. 4 Step 7- Crystallization ......................................................................................................................... 4 Background ............................................................................................................................................. 5 Raw materials.......................................................................................................................................... 6 Initial Working Capital............................................................................................................................. 6 Sugarcane Payment System .................................................................................................................... 7 SUGARCANE ............................................................................................................................................ 8 Production: ......................................................................................................................................... 8 Production Policy ................................................................................................................................ 9 SUGAR PROCESS: .................................................................................................................................. 10 Production......................................................................................................................................... 10 Consumption:.................................................................................................................................... 10 Table: Monthly Average Retail Prices of Sugar ............................................................................. 11 Trade: ................................................................................................................................................ 11 Stocks: ............................................................................................................................................... 12 SWOT Analysis....................................................................................................................................... 12 Strengths ........................................................................................................................................... 12 Weaknesses ...................................................................................................................................... 13 Opportunities .................................................................................................................................... 13 Threats .............................................................................................................................................. 13 Porters Five Forces Model Applied On the Sugar Industry Pakistan .................................................... 13 !Unexpected End of Formula Fixation Of Sugarcane Support Price And System Of Payment Of Quality Premium. ...................... 14 Middlemen making Pakistani Sugar Costlier .................................................................................... 14 Gur manufacturing a cause of tax revenue losses ............................................................................ 14 High Costs Resulting In High Prices ................................................................................................... 15 Remedial Measures15 2

Introduction
The sugar industry plays an important role in the economy of the country. It is the second largest industry after textiles. At the time of independence in 1947, there were only two sugar factories in Pakistan. The output of these factories was not sufficient for meeting the domestic requirements. The country started to import sugar from other countries and huge foreign exchange was spent on this item. Need was felt to increase the production of sugar. Keeping in view the importance of sugar industry, the Government setup a commission in 1957 to frame a scheme for the development of sugar industry. In this way the first sugar mill was established at Tando Muhammad Khan in Sindh province in the year 1961. At present there are 76 sugar mills operating in Pakistan. The Sugar industry employs over 75000 people, including management experts, technologists, engineers, financial experts, skilled, semiskilled and unskilled workers. It contributes around 4 billion rupees only under the head of excise duty and other levies to the Government are also paramount significance. Unfortunately, Pakistans sugar industry is mostly owned by political personalities and majority of the sugar mills were setup with the help of DFIs normally trapped with the working capital crisis. Consequently, some of the mills have already been closed and it is feared that some more sick units will also close down. A collapse of sugar mill is a loss of national assets, reduction in the sales tax revenue and an increase in unemployment. Sugarcane is the fourth largest cash crop grown in Pakistan which contributes to the agriculture economy the crop value of Rs. 48,292 million. Its share in the large-scale industry is 18% and 1.9% in GDP. Sugar industrys contribution to the Government exchequer in Federal excise duty is 11.2%. Average yield of sugarcane is 44 tons against the world average of 60 tons per hectare. Pakistans sugar mills crushing capacity is 58 million tons of sugarcane capable to produce 5 million tons of refined sugar and 3 mill tons of molasses. The mills still have utilized capacity of 34%.

Sugar Production Process

Step 1- Processing raw sugar from sugarcane:
Approximately 10 percent of each sugar cane can be processed into commercial sugar. Sugar cane consists of 70 percent water, 14 percent fiber, 13.3 percent saccharine (about 10 to 15 percent sucrose) and 2.7 percent soluble impurities.

Step 2- Harvesting
Mature canes are gathered manually . Hand cutting is the most common method, but some locations use mechanical harvesters. Canes are cut at ground level, the leaves removed and the top trimmed. Cane is then tied in bundles and transported to a sugar factory.

Step 3- Cleansing and grinding:

Stalks are thoroughly washed and cut at the sugar mill. Rotating knives shred the cane into pieces, and multiple-sets of three-roller mills grind it. The crushed canes are transferred by conveyers from 3

one mill to the next. During grinding, hot water is sprayed onto the sugarcane to dissolve any remaining hard sugar.

