Sugar Industry of Pakistan – An Academic Report
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. Over the past 50 years it has become the second largest industry after the Textiles sector. Its contribution towards the building of the economy is enormous and worth of mention.
On achieving independence, Pakistan inherited two mini sugar mills (at Rahwali and Takhtbai) with capacities of 600 and 1200 TCD (tons crushed per day) respectively giving a total capacity of 10,000 tons of sugar per year. Next came Premier Sugar Mills set up in Mardan in the year 1949-50. Up to the year 1956 Pakistan had six sugar mills with total installed capacity of 11,250 TCD. During 1960-70, three more sugar mills came on ground. However, the period that witnessed the most expansion in the sugar sector was the decade of 1970-80, in which fifteen new sugar mills with an installed capacity of 30,500 TCD were established.
The location of the sugar industry has been the major contributor in the transformation of the rural lands into the semi-urban oasis. Due to sugar mill sites in thick rural places, modern facilities of roads, schools, dispensaries, markets and utilities like electricity, telecommunications and transport have flourished. Huge development outlay by the Government could not have created this infrastructure which has been accomplished by the mere establishments of the sugar mills. Sugar industry, in short, has been the engine of rural development. This has not been quantified, acknowledged or recognized. Had this been understood, sugar industry’s neglect would not have been an affordable laxity.
The sugar industry has been facing a situation quite similar to the Textile industry stemming out of unchecked growth of the sector because of project sanctioning on political grounds without any consideration to raw material availability and market size. The problem is more intense for the newer units, which have a lower crushing capacity and higher associated financial costs.
In terms of the area cultivated, sugarcane is the fifth largest crop grown in Pakistan. The sugar industry is totally dependent on this raw material although sugar in the northern areas is also made from sugar beet. Sugarcane is a labor-intensive crop. It requires about 134 man-days/hectare. Sugarcane cultivation provides partial and seasonal employment to 3.9983m people approximately, which is about 12.14% of the total agricultural labor force.
The general perception of the sugar industry as minting money is not a correct perspective in the prevailing situation. First of all, it has a seasonal production spell for a period of five months from November to March. Keeping production flow smoothly coordinated with storing and maintaining orderly schedules of supplies throughout the year are really complex issues to tackle.
Another difficult dimension relates to the cost efficiency. In this regard we can say that the mill-owners have a Hobson’s choice that is no say in the matter. The government monitors 80-85% of the costs. Sugarcane support price forms 60% of the current cost of production. Wage, transport, utilities added to this are other elements out of the sugar industry’s jurisdiction. It is indeed only a small amount that the sugar-mill owners get out of their handwork. Hence the sugar industry can be best defined as a fully regulated industry.
Sugar industry in Pakistan comprises of 78 sugar mills with an installed crushing capacity of 365,000 TCD which can produce about 31,025 tons sugar daily leading to about 5.58m tons of sugar production per crushing season of 180 days at the sucrose content of 10% with 85% efficiency where as 6.57m tons of sugar can be produced on 100% efficiency. But this is not the case and seldom does the industry work for the whole 180 days. 150 days is more common and is the normal trend that is going on for quite sometime.
During the 1998-99 crushing season, only 73 mills were operating which produced 3.541 millions tons of sugar utilizing 76% of the total available crushing capacity. This was much better than the 1997-98 season as there was once again a bumper crop of sugarcane. After a lapse of two decades Pakistan exported sugar to several countries around the world. Around 600,000 tons of sugar was exported to earn around $150 mn, which was a very good achievement indeed.
Sugar industry in Pakistan has now entered into an era of export orientation as it has been exporting it for the last two years. But this year this looks doubtful as there is a shortfall expected in the sugar production. Pakistan may become an importer again and this trend will continue for sometime until the policy makers put our sugar industry on the right track. A restructuring of the sugar industry in inevitable to prevent the constant decline in this industry and to put it back on the track of growth and profitability.
SUGARCANE / BEET: THE BUILDING BLOCKS OF THE SUGAR INDUSTRY
Sugarcane forms the basis for many important industries like sugar, beverages, chipboard, paper confectionery, gur, etc., and also provides raw materials to many industries such as chemicals, plastics, paints, synthetic fibre, insecticide and detergents.
It is the fourth largest cash crop of Pakistan. It is the 5th largest country in the world by area under sugarcane cultivation and 10th by production of sugar. Sugarcane crop is an annual crop, occupying land for 8-12 months. The main harvest period is from November to March after which the sugarcane content starts to fall sharply.
CROP REQUIREMENTS, PLANTATION, HARVESTING
The sugar mills are totally dependent on the sugarcane crop each year and can only utilize their capacity according to the raw cane that they can procure. Because the sugar crop is of vital importance the mills, we will now take a look at the dynamics of the sugar crop itself. The sugar plant requires:
- a high temperature,
- plenty of sunlight,
- large quantities of water with at least 1525 mm of rain annually unless grown with irrigation ,
- high natural fertility unless amply supplied with fertilizers,
- good drainage.
