OVER EXPANSION IN THE SUGAR INDUSTRY
55% capacity utilization has left the industry uncompetitive and has inflIcted heavy losses on the mills
By SHABBIR H. KAZMI
Dec 14-20, 1996
The sugar industry in Pakistan has continued to expand heavily in spite of negative fundamentals and continuous advice of Pakistan Sugar Mills Association to the contrary for the last six years. New units have been established and the number increased from 52 mills in 1991-92 to 74 in the current season which has commenced last month. Besides, the mills already in operation have enhanced their sugarcane crushing and sugar refining capacities through BMR. The increase in the number of sugar mills, in such an unplanned manner, has been blamed by many on the government and the financial institutions who have provided long-term loans and wasted limited resources.
The year 1995-96 was in sharp contrast with the previous years during which sugar production was close to 3 million tonnes which dropped by a hefty 20% to 2.449 million tonnes from 2.983 million tonnes in 1994-95. That, necessited import of around 500,000 tonnes involving substantial foreign exchange outlay. The domestic consumption is estimated at around 2.7 million tonnes.
The magnitude of problems of the sugar industry can be gauged from the crushing capacity utilization dropping to around 55% during 1995-96. With idle capacity at 45%, rarely could an industry break even, let alone expect a profitable run.
The political angle
Initially the sugar mills in the country were established by the business community but during the last 8 to 10 years establishment of sugar mills has become a prerogative of people indulging in politics directly or indirectly. They were not only able to get the permissions to establish sugar mills but to acquire huge credits from the financial institutions as well. The cost of projects established after the mid-eighties was not only very high but credits were disbursed at 80:20 resulting in very high financial cost.
All these new mills have been established in prime sugarcane growing areas where the operating mills had spent resources to educate farmers in ahieving better yields and had arranged soft-term credits for the farmers for the procurement of seed, fertilizer and agricultural implements. With the establishment of mills by people enjoying political clout and power, the growers were forced to sell their produce to these mills. During the last season, industry sources said, one of the politicians ownng sugar mills was instrumental in closure of a sugar mill as it was paying higher prices to the growers.
Expansion of daily crushing capacity and reduction in availability of sugarcane has, over the years been responsible for persistent crisis in the industry which has been deepening with each successive year. There has been a constant reduction in actual sugarcane crushing.
During 1995-95 sugarcane crushing on countrywide basis dropped by 17.7% and sugar production decreased by 17.9% as compared to the preceding year. Sugarcane crushing in the Punjab came down by 19.6%. The sucrose percentage also dropped from 8.49% to 8.12% resulting in cumulative decline in sugar production by 22.3% as compared to last year.
In Sindh, sugarcane crushing fell down from 12.038 million tonnes in the preceding year to 10.341 million tonnes. The production of sugar declined from 1.108 million tonnes in 1994-95 to 1.008 million tonnes in the year under review. However, there was an improvement in recovery which improved from 9.2% to 9.75%.
The mills in NWFP suffered serious setback and production of sugar in the province fell down to 65,682 tonnes only as against the preceding year's production of 104,136 tonnes - a massive reduction by 63%.
Cost of production
The shortfall in sugarcane availability resulting in under-utilization of capacity, coupled with regular enhancement in its support price fixed by the government, have been factors responsible for the increase in cost of production of sugar.
Since the nature of production is seasonal and consumption continues throughout the year, the financial cost incurred on carrying for over six months squeezes profit margins or increases accumulated losses of the mills.
Not only the government has been increasing sugarcane support price, the growers have also started demanding prices higher than those fixed by the government. Knowing the limited availability of sugarcane, the growers either completely stop the supplies or curtail them to a large extent.
Succumbing to pressure from the growers, the mills are forced to pay price for sugarcane much higher than those fixed by the government. The situation further aggravates the mills' position as they are not in a position to recover even the season's variable cost which affects repayment of loan installments and interest charges to the financial institutions.