Step 4- Juicing
The shredded sugarcane travels on a conveyer belt through a series of heavy-duty rollers, which extract juice from the pulp. The pulp that remains, or is dried and used as fuel. The raw juice moves on through the mill to be clarified.

Step 5-Clarifying
Carbon dioxide and lime juice are added to the liquid sugar and heated to around 95 degrees Celsius. As the carbon dioxide travels through the liquid, it forms calcium carbonate, which precipitates non-sugar debris from the juice. This precipitate, called "mud," is then separated from the juice by centrifugation. The juice is then filtered to remove any remaining impurities.

Step 6- Evaporation
The filtered juice is evaporated under a vacuum, concentrated at a low temperature, and the sugar crystallized in vacuum pans.

Step 7- Crystallization
Inside a sterilized vacuum pan, pulverized sugar is fed into the pan as the liquid evaporates, causing the formation of a thick mass of crystals. The crystals are spun-dry in a centrifuge, producing raw, inedible sugar.

Background
Sugar Industry is the 2nd most important industry of Pakistan after cotton. Pakistan is self sufficient in sugar, out of which most is consumed locally and the excess is even exported. Pakistan inherited a weak base of sugar industry at the time of independence producing only 7,932 tonnes of sugar. The amount was insufficient for the local needs and so most of it had to be imported. The Government paid attention to improve this sector and set up a commission with the purpose to developing a stronger sugar industry. As a result of all the consistent efforts now we have 75 sugar mills in Pakistan which are producing 2.5 million tones of sugar. Most of sugar mills are present in Punjab and Sindh with 38 and 30 respectively, and only 6 are present in Khyber Pakhtunkhwa.

The industry has given employment to around 100,000 people. As sugarcane needs to be pressed soon after it is harvested, so the mills are located very close to the sugarcane fields so that the stalks can be transported as quickly as possible. The on-going season will face a shortfall of 972,843 tons for which a hefty foreign exchange of US $ 241 million is required.

Raw materials
Sugar Industry is an agro-based industry, which provides employment to the landless rural population and has a great impact on the economy of the country.The three principal bye-products of a sugar industry are bagasses, molasses and press cake which along constitute about 40 per cent of the weight of the total cane crushed. Proper and economic utilization of these bye-products can reduce the cost of production of sugar to some extent. Bagasse is a source of energy fuel for sugar industry which is used to fire boilers for juice heating. Bagasse is also being used for making Medium Density Fibre Board (MDFB) at some industries which is a substitute for natural wood. In Pakistan, utilization of sugar bye-products has not received much attention as compared to other countries of the world. Two types of process are generally used in sugar factories. (1) Defecation remelt carbonation (DRC); (2) Defecation remelt carbonation and sulphitation (DRCs). These two are clarification process. Molasses may be utilized for production of power alcohol, industrial alcohol and portable spirits. Press cake of sulphitation factories are used as manure and that of carbonation factories are usually burnt. Sugar is commonly used as a sweetener. It is one of the worlds valuable nutritious foods and is the main source of carbohydrates and provides inexpensive calories for human body Pakistan has potential to further develop an area of 13,224 hectares along the main feeder canal from Indus river in Sindh with the help of utilization of 34% idle capacity of Pakistani mills who can export 50,000 tons of sugar. The industry employs more than 100,000 labour force while more than 9 million people of rural population are involved in the production of sugarcane.