The ideal climate is one with a long warm summer growing season, a fairly dry and sunny and cool, but frost-free ripening and harvesting season and freedom from hurricanes and typhoons. A relatively long growing period is essential for high yields. The life of the crop ranges from 10 months to two years around the world but the average growing season is limited to 5-6 months when the crop reaches maturity and has the highest sucrose content.
In Pakistan the cold and frosts of NWFP are the limiting factor in the extension of sugarcane crop and the attainment of high yields and the twin menace of water-logging and salinity in Sindh and Punjab. Sindh particularly the lower region however continues to have the concentration of sugar crop so far as it provides suitable climate for the crop during the periods of growth. The coastal breeze maintains a suitable temperature and the humidity in the southern regions particularly is free from biting cold and frost.
The plantation and harvesting periods are highlighted below. There are two sowing seasons: Autumn (September) and February (spring). The latter is the main season but due to water deficiency during February and March the cultivation extends up to the end of April. The Autumn sowing is limited to the areas near the sugar mills. During these months the crops like wheat and onion can conveniently sown along with the sugarcane crop. In the lower Indus region, however, the optimal plantation period is September and October. The harvesting of the early maturing varieties is carried out in October. This continues till January.
COMPETING FOR ACREAGE
Because of the very demanding nature of the sugarcane crop and the fact that it almost depletes the soil of phosphates after a single season and hence is in a constant need of fertilizer, growers in Pakistan have not always been willing to plant cane instead of other cash crops like wheat and rice. Therefor there has been a general trend towards stagnant growth in the acreage under sugarcane. On the other hand, crops like wheat and rice command a higher price in the foreign markets. This further increases the tendency of farmers to prefer planting wheat or rice instead.
Low yield: The matter of greatest concern is the low yield per hectare and the sucrose content (sugar recovery). It is the very well below the world average and this is the source of great worry for the successive governments. The table on the next page gives the whole picture of the sugarcane crop for the past fourteen years.
Looking at the figures it has been observed that the area, production and per acre yield of sugarcane has increased remarkably. The area increased from 388,000 tons in 1960-61 to 1.05 mn tons in 1998-99. Several factors have contributed towards this increase. These include better support prices, input credit by the factories to growers and institutional loaning from financial institutions. Productivity per unit area has been, however, low in Pakistan.
During the year 1998-99, production of sugarcane was 33.4 mn tons in Punjab, 17 mn tons in Sindh and 5.2 mn tons in NWFP. But the yield per hectare was highest in Sindh (62.91 tons), followed by NWFP (45.46 tons) and then Punjab (42.79 tons).
AREA, PRODUCTION, YIELD AND UTILIZATION OF SUGARCANE BY SUGAR INDUSTRY
|YEAR||AREA HECTARES||PRODUCTION MILLION TONS||YIELD TONS PER HECTARE||UTILIZATION BY SUGAR MILL(%)|
On average, mills consume about 80% of the total sugarcane production in Punjab, 87% in Sindh and 30% in NWFP. The balance quantities are utilized by the gur industry.
Before we proceed further, a brief look at the production process will help us in better understanding the industry. The sugar production process is very much standardized. The Heavy Mechanical Complex locally makes most of the machinery and there is no need to import it. 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.
The world is producing around 130 million tons of sugar with the demand hovering around 120 million tons thereby creating an glut in the market. The table below illustrates the world sugar production and distribution.
WORLD PRODUCTION AND SUPPLY OF SUGAR
(Figures in 1,000 metric tons)
|Year||Begin. Stocks||Production||Imports||Total Supply||Exports||Domestic Consumption||Ending Stocks|
Source: US Dept. of Agriculture
A region wise breakup of sugar production is given below:
|North America||1997-98||12,861||Former USSR||1997-98||4,029|
|Central America||1997-98||3,469||Sub-Saharan Africa||1997-98||6,108|
|South America||1997-98||21,960||Middle East||1997-98||3,352|
Source: US Department of Agriculture.
The oversupply in the international market will make the going tough for Pakistan, due to falling international sugar prices. As mentioned before there are 78 sugar mills in Pakistan having a capacity to produce around 5 million tons of sugar if their capacity is 100% utilized. But this has never been the case and every year there is idle capacity. The break-up of the sugar mills is given below.
CAPACITY WISE GROUPS OF SUGAR MILLS
BELOW 4,000 TCD
|No. Of sugar mills||8||9||5||0||22|
4,000 TO 6,000 TCD
|No. Of sugar mills||14||22||1||1||38|
6,000 AND ABOVE TCD
|No. Of sugar mills||10||8||0||0||18|
PROVINCIAL GRAND TOTAL
|No. Of sugar mills||32||39||6||1||78|
There has been a drastic increase in the sugar mills and in the last 10 years or so it ahs almost doubled. The main reason being the high profitability in this industry and no entry barriers with the capital requirement not that high as well. This resulted in the increased capacity which has never been utilized 100% which is a great loss to the industry and the economy as a whole. Most of the sugar mills in the NWFP rely on sugar beet rather than on sugarcane and this constitutes 0.5% of the total sugar production in the country.
