CHANGING DYNAMICS OF SUGAR INDUSTRY
EMERGING GLOBAL SHORTAGE DEMANDS IMMEDIATE REVITALIZATION OF THE LOCAL INDUSTRY
SHABBIR H. KAZMI
Feb 16 - 22, 2009
Emerging global shortage of sugar, particularly in India, demands all the stakeholders in Pakistan to get ready to take the advantage by producing exportable surplus. The standing sugarcane crop would hardly be enough to achieve self sufficiency in sugar. The inadequate crop size may also not allow the country to exploit ethanol production target and electricity generation at sugar mills.
One just cannot underestimate the importance of sugar industry in Pakistan's economy. It can rightly be called the driving engine of the rural economy. It is the second largest industry and units are located in the rural areas, throughout the country. The industry has enormous potential of earning foreign exchange by exporting surplus sugar and ethanol and also save substantial foreign exchange currently being spent on the import of furnace oil used in power generation.
Currently, some of the groups having vested interest are trying to create an impression that the indigenous sugar production will not be sufficient to meet the demand. They have been successful in convincing the government to allow import of 200,000 tons refined sugar. The Trading Corporation of Pakistan (TCP) has already issued the tender for import of 50,000 tons sugar. It is being said that the landed cost of imported sugar would be around Rs 40/kg and the government intends to sell it at Rs 38/kg through Utility Stores.
Many analysts are of the view that keeping in view the stock and expected production the country does not need to import refined sugar. On top of this, import of sugar when the crushing season is in full swing would be bad for the industry in general and for the mills located in Sindh in particular. The bureaucracy is of the opinion that Sindh did suffer due to import of sugar in the past because the commodity was discharged at either of the two ports located in Karachi. However, discharging of TCP consignments at Gwadar port now should not cause any problem.
Sugar industry has always resisted import of refined sugar on two pretexts 1) higher cost of refined sugar and 2) substantial waste of foreign exchange. According to the industry sources raw sugar costs at least US$100/ton less compared to refined sugar. On top of this, refining at local mills allows value addition and results in cost optimization, resulting in overall lower cost of production.
Some of the industry experts say that Pakistan should follow the Indian policy. In India sugar mills are allowed to import as much raw sugar as they like but are also bound to export the same quantity of refined sugar. It may be a coincidence that this year both the governments have announced import of sugar around the same time. While India opted for import of raw sugar the policy planners in Pakistan decided to import refined sugar. The publication of news that Pakistan intends to import refined sugar hiked its price in the international markets.
The GoP also made a wrong decision of importing refined sugar at a time while the crushing season is in full swing. This clearly indicates failure in understanding industry dynamics. Sugar industry operates around three months but sale goes on throughout the year. Therefore, import of sugar while crushing is going on is bad for the industry as well as the government; it increases the inventory carrying cost of the mills and the government and also makes them competing against each other.
The critics of sugar industry always talk about higher cost of production in the country but hardly take into account factors contributing to higher cost of production. The policy planners believe that import of sugar can help in bringing down retail price. However, the premise is not only incorrect but also results in huge losses of the industry. Therefore, unless efforts are made to optimize cost of production the aim of bringing down retail prices cannot be achieved. Imports that too at higher price not only put burden on national exchequer but also affect sugarcane growers who do not get timely payment from the mills.
In Pakistan three factors are responsible for the higher cost of production. These are 1) persistent hike in sugarcane support price, 2) mills producing only one product (sugar) and exporting the most precious byproduct (molasses) and 3) low capacity utilization.
All these problems are the outcome of inadequate availability of sugarcane, also due to hike in sugarcane support price. This issue can be resolved simply by discontinuing the practice of fixing of the support price by the government. Ironically, the government suffers from dichotomy. On the one hand it claims to be the follower of market based policies but on the other hand it is not ready to discontinue a policy, which discriminates between the farmers and the industrialists.
According to sugar mill owners, "The government has just announced a moratorium for the textile industry but wants the sugar mills to settle their liabilities up to March 31, 2009. One fails to understand the logic because borrowing of sugar mills is seasonal and the highest when crushing season is about to conclude. Therefore, the SBP circular is tantamount to arm twisting. Central bank should avoid unilateral policy.