Initial Working Capital

Unfortunately, Pakistans sugar industry is mostly owned by political personalities and majority of the sugar mills were setup with the help of DFIs normally trapped with the working capital crisis. Consequently, some of the mills have already been closed down and it is feared that some more sick units will also close down. A collapse of sugar mill is a loss of national assets, reduction in the sales tax revenue and an increase in unemployment. It is the prime responsibility of entrepreneurs to arrange for working capital required for smooth start and uninterrupted production during a season. A minimum cash of Rs. 40 million is required to rotate the crushing and production cycle in the first month of a season. Setting up a project is one thing, which in most cases, is financed by DFIs, but availability of working capital is the life blood for a project. Some companies prefer to use the option 6

of borrowed funds both from commercial banks andby way of using suppliers credit, which does not help the company in long-term survival of the project. Availability of the working capital plays a critical role. Improvement in sugarcane yield per hectare, increase in sucrose content, maximum utilization of plant capacities and, above all, availability and efficient use of working capital will help the country in the production of surplus sugar during the next three years. Sugar Industry Contribution in Large Scale Manufacturing & Gross Domestic Product: Sugar industrys share during the last five years from 2005to 2010 was Rs.249,629 million in large scale manufacturing of Rs. 1,394,461 million, which in term of average percentage is 18%. Pakistans total GDP at market prices for these five years was Rs.13,364,078 million, out of which sugar industrys average contribution was 1.9%. These indicators clearly show the incredible performance of sugar industrial sector performance in national economy.

Sugarcane Payment System

The Government of Pakistan supports cane production by setting a market minimum support price announced before or after planting. The support price is set below the local demand price. As a result mills renegotiate the procurement price. The crop price increases up to 50% whenever the crop cycle is at its low ebb. The sugarcane support price has increased from Rs. 40/- per 40 kg in 2004-05 to Rs. 80/- per 40 KG within the recent 4 years causing the sugar production price increase simultaneously.2009-10 is yet to see another 25% increase in the support price of sugarcane in an effort of price incentive to the farmers for increase in plantation which will directly affect the existing production cost of sugar proportionately.

SUGARCANE
Production:
Pakistan has the 5th largest sugarcane growing area in the world and is the 15th biggest global producer of sugar. Sugarcane is grown on around a million hectares and provides the raw material for Pakistans 84 sugar mills. The sugar industry is the countrys second largest agro-industry after textiles. Besides its edible use, Pakistan also uses sugar to produce alcohol for medicinal purposes, ethanol for fuel, chip board manufacturing, etc. In MY 2009/10, (Oct/Sept) Pakistans sugarcane production is estimated at 47.8 MMT, down 2.2 million tons from last years estimate. The decrease in sugarcane area and lower production during the last couple of years are attributed to the non-transparent government sugar policies, significant increase in minimum support prices for competing crops (e.g. wheat and rice), dwindling water resources, and higher input costs. Internal disputes between Pakistans sugar growers and processors also plague the industry. Procurement practices used by sugar processors such as delaying the crushing season, buying cane at less than the support price, and withholding payments hurt the farmers profitability. On the other hand, sugar processors complain that farmers grow unapproved varieties that produce low sucrose content resulting in lower sugar production and recovery rates. As a result of the fluctuations in quantity and quality of raw material, sugar mills have been required to operate at 50 percent of their installed capacity. Furthermore, the lower sugarcane supplies have also forced most of the mills in cane producing areas to close 1-2 months earlier than normal.

Despite the industrys troubles, the tighter sugar supplies have led to higher sugar prices and benefitted sugar growers. This trend is projected to continue in MY 2010/11. In MY 2010/11 sugarcane production is forecast at 52.7 MMT, an increase of 10 percent over the previous year due to an anticipated increase in planting area. Cane prices may range from Rs. 1,200 to 1,800 per ton, which is significantly higher than last year. The higher prices are likely to persuade farmers to grow more sugarcane in 2010, thus, MY 2010/11 cane acreage is expected to increase 14 percent to 1,075 thousand hectares.

Production Policy
The Federal government generally does not procure sugarcane, but it authorizes provincial governments to fix respective sugarcane prices in consultation with representatives of both the sugar industry and farmer organizations. For MY 2010/11, none of the cane producing states; Punjab and Sindh, increased sugarcane prices. To assist sugar processors in the economic downturn, the Ministry of Food and Agriculture (MINFA) and the Ministry of Industries and Production are in consultation with the Pakistan Sugar Mills Association (PSMA) to finds ways of making sugar operations run more efficiently. The sugar industry is also searching for opportunities to develop value added by-products, reducing costs, and promoting cultivation of high sucrose cane. The GOP is also considering PSMAs proposal to use sugarcane in electricity production.