The sugar production has always been fluctuating every year. There has been no stability. Very recently we had two exporting years after two decades of importing but this year it looks like we will be importing again as the sugar production is well below the domestic requirement.
The recovery ratio has never improved for the past so many years and it has remained well below the world average. It is always hovering around the 8.2% mark. Efforts have to be made to get this ratio up so that there is not only better quality but also better quantity of sugar for the years to come. Even between the provinces it fluctuates a lot. The best is of Sindh (8.96%), followed by NWFP (7.95%) and then Punjab (7.79%).
SUGAR PRODUCTION & RECOVERY %
|YEAR||NO. OF MILLS||CANE CRUSHING TONS IN MILLION||SUGAR PRODUCTION TONS IN MILLION||RECOVERY %|
Source: PSMA Annual Report ‘98-99
BY-PRODUCTS OF SUGAR
In Pakistan, the utilization of sugar by-products has received almost no attention. It is estimated that if these by-products were utilized fully, Pakistan would be able to earn about $300m annually. The three principal by-products of the sugar industry are:
- Press Mud
They constitute around 40% of the weight of the total cane crushed. 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. Cost of production and thereby prices of sugar could also be brought down with the proper utilization of the by-products.
Molasses is a dark colored heavy liquid from which number further sugar can be crystallized by regular methods. It is mainly an agricultural product. It 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. Almost 85% of it is exported in raw form. If all molasses is converted into alcohol, the country could earn more foreign exchange through its exports; or if blended with gasoline will provide gasohol, thus reducing oil imports. The table gives the complete picture.
PRODUCTION AND EXPORT OF MOLASSES
Source: PSMA Annual report 1996-97
It is the fibrous material left after the juice has been extracted from sugarcane. It is utilized in the sugar industry itself as fuel for generation of steam so as to run the boilers. The surplus bagasse can be utilized in any of the following ways:
- processing it to make hard boards, cartons and chip boards
- for making pulp for manufacture of soft board and tissue paper
- as a raw material for Medium Density Fiber Board.
- And using this MDFB to make light furniture.
Bagasse production amounted to
This by-product is a very valuable source of organic matter for giving fertility and tilth to the soil. Some sugar factories sell press-mud and the compost made therefrom to the cane growers at a nominal cost as it is very useful for higher yield and improvement of sugarcane.
COSTS AND PRICING
The major costs borne by the sugar industry is of sugarcane. It alone constitutes around 62% of the total cost of production. Add to that the other variable costs and the costs really become very high. Taxes are also imposed heavily and this further shoots up the prices to a considerable extent. It is estimated that it costs around Rs. 20,000 to produce a ton of sugar. Our costs are the highest in the world considering that the international price is hovering around the $200 mark while our yield of sugar content is the lowest. Pakistan cannot compete in the export market without support.
Support prices for the sugarcane are fixed by the federal ministry of food and agriculture from year to year and are usually different for Punjab and Sindh. This year the support prices are Rs. 35 per maund for Punjab and NWFP and Rs. 36 for Sindh. The support prices have been increased by about 220% over the last ten years whereas the sugar prices have increased by 100% during the same period.
INCREASE IN SUGAR PRICES & SUGARCANE SUPPORT PRICES
(Support Price Rs. Per 40kg)
|Year||PUNJAB||SINDH||NWFP||Average Sugar* Prices/kg||QUALITY PREMIUM|
The next table gives us a clear picture of the costs of production and the support prices that are fixed by the government without giving any consideration to the sugar industry who have to face the hardships in terms of low profits. As it is they are making very low profits and this increase has really hampered their growth with some getting sick as well.
COST OF PRODUCTION AND SUPPORT PRICES OF SUGARCANE
(Rupees per 40 Kg.)
|Cost of Prod.||Support Price||Cost of Prod.||Support Price||Cost of Prod.||Support Price|
Source: DAWN (EBR: Oct.18-24, ’99)
The disproportionate increase in sugarcane support prices has reduced the profitability of the sugar industry. The sugar mills in Sindh are also required to pay premium for better quality but are not allowed to discount the price for poor quality.
DEMAND AND SUPPLY OF SUGAR
Over the years Pakistan was never able to meet its domestic demand of sugar and was a net importer for most of the time. The last two years have been really good for the sugar industry and at last we became a net exporter of sugar but not for long as we are poised to import some more to meet our annual demand.