Factors affecting sugarcane supply
Over the years many factors have been responsible for shortfall in sugarcane supply. They include increased consumption by the mills and failure of the growers to increase sugarcane production. Production could be increased either by increasing the area under sugarcane cultivation or more importantly by improving the yield per acre substantially.
A comparative analysis of sugarcane yield and recovery between India and Pakistan prepared by the Pakistan Sugar Mills Association indicates that Pakistan is far behind India. While in Pakistani Punjab farmers are able to get a yield of only 43 tonnes per acre, in the Indian Punjabthe yield is over 63 tonnes per acre. The average recovery is 9.39% in Indian Punjab as compared to an average recovery of 8.44% attained in the Pakistani Punjab.
Similarly, the average yield and recovery in Indian Gujrat is 89.6 tonnes per acre and 11.34% respectively ascompared to 57.3 tonnes per acre and 9% recovery in Sindh.
In both the provinces, Sindh and Punjab, the sugarcane cultivation directly competes with cotton. If the prices of cotton are better, the farmers switch over to it, or vice versa. When the CLV attacks on cotton were common, a large number of farmers, originally growing cotton, switched over to sugarcane cultivation. But with the improvement in cotton prices and availability of virus resistant varieties, the farmers have gone back to cotton cultivation.
The area as well as production of sugarcane shrank by 5 and 4 percent respectively in 1995-96 as compared to last year.
In the past, the provincial governments used to ban production of 'gur ' during sugarcane crushing season but lately its production has increased manifold. The percentage of sugarcane consumed by the sugar mills in Sindh is still the highest as compared to the other two provinces. 'gur' making has progressed without paying any taxes and has therefore been consuming more sugarcane to the detriment of the sugar industry.
The average utilization of sugarcane on countrywide basis touched the highest - 76.93% in 1993-94 but has gone down during the last two years.
In the Punjab the maximum utilisation was 81.87% in the same year but came down to 63.22% during 1995-96. But the consumption of sugarcane by mills is NWFP was reduced to only 17% in 1995-96. Contrary to this, Sindh has the highest sugarcane consumption record. The maximum consumption touched 93.85% in 1992-93 and came down to 75.28% in 1995-96.
Myth behind massive expansion
Over the last few years most of the existing mills have enhanced their crushing capacities 2- to 3-fold. They give two reasons for this: expansion is much cheaper as compared to establishing new mills of equivalent size and they also want to achieve better recovery by curtailing the number of crushing days. The recovery at the beginning and at the tail-end of the season is low. Therefore it was considered to restrict the crushing period to about 150 days to achieve a better rate of recovery and reduce the variable cost of the season.
Incidentally, the hypothesis got some proof last year. Delay in commencement of crushing in Sindh has been instrumental in achieving a higher recovery rate. Mills in Sindh are thinking about beginning the crushing in November rather than in October.
The commercial banks were directed by the State Bank of Pakistan to adjust by August 20, 1996, the balances of credit made available to the sugar industry against sugar stocks. The action was based on information that the mills were hoarding the stocks. Industry sources, however say that they prepare fortnightly reports pertaining to sugar production, its lifting and stocks. Besides, the mills would never like to hoard the stocks and their priority was to empty their godowns as quickly as possible as carrying a huge inventory meant huge financial cost.
Sugar mills in Sindh pay quality premium regularly - while the mills located in the other two province do not pay such premium - and paid Rs. 733 million to the farmers in 1995-96 alone resulting in additional cost of production.
Oblivious of the difficult situation faced by the sugar industry, federal, provincial and local levels, persistently keep hanking for more revenue. Some of the revenue measures imposed in Sindh lately are, imposition of market committee fee, road cess, surcharge on sugarcane cess, varying rates of octroi, export tax and rawangi mahsool.
Although the Sindh High Court declared collection of rawangi mahsool unconstitutional, bad in law and without authority, and the Supreme Court also dismissed the appeal, yet the district councils recover this tax by a novel procedure.