SUGAR PROCESS:
Production
In MY 2010/11 refined sugar production is forecast at 3.75 MMT, primarily due to anticipated increase in area under sugar cane crop. Pakistans domestic consumption is expected to be 4.28 MMT. Domestic production will be supplemented through imports. For MY 2009/10, refined sugar production is estimated at 3.42 MMT (raw value) based on 80 percent crushing and 8.9 percent recovery. The production decreased primarily due to a smaller growing area, which is down 8 percent from the previous year. The MINFA and the PSMA have initiated a sugar crop development project utilizing sugar beets. The provinces of Punjab and Sindh have already conducted research in the cultivation of sugar beet with limited success. Industrial adoption and commercialization of sugar beet have been slow because it requires additional research as well as comprehensive planning on the part of government, industry and the farming community. In addition, the sugar industry is reluctant to promote sugar beet cultivation because the amount of time needed to process beets into sugar. The hot temperatures and processing delays could also easily deteriorate the quality of the product. Beet processing requires more fuel, making it costlier compared to cane processing. In order to promote this initiative, the GOP is considering tax holidays for companies that process sugar beets.

Consumption:
The MY 2010/11 sugar consumption is forecast at 4.28 MMT. Consumption estimates for MY 2009/10 is lowered to 4.2 million tons, 50,000 tons less than the earlier estimates due to relatively tight domestic supplies and higher prices. Although limited sugar supplies and the steady increase in prices have affected household sugar consumption, overall sugar consumption remains the same due to growing demand by the processed food sector (soft drinks, fruit drinks, dairy, confectionary, traditional sweets etc). Bulk 10

consumers such as bakeries, makers of candy and local sweets, and soft drink manufacturers account for about 60 percent of the total sugar demand. Pakistans sugar industry continued to deal with uncertainty in CY 2009 due to decreasing sugar production and a lack of coordinated government policy. Despite the Economic Coordination Committee of the Cabinets (ECCs) February 2009 decision to import 200,000 metric tons of sugar, the Trading Corporation of Pakistan (TCP -government entity responsible for importing and exporting commodities) was still unable to arrange timely imports. As a result of the governments inability to deal with the supply situation, the Pakistan Supreme Court intervened to stabilize sugar prices. Despite the Supreme Courts intervention, however, sugar prices continued to rise due to the tighter supplies. Sugar prices have been on the rise since May 2008 and reached record levels in December 2009. The current sugar retail price is around $803 per ton, about 60 percent higher than last years level. Prices are expected to hover around Rs.60 in the remaining part of the year due to anticipated better sugar supplies in the international market. The future stability of retail prices will depend upon timely imports and prevailing prices in the international market.

Table: Monthly Average Retail Prices of Sugar

(Rs. per Kg)

Trade:
In MY 2010/11 sugar imports are forecast at 700,000 MT, and MY 2009/10 sugar imports are estimated at 1,030,000 MT. On January 2010, the ECC decided to import 1.25 million tons of refined sugar from the international market. Accordingly, the GOP authorized the TCP to import 500,000 MT for government stocks and the remaining 750,000 MT for the private sector before June 2010. Industry reports indicate that the TCP has issued tenders for the import of half a million tons of sugar, whereas, private sector is waiting for a drop international sugar prices. The ECC also decided that the private sector import would be exempted from sales taxes and other duties to ensure that landing cost of imported sugar will range around Rs.50 per Kg and retail price at Rs.55. The ECC also decided to scrap the 16 percent General Sales Tax (GST) in order to stem the rise of sugar prices. Imports of raw sugar are subject to a 25 percent import duty, whereas, imports of refined sugar may enter duty free.