The total demand comes to around 2.9-3.1 million tons at a per capita consumption of 22Kgs.of sugar. This year the situation is precarious and import in inevitable. The table below gives the complete picture of the supply and distribution for the past five years. For the current year 1999-2000, there has been a demand forecast of 3.2 million tons against the production of 3 million tons with some stocks carried forward from previous year as well.
PAKISTAN SUGAR PRODUCTION, SUPPLY AND DISTRIBUTION,
‘93-94 to ‘98-99
|T.Sale upto 30th Sept.||2,613,148||2,736,784||2,366,481||1,980,072||3,042,165||3,170,374|
|End Stock 30th Sept.||309,309||264,689||103,553||413,290||513,062||371,389|
Source: PAGE Feb. 28, 2000.
There is a glut of sugar in the international market as well which has caused the prices to plummet from as high as $400 per ton to less than $200 per ton now. The excess supply is sold without any relevance to the domestic prices and the costs of production. Pakistan will find it cheaper to import sugar rather than produce as the costs here are very high.
EXPORT AND IMPORT
The table below gives the region wise distribution of world sugar production, exports and imports.
(1000 metric tons)
Source: US Department of Agriculture
The major exporters and importers of sugar for the year 1998-99 are
(1000 metric tons)
Source: US Department of Agriculture
Pakistan has basically been a net importer of sugar. Very recently it became an exporter but it looks that it wouldn’t last long as a shortage is expected this year. The tables below illustrate the whole scenario of the exports and imports of sugar.
|FISCAL YEAR||QUANTITY TONS||VALUE (Rs. in millions)|
PAKISTANI EXPORTS (COUNTRY-WISE)
DURING FEBRUARY 1998 TO FEBRUARY 1999
|COUNTRY||QUANTITY (TONS)||AMOUNT (MILLION $)|
The total exports for the year 1997-98 and 1998-99 were 457,471 and 616,095 tons fetching $165 and 145 million respectively. The exports had to be heavily subsidized at the rate of Rs. 2500 and 4500 per ton respectively for the two years in question costing the exchequer Rs. 5.5 billion.
The whole break-up of the export price is given below:
ECONOMICS OF SUGAR EXPORT (Rs. PER TON)
|SUCROSE RECOVERY %||8.5|
|EXPORT PRICE FOB KARACHI||11,150|
|LESS: COST OF PRODUCTION:|
|TOTAL COST OF PRODUCTION||16,764.00|
|EXCISE DUTY AND SALES TAX||2,250.00|
|NET REBATE ON SUGAR||6,750.00|
|NET PROFIT TO THE EXPORTER||1,136.00|
|TOTAL REBATE PAID IN SUGAR EXPORT||(Rs. in millions)|
|FEB 1998 TILL FEB 1999||5,489.00|
|EXPECTED REBATE TO BE PAID ON FURTHER EXPORT||2,700.00|
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.
The total imports of sugar by Pakistan for the past twelve years in summarized in the table below.
IMPORT OF SUGAR
(Rs. In thousands)
|PRICE(Rs. Per ton)|
There was no import of sugar for ‘97-98 and ‘98-99 as there was a surplus here.
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.REASON FOR IMPORTS
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.
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 cane factories increased by 75%. For quite some time a ban had been placed on the imports of the machinery for sugar mills. The government, however, is expected to raise this ban partially in order to allow the import of spare parts for existing mills. The government so as to preserve sugar for the local market also banned exports. But now with bumper sugar production, exports were allowed.
The Agricultural Package announced by the government in 1996-97 gave a number of incentives to several agro-based industries including sugar. These incentives were aimed at increasing the agricultural output and hence the industries dependent on these outputs like the sugar industry. The salient features of the agricultural package were:
- Adequate returns to the farmer;
- Relief in prices of key agricultural inputs;
- extension of agricultural credit;
- Improvement of the irrigation and drainage system;
- Steps against adulteration of fertilizer, pesticide and seed;
- Livestock promotion;
- Agricultural research and extension;
PROBLEMS FACED BY THE SUGAR INDUSTRY
Although the sugar industry is the second largest industry of Pakistan, it is faced with a lot of problems that need to be solved so that it gets back on the track of profitability and growth. A major restructuring has to be done so that not only the sugar mill owners but also the farmers also benefit. Efforts have to be made to create complete harmonization among the growers and the mill owners.
- OVER CAPITALIZATION
The cost incurred on machinery and equipment including its commissioning on the sugar mills established after 1990 increased by 100%, which are an over burden on the industry.
X MUSHROOM GROWTH OF SUGAR MILLS
There has been a major influx of sugar mills due to the profitability of the industry, which soon declined. All these new units had incurred heavy costs in establishing these plants due to which their payback time is also very long. Most of the sugar mills have been established through loans and the financing charges are taking a heavy toll on the mill owners’ profits
- SURPLUS INSTALLED CRUSHING CAPACITY
The available total installed crushing capacity in the country can produce 5.6m tons of sugar as against the domestic requirement of 3m tons by increasing the average yield of sugarcane to 72 tons per hectare and average sucrose contents to 10%, which is the international average crushing for 180 days season as declared in the sugarcane as with 85% efficiency. Whereas production can further be increased to 6.57m tons on 100% efficiency.