The central excise division of the Central Board of Revenue vide SRO 329(I)96 dated May 30, 1996 curtailed the period of sugar storage, without payment of duty, to six months from the date of production. However, the collectorate has been given discretion to extend the period.
The custom & central excise division of the CBR during June 1996 directed the sugar industry to manage clearance of sugar on the basis of 'first-in-first-out'. According to the Association sources, stacking of sugar bags and clearance strictly on the prescribed lines is not manageable and practical. The instructions seem to have been issued by error of judgment and common sense. It looks as if the person who has issued the directive has never visited a sugar mill and does not understand its operation.
Structure of sugar industry in the country
While sugar production is primarily confined to two provinces, Sindh and Punjab, and a small quantity in the NWFP, the product is consumed in all the four provinces and Azad Jammun and Kashmir. Every year a substantial quantity is smuggled to Iran and Afghanistan and even goes as far as the newly- liberated Central Asian states.
Traditionally, Sindh has always had surplus production and fed Balochistan, lower Punjab and at times supplies were made to the NWFP, upper Punjab and Azad Kashmir. However, over the years Punjab has attained self-sufficiency. Since the price of sugar is more or less uniform throughout the country, higher cost of freight incurred on dispatches to far-flung areas squeezes the profit margins of mills located in Sindh.
Imported sugar also enters Pakistan via Karachi, Sindh and since most of the quantity is sold in the wholesale markets in Karachi, the prices remain subdued in the province.
Although a number of new mills with large capacities have been established in the Punjab the fact remains that cultivation of sugarcane and production of sugar in the province involves higher costs. The yield per acre and recovery are also low. It is mainly because the climatic conditions are not conducive for cultivation of sugarcane in the province. The climate in Punjab is dry and the average temperature is high which reduces the moisture content in the standing crop.
Sugarcane needs high temperature and humid atmosphere. The conditions prevailing in the lower Sindh are most conducive and therefore the yield per acre and average sugar recovery percentage is the highest in the province.
The industry experts and agriculturists are strongly of the view that shift of sugar production from Sindh to Punjab is one of the major reasons for increase in its cost of production in the country.
The sugar mills in Punjab which produced over 60,000 tonnes of sugar in 1995-96 included the names of Brothers, waqas, Shakarganj, Tandlianwal and Shahtaj. Waqas crushed the highest quaintly of sugarcane and also produced the highest quantity of sugar.
In Sindh, Dewan crushed the highest quantity of sugarcane and also produced the largest quantity of sugar exceeding 100,000 tonnes. The other mills which produced over 50,000 tonnes were Bawany, Faran, Habib, Shahmurad and Sindh Aabadgar.
Dewan Sugar Mills started sugarcane crushing on October 18 and ended April 14 during the last season. By crushing 983,489 tonnes sugarcane during the period with an average recovery of 10.15% it produced 100,008 tonnes of sugar. In the half-yearly report the directors' review expressed on the increase of sugarcane prices which touched new heights as most of the mills entered into an open warfare for procurement of sugarcane. Dewan has been declaring modest cash dividend in the past in spite of persistent increase in the procurement prices of sugarcane. The mills located in prime sugarcane growing area of Sindh was established in 1987.
Habib Sugar Mills established in Nawabshah in 1963 has not only tripled its crushing capacity using in-house expertise but is among the few sugar mills which have been declaring handsome dividends in the past. During 143 days of crushing during 1995-96 season it produced over 60,000 tonnes of sugar with an average recovery of 9.2%. It also produces industrial alcohol. The modifications in the distillery has helped to streamline its operating efficiency.
Shahtaj Sugar Mills worked for 157 days during the last season and achieved the highest level of crushing and sugar production since the unit was established. According to directors' report the company could have crushed larger quantity had there been no shortage of sugarcane. The unit is located in Punjab and also suffered from shortage of sugarcane and increase in sugarcane support price.
Mirpurkhas Sugar Mills also suffered from the shortage of sugarcane and the number of days it worked was reduced to 157 as against 178 days during the last season. The company exported 14,600 tonnes of sugar from last year production and earned over half a million dollars.