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Stocks:
MY 2010/11 stocks are forecast at 850,000 MT based on projected supply-demand scenarios and trade expectations.

Statistics of major competitors in sugar industry Sugar Mills Production Capacity(tonnes) Crushing Capacity(tonnes)

Hamza sugar mill

178,362

1.7 million

Shakerganj Mills

136,813

1.6 million

JDW Sugar Mills

124,843

1.2 million

Habib Sugar Mills

84,806

0.25 million

Faran Sugar Mills

74,338

0.81 million

Dewan Sugar Mills

72,055

0.75 million

SWOT Analysis
Strengths
Currently there is a lot of labour available in our country which can be utilized effectively. A lot of land I available which can be used for cultivation like lands of sindh and punjab. Large domestic market is available.

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Weaknesses
We do not have proper recycling system which results in high water consumption. We do not tune-up boilers periodically that cause emission of gases. Low yield Farmers are still using obsolete technology no advancement in the machinery yet.

Opportunities
The cost advantage can be achieved through suitable technologies that affect the productivity of labour and capital. To maintain a balance in the cost of inputs. Production efficiency can be improved through scale economies and broadening the scope of production. Research and development, quality control, and the use of higher quality inputs are among the sources that affect product quality. Brand advertising and other promotional strategies influence the consumer's perception of a product, thus increasing their demand.

Threats
The production of sugar cane decreases the productivity of land. As sugar cane crop requires a lot of water, increase in production may create shortage of water for other crops.

Porters Five Forces Model Applied On the Sugar Industry Pakistan

1. Bargaining power of buyers The bargaining power of buyers is low, because there is no substitute of sugar available in the market , it s a basic need a basic commodity and the price structure made by the buyers cannot influence the suppliers at all as the suppliers are concentrated in the market. 2. Bargaining power of suppliers The bargaining power of suppliers is high, because suppliers know that people will purchase little or more sugar no matter how much there are price fluctuations or influences because sugar is the need of every person as it is a basic commodity and a lot of businesses cant be carried out without the involvement of sugar. 3. Rivalry There can be a lot of rivalry among the producers as there are a lot of producers in the market, but the price set is constant is by government so the consumers would never differentiate on the basis of price, sugar can be differentiated on the basis of quality, distribution availability like some people might prefer buying sugar from imtiaz store than naheed. 4. Threat of substitutes There is no as such threat currently because sugar has no substitute but these days government is been working on the production of beet root and its cultivation which can be use as an alternative for sugar so this can be a major threat in future. 5. Threat of new entrants

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Threat of new entrants may be high because entering the industry is not that costly, but maintaining a position a goodwill is very important this becomes difficult for the new entrants at times.

Problems Of Sugar Cane Industry

Fixation Of Sugarcane Support Price And System Of Payment Of Quality Premium.
Sugarcane growers are negatively motivated for earning more money based on price structure ignoring the importance of adopting recent technologies for increasing yield of sugarcane per hectare thus hampering the national economy. Late maturing and better quality cane is being produced of unapproved variety. Sugarcane growers interested in growing good quality cane are being discouraged due to existing payment procedure of quality premium based on average recovery of bad and good cane both thus benefiting those who are growing bad quality cane of unapproved varieties at the cost of good grower planting good quality cane. The Government should take up cost studies at the growing sugarcane stage for the purpose of fixing the support price for the growers. Cost studies for production of refined sugar both in terms of variable cost and fixed cost of production in each sugar mill, should also be undertaken to control the retail prices. Cost audit rules and compulsory maintenance of cost accounting records for sugar industry, in line with the international cost accounting models in other countries of the world, will prove to be a great help in this direction.