- UNDER-UTILIZATION OF CAPACITY
There has been a deteriorating condition in the face of increased installed capacity since the e crushing season of 1986-87 the last of zoning to the season 1997-98 the 11th after de-zoning. The availability of sugar cane from 168 TCD on 180 days season reduced to 112 TCD based on 160 days crushing season. The industry has not run on 100% capacity for quite a few years now, which is a major setback not only for the sugar industry but also for the economy as a whole.
Till early 80s the sugarcane availability was in excess to available crushing capacity but now the scenario is different and the available crushing capacity is being under-utilized as under:
- LOW PRICE AND HIGH COST OF PRODUCTION
In addition to all these problems the taxation and other government policies have also discouraged the sponsors, which needs to be reviewed in a broader spectrum. Favorable consideration by the government is needed in this respect for stabilizing the sugar prices in the country if we have to save the industry and financial institutions from the disaster in sight. The prices have to be rationalized and should take into account both the farmers and the mill owners. As shown before there has been a disproportionate increase in the price of sugarcane compared to sugar which augurs badly for the industry.
Efforts have to be made to bring the cost of production down as it is harming the local industry. The sugar is not competitive in the international market and subsidies have to be provided to enable exports. It costs around Rs. 20,000 per ton to produce against the international price of around Rs. 11,000. This disparity has to be reduced and very fast.
- LOW YIELD PER HECTARE AND LOW SUCROSE CONTENT
As compared to the other sugarcane producing countries, Pakistan’s yield per hectare is very low at only 47 tons per hectare. India is at 71.1 whereas Columbia is the largest at 132.80 tons per hectare. The word average is 63.70 ton per hectare and hence Pakistan lies really below that level. Pakistan needs to grow newer varieties of sugarcane that can give us a high sucrose content and also prompt delivery has to be made so that the sucrose content does not go into waste. The table below gives a clear picture of the scenario:
Yield per hectare & Sugar recovery in different countries in 1997-98
|Country||Yield Tons/ha||Recovery of raw sugar (%)||Refined sugar values (%)|
Scientists quote following major constraints, which result in the low per hectare production of sugarcane;
- Insufficient irrigation water available for the crops. The sugarcane crop requires 2 times more water than the cotton or rice crops.
- Usage of inadequate dose of fertilizer and insecticides and pesticides.
- Proper timing for cultivation is not being observed.
- Growers are not making proper preparation of land.
The yield per hectare can be increased if the growers use improved and high yielding varieties of sugarcane recommended for particular areas.
- LOW RECOVERY
Another area of concern for the sugar industry is the low rate of sucrose recovery. This calls for an improvement in the crop variety as well as the milling sections of the sugar mills. In most sugar-producing countries, the mills have computerized systems which monitor the age of the cane. This helps in bringing in the cane within six hours of harvesting during which it ahs the highest contents. Since the monitoring is not so precise in Pakistan, The crops lose some of their sucrose contents before they can be crushed. Usually the harvested cane lies in the fields before it is lifted. The journey takes another 12-24 hours. By the time the sugarcane gets weighed, a lot of the sucrose content is lost. It has been calculated that almost 20% of the 11.5 recoverable is lost due to the wait. This loss, borne mainly by the small grower is unfortunate because they provide 70-80% of a sugar mill’s cane. Consequently the average falls dramatically resulting in reduced premiums to all growers.
- ‘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
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.
- AVAILABILITY OF CREDIT
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. Only recently has the government shown some urgency and has told the ADBP to give credit to the growers and the mill owners so that they are able to finance their working capital requirements. Also the interest rates have also been reduced which lowers the cost of borrowing as well.
- REQUIREMENT OF WORKING CAPITAL
A minimum cash of Rs. 40 million is required to rotate the crushing and production cycle in the first month of the season. Setting up a project is one thing, which, in most cases is financed by the DFIs, but the availability of working capital is the lifeblood for a project. It is the responsibility of the entrepreneurs to arrange for the working capital so as to keep his mill running during the crushing season.
Some companies prefer to use the option of borrowed funds both from commercial banks and by way of using suppliers’ credit which does not help the company in the long-term survival of the project. Availability of the working capital plays a critical role.
- POLITICAL INTERVENTION
Unfortunately, Pakistan’s sugar industry is mostly owned by political personalities and majority of the sugar mills were set-up with the help of DFIs normally trapped with the working capital crisis. Consequently, some of the mills have already 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.