Noon Sugar Mills produced lesser quantity of sugar mainly due to limited availability of sugarcane and disruption of supplies for two weeks. The company supplied 59,000 bags of 50 kg each to the government for sale through utility stores during the last season.
Import of sugar
Import of sugar is a short-term measure to ensure availability and stabilize its price in the domestic market. 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 industry experts have a valid point that increase in support price and quality premium have failed in increasing yield per acre and recovery percentage but the cost of sugarcane per tonne has been increasing over the years pushing up the cost of production of sugar. Therefore, the farmers should improve yield per acre or the industry would not be able to sustain further losses.
Measures to improve profitability
Since the industry has expanded its capacity to the present level - producing nearly 5.5 million tonnes of sugar per annum - the first suggested step is to ban the establishment of new units and expansion of the existing units till such time as almost all the mills achieve 90% capacity utilization.
Since it is not possible to increase area under sugarcane cultivation the suggested second step is to undertake efforts to develop new varieties offering higher yield and recovery. This will result in higher sugarcane production and better returns to the growers without increasing support prices, improved capacity utilization by the mills, larger sugar production, reduction in cost of production per kilogram of sugar, more revenue for the government, stable prices for the consumers and better dividend to the shareholders of public limited companies.
Since the country is capable of producing double the quantity consumed domestically export of surplus sugar can also help in earning the much needed foreign exchange for the country.
During the 1995-96 season the mills started late with the delay ranging from 30 to 45 days. About 66 sugar mills crushed over 28 million tonnes of sugarcane and produced about 2.45 million tonnes of sugar with an average recovery of 8.7%. In Punjab 37 mills produced 1.375 million tonnes of sugar by crushing nearly 17 million tonnes of sugarcane and achieved average recovery of 8.10%. In Sindh the average recovery, touching 9.75% helped the 24 mills which operated during the season to produce over one million tonnes of sugar by crushing 10.34 million tonnes of sugarcane. In NWFP, the 5 mills which worked during the season produced only 65,682 tonnes of sugar crushing 817,429 tonnes of sugarcane with average recovery of 8.19%.
According to the information available, during the current season out of 31 mills in Sindh only 27 were able to commence operation. The season started in November. The 27 mills in operation produced only 84,446 tonnes of sugar achieving average recovery of 7.6%. Out of the total quantity produced only 28,167 tonnes of sugar was lifted and the remaining 56,279 tonnes were lying at the mills.
(Million tonnes)1990-91 1991-92 1992-93 1993-94 1994-95 1995-96Sindh 0.902 1.187 1.175 1.172 1.107 1.008Punjab 0.933 1.012 1.103 1.634 1.771 1.375NWFP 0.072 0.097 0.096 0.093 0.104 0.065
Source: Pakistan Sugar Mills Association
(Average %)1990-91 1991-92 1992-93 1993-94 1994-95 1995-96Pakistan 8.44 9.25 8.71 8.49 8.72 8.70Sindh 9.40 9.93 9.24 9.00 9.20 9.75Punjab 7.72 8.62 8.22 8.14 8.44 8.10NWFP 7.99 8.85 8.64 8.66 8.83 8.19
Source: Pakistan Sugar Mills Association
Performance of the listed companies
Although more than 40 companies are listed under 'sugar and allied' sector at the Karachi Stock Exchange with a total paid-up capital of over 4.7 billion rupees; barring only a few, all are sugar mills. Shares of most of the companies are quoted below par and only a few were able to declare cash dividend. The list of companies declaring regular dividend comprise Dewan, Mirpurkhas, Noon, Shahtaj and Thal industries.
According to research analysts working for securities analysis companies, the negative fundamentals for the industry prevailing for nearly five years had kept the investors away from this second largest agro-based industry. Individual, institutional, local, mutual funds and foreign fund managers have neither shown interest nor are interested in investing in scrips of sugar mills in general. In the past, though this industry has been distributing handsome dividends.