Middlemen making Pakistani Sugar Costlier

Those sugar mills who were in operation in the previous season are also striving hard for working capital finance for purchase of cane and initial start up expenses for the cane crushing. Some of the sugar mills are forced to make agreements with the middlemen who would purchase sugarcane from the growers at the rate of Rs.36 per 40 kg on commission basis and sell it out at the rate of Rs.40 to Rs. 55 to sugar mills. Such middlemen also receive commission from cane growers and pay to poor growers lesser than the support price. This situation would definitely increase the ex-factory cost of sugar production, which may be avoided if sugar mills are provided initial working capital finance by the commercial banks.

Gur manufacturing a cause of tax revenue losses

One of the major reasons for the shortfall in sugar production is Gur manufacturing. The demand of Gur has increased for the last five years due to influx of Aghan refugees who use Gur for meeting their nutritious requirement. But it should be noted that whitened Gur is injurious to the health of human body due to use of unapproved chemicals to change the colour of Gur to whitening. The situation for current season is very much alarming which is heading to create a big quantum of shortfall in sugar production. But here we restrict to the loss of white crystalline refined sugar due to excess diversion of sugarcane by 12.5% for Gur manufacturing. This will result a loss of white sugar production of 437,620 tons that will render a minimum loss on account of sales tax revenue to the

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Government for the sum of Rs.919 million to Rs.1011 million, which can be avoided easily by imposing restrictions on Gur manufacturing above the 25% allowed standard both for seed and Gur.

High Costs Resulting In High Prices

The cost of raw materials per ton of sugar in Sindh at 8.70% recovery at Rs 43 per 40 kgs cane price works out to Rs 12,356 whereas in Punjab it works out to Rs 11,765, making sugar in Sindh costlier by Rs 591 per ton. There is a difference in cane price of Rs 3 per 40 kgs between Punjab and Sindh making sugar production in Sindh more costly. The mills in Sindh are also required to pay quality premium @ 50 paisas per point one increase from base recovery of 8.70% whereas such payment is not applicable in Punjab. The sugar market in Punjab and Sindh mills have to bear transport and transit expenses but the former fetch lesser price of their product as compared to the Punjab mills.

The limiting economic factors affecting the sugar industry such as: Area under cultivation Lower yield Lower sucrose recovery Lack of working capital finance Gur manufacturing

Remedial Measures
The Government should seriously think about this critical problem and make remedial measures along with those suggested below to avert the crisis in future. Balanced policy for cultivation of four major cash crop wheat, cotton, rice and sugar. An incentive should be provided to the growers for cultivation of sugarcane on 1.150 million hectares. Indian variety of seed which has totally degenerated and diseased affect the production yield should be avoided. Instead the government should import high yielding varieties of sugarcane from other countries for averting any sugar crisis in the future. The government should make a publicity campaign for minimizing use of Gur so that a substantial quantity of cane becomes available for crushing and making white spoon sugar. The State Bank of Pakistan should earmark a sum of about Rs. 2.7 billion and direct all commercial banks to finance working capital requirement of operating sugar mills in every season through proper and vigilant loaning methods. Sales Tax @ 15% is fixed on ex-factory price of Rs. 14 per kilo in case of supplies to registered person. A move to charge the sales tax on the price other than the fixed price of Rs.14/= will 15

further create problem for the consumers whose purchasing power is already very low due to industrial sluggishness and stagnant economy. It is suggested that sales tax should not be charged on market price. The Government should impose restrictions on excess production of Gur equivalent to 12.5% of the expected cane production of 40.614 million tons from the current year crop 2000=2001 to reduce the shortage of sugar in the country as well as earn sales tax revenue of more than one billion Rupees. The support prices of sugarcane can not work at all through the free market forces due to the simple reason that retail price of sugar is controlled by the Government and further, the support prices of other cash crops such as wheat, rice and cotton are also fixed by the Government. Two economic theories (1) principle of supply20 and demand governed by market forces and (2) Government control of retail price can not work together and will further widen the sugar crisis in the country. The provincial Governments should fix the support price of Rs.40 per 40 kg for purchase of sugarcane at the factory gate as well as at the cane purchase centres under section 16 of the Sugar Factories Control Act, 1950.

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