Excise duties, sales tax, octroi, district council tax, cess funds, market committee fee, surcharge on various taxes have over burdened the industry. The sugar industry is contributing a sum of Rs. 7,415 million per season to the government exchequer towards sales tax revenue and Rs. 860 million as road cess. Such huge taxes have eroded the competitiveness of the industry. Sales tax was also imposed on bagasse which was a little harsh as it was being used as fuel and also to produce fibreboards.
- AVAILABILITY OF LAND
It has been seen that most of the farmers are shifting towards the sugarcane crop as it is more profitable but this is mainly at the cost of the wheat and cotton crops, as land used for sugarcane cultivation cannot be reverted back to rice or cotton. Thus the opportunity costs of cultivating sugarcane are very high. A rough study showed that the farmers and the national economy suffered substantial losses running into billions of rupees by this shift from cotton to sugar cane. During the year 1999, the area under sugarcane cultivation increased by 9.3% over previous year, mainly because the cotton crop was considered rather risky.
- LACK OF RESEARCH
It has been seen that no proper attention is paid to this important aspect of the sugar industry. Pakistan lags far behind in terms of the yield per hectare and also in terms of recovery of sugar. The sugarcane grown here is not of good quality and it has a very low sucrose content as compared to other countries. There are two research institutes in Punjab and one each in Sindh and NWFP. But proper research and extension work is lacking. Despite all these institutions there has been no improvement in the quality of sugarcane being produced and the sugar recovery percentage today is the same as ten years ago.
New technologies can be used in Pakistan to increase the per hectare yield but since the farmers are not accustomed to them, they are not being adopted. A proper orientation program has to be launched educating the farmers of the benefits that they would derive from higher production with high sucrose content. This will require full support from the mill owners, as they are the ones who will bear fruits in the future.
- OTHER PROBLEMS
- Land holdings of farmers are small, as they are not allowed to own huge areas of land. A sugar factory has to deal with around 15,000 cane farmers/suppliers.
- The cess recovered by the government is hardly ever spent on the improvement of roads from farms to sugar factories.
- The zoning system has been abolished which has had a dampening effect on the sugar factory owners and made them indifferent. Because of this middlemen have entered the market, and are making money at the cost of actual tiller. This is also increasing the costs for the mill owners.
- Quality of sugar is lower than international standards, which is due to the use of low grade chemicals by the factories.
- Sugar factories are smaller by international standards, yet they are underutilized.
- The factory owners have to pay the growers/suppliers during the crushing season, while the sales of sugar are spread over the year. This creates a liquidity problem for the mill owners.
- The government’s intervention in the sugar industry has really hampered its growth. Last year the industry had to suffer a loss of Rs. 8 billion due to the governments’ policy to import the product and also because it increased the support prices.
- The early start of crushing season benefits the farmers and the delayed one, the sugar mills. The government, therefore, makes mandatory on the mills to start the crushing season in the month of September every year, but the official schedule is never observed. The sugar mills apply various tactics to cause delays.
The sugar industry, which is the second largest in the country after textiles, has a potential of great economic significance for the country. It employs more than 100,000 persons while more than 8.76 million farmers are involved in the production of sugarcane. Therefore all out efforts have to be made by not only the government but also the mill owners and farmers to get the industry out of its present state of decline.
There is an urgent need for restructuring of the sugar policy so that the cost of production could be brought down through maximum capacity utilization of the existing mills. Situation also demands for the early announcement of the sugar policy prior to the start of crushing season to encourage the millers.
Pakistan is producing high quality sugar of international standards but it is costlier due to various factors. The government should take up cost studies at the growing sugarcane stage for the purpose of fixing of 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 international cost accounting models followed in other countries of the world, will prove to be a great help in this direction. Cost audit should be taken up both in letter and in spirit. It identifies areas of weaknesses, invisible losses and unaccounted inefficiencies, which ultimately result in adverse effects on the financial health of an organization. It also helps in getting early warning signals for remedial action.
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 production of surplus sugar during the next five years as shown in the following tables.
(Figures in Million Tons)
|Varying Capacity||Cane crushing||
|At 76% (Present)||38.884||3.200||2.959||0.241 (Estimate)|
|Varying Recovery %||Sugar Production||Domestic Demand||Surplus Sugar|
Source: EBR DAWN
Installed crushing capacity of Pakistani sugar mills is much higher than the normal estimated practical capacity of 56 million tons. The existing mills are sufficient enough to produce around 5 million tons of sugar operating at full capacity. We can easily meet the country’s sugar requirements for the next 5 years. The government should focus its policy for increasing the production of sugarcane on the existing area under cultivation and sugar output by the available mills. It should not encourage further increase in the number of sugar mills.
It is seen that there has been constant negligence towards research and development of newer varieties of sugarcane giving us both high yield per hectare and high sucrose content. Research and training institutes may be established under the umbrella of agricultural universities in the provinces where sugar mills are established. The country lacks in highly qualified personnel in sugarcane and sugar technology. Research stations on central, provincial and divisional levels must be established by diverting total cess money lying unutilized and diverting 50% of the current and future cess funds towards it. Paisas 0.05 per Kg of sugar may be donated by the sugar mill owners to meet the deficit expenses of these institutes. Governing body of these institutes and research stations must comprise of directors from the government, sugar mill owners and scientists on equal basis.
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 and sugar per hectare thus hampering the national economy. Sugarcane payments must be based on sucrose recovery basis, which will encourage the production of good quality cane and thus will boost exports.
Generally, the rate of recovery and value of other useable contents of sugarcane determine its price to the growers. In the developed agricultural states, independent laboratories determine the rate of recovery. However no such laboratory exists in Pakistan. The sugar mills have their own laboratories and the owners are so strong and powerful that they never allow the poor farmers to raise a voice against their self-claimed recovery rates.
The government should on priority basis, try to find out solution to the legitimate grievances of the farmers as well as of the mill owners, if any, and bring about the reconciliation between them so that the farmers, the sugar industry and the national economy does not suffer. Because of the powerful influence of the mill owners on the government the farming community is losing faith in the credibility of the government. The government has to sort out this dilemma very carefully & effectively. One way would be to reactivate the Sugar Board, setup by MINFAL under the chairmanship of the Minister for Food and Agriculture and on which all the concerned agencies are represented. This board used to meet twice a year and tried to resolve the conflicting issues. But for some reasons, it has gone into dormancy during the last 4 years.
The biggest problem right now is that the farmers are not educated. To familiarize the growers with basic agriculture and production practices, adequate extension work has to be conducted by the sugar mills. Extension personnel should be in constant touch with cane growers and educate them with regards to improve production practices and water management technologies.
The industry feels that developing a harmonized culture between the growers and the millers is the need of the hour to get the maximum benefit of this important segment of the economy. For achieving that target the issue of support price should be resolved once and for all, by giving status of a crop to the sugar produced in the country. It is also practiced elsewhere in the world. Under this mechanism the millers will be made responsible to lift the cane crop at an agreed price provided the support price is subsidized to the millers. The prevailing system is proving nothing but increasing the cost of production.
Cost of production and thereby prices of sugar could also be brought down with proper utilization of the by-products. Efforts should be made to develop some downstream industries that can utilize their by-products to the fullest. There should be value-added exports of these by-products rather than exporting them in raw form, as there is a lot of export potential. It is estimated that if these by-products were utilized fully, Pakistan would be able to earn about $300m annually. In some countries, sugar itself is considered to be a by-product by utilization of bagasse and molasses for the downstream industries is more profitable.
Efficient infrastructure support be created and required resources be mobilized in facilitation of the sugar exports. If the industry utilizes the installed capacity, then there is an export potential which would help in earning the much needed forex for the country provided that the exports are subsidized heavily. 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.
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. 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.
Production credit be made available to the cane growers with the minimum possible markup. Procurement prices of sugarcane be increased in proportion to the prices of inputs to sustain the interest of the growers. Proper advance planning be made in consultation with PSMA for smooth disposal of sugar to be implemented in the ensuing season.
Very recently the government abolished the zoning system. Dezoning of sugar mills has brought in middlemen, who are raking in commissions from both the parties, as a result of which cost of sugarcane has increased for the millers. Hence the zoning system must be reinstated so that the mills may develop enough sugarcane in the areas by providing financial help and latest technology to the sugarcane growers. Since Sindh has a comparative advantage in cane cultivation, zones may be developed with necessary infrastructure and facilities.
Sugar industries in Sindh might be able to survive due to high sugar recovery, but those located in Punjab do not seem to have a bright future until and unless some concrete steps are taken by the government and the mill owners themselves to get them back on track. The task ahead is no doubt laborious but there has to be a beginning. If there is total commitment on the part of all parties, in all probability the sugar industry stands a good chance of revival.
PERFORMANCE OF SUGAR COMPANIES LISTED AT THE KSE
There are a total of 35 listed at the KSE. The total paid up capital of these companies comes to around Rs. 5 billion. Most of the companies were listed during the 1980s and the early 90s when the sugar industry was booming with phenomenal amounts of growth predicted in this sector. There were very less barriers to entry and the government promoted it as well not realizing the problems that it would create in the long run for the sugar industry.
This resulted in excess capacity in the industry and in no single year in the 1990s has any sugar company 100% of its capacity as found out from the accounts of the companies. It is really something very sad and a source of worry for not only the mill owners but also the government as there are idle factors of production that are being wasted. The mill owners’ costs are also escalating, as they have to spread the costs over a small output, which thereby increases the sugar costs for the consumers thereby promoting anger from them as well.
The government is in a catch 22 situation right now. It has no idea as to what to do with these extra sugar mills and how to utilize their capacity. No efforts are being made to increase the sugarcane crop so that it could be utilized. There has always been a lack of a long-term policy that could take into perspective all the factors and then concrete steps could be taken to rectify the situation so that nobody loses out in the long run.
It doesn’t require a very large amount of capital to set up a sugar mill. All the machinery is available from the Heave Mechanical Complex (HMC) which reduces the imports and the forex requirement as well. Also the mill owners are easily able to over invoice the costs so that they are able to get huge loans from the banks and make money from that as well. This has been going on with no checking whatsoever and the government is paying heavily now, as the default situation has really become uncontrollable for them. Now there has been a ban on new sugar mills by the government which has really come in late as the damage has already been done and there seems to be no remedy for this in the short run. Pakistan does not have the export potential as well as the cost is well above the prevailing world sugar price due to which the government has to provide huge subsidies to make it profitable to export sugar. This cannot go on for a long time.
The total sales of the sugar industry are hovering around Rs. 30 billion. The figures that we could get were till the year 1997-98 as the latest figures are a little hard to find. According to those figures the top ten leading companies according to their revenues are given as under:
|Company Name||Sales (Rs. Million) 1997-98|
|Dewan Sugar Mills Ltd.||2,107.09|
|Shakarganj Mills Ltd.||1,816.42|
|Shahmurad Sugar Mills Ltd.||1,459.80|
|Habib Sugar Mills||1,437.43|
|Crescent Sugar Mills||1,421.19|
|Tandlianwala Sugar Mills Ltd.||1,394.26|
|Al- Noor Sugar Mills Ltd.||1,332.80|
|Shahtaj Sugar Mills Ltd.||1,270.53|
|Haseeb Waqas Sugar Mills Ltd.||1,149.78|
|Faran Sugar Mills Ltd.||1,103.31|
Source: VIS 1998
Apart from the figures above, there are many companies that have sales above the billion-rupee mark and there are many whose sales are hovering around the 800 to 900 million mark.
All the companies that have achieved the top position have done so basically because of the bumper sugarcane crop and also because the government allowed the export of sugar even though it had to subsidize it heavily at Rs. 2,500 per ton. This improved the performance of the companies and some companies sales increased by as high as 90% compared to previous year. As expected the 1998-99 year also had a bumper sugarcane crop and it is expected that this year also the companies had performed very well as the government allowed exports at a subsidy of Rs. 4,500 per ton. This not only improved the sugar industry but also helped the govt. earn the much needed foreign exchange.
Looking at the figures above nobody can say that there is a crisis situation in the industry but the sales does not give the complete picture. The sales are high mostly because of the high sugar prices that they are getting and also because most of the companies are able to produce large quantities because of high installed capacity compared to others which are small and thus cannot compete with the big ones.
Majority of the top companies are situated in the Punjab area where the sugarcane crop is larger and thus the companies are able to acquire more cane to produce more sugar.
The next thing that best measures the performance of the companies is the capacity that the company utilizes. It gives a measure of the productivity and the efficiency of the firm in utilization of the resources that it has at its disposal. It was around only 55% for the year 1996-97 and the govt. had to import sugar to meet the domestic the requirements. The industry average is 63% for the year ended 1997-98 and for the year ended 1998-99, it increased marginally to 76% which was mainly because of the bumper crop that we had for both the years. But this does not mean that individual firms did not utilize their 100% capacity as most of them exceeded it as well. It is mostly the sick and the inefficient companies that have brought the percentage down drastically.
The table below gives the top ten companies in terms of capacity utilized:
|Company Name||Capacity Utilized (%) 1997-98|
|Shakarganj Mills Limited||103.3364|
|Dewan Sugar Mills Ltd.||103.3854|
|Shahtaj Sugar Mills Ltd.||154.8327|
|Shahmurad Sugar Mills Ltd.||134.1941|
|Faran Sugar Mills Ltd.||106.6435|
|Bawany Sugar Mills Ltd.||89.34609|
|Habib Sugar Mills Ltd.||95.56429|
|Al-Noor Sugar Mills Ltd.||275.4781|
|Husein Sugar Mills Ltd.||100.4291|
|Fecto Sugar Mills Limited||139.8407|
Source: VIS 1998
Most of the companies that were not sick and could work for the required crushing season have earned profits for the year ended 1997-98 and this trend is expected to continue for the year 1998-99 as well. This was mainly because of the increase in the sugarcane crop and also a marginal increase in the prices of sugar as well. The large quantity of sugar produced also helped in the increase of profits as the volume increased the revenues by quite a margin for many firms.
The total net profit earned by the industry, according to Vital Information Services (VIS), comes to around Rs. (271) million. The negative figure implies that there are a few major players in the industry who are able to control it and have a great influence on the others and the industry as a whole. The PSMA should make efforts to try and get rid of this disparity as this will hamper the growth if this industry in the long run.
The figure last year was also in the negative at Rs. (254) million. But the major players have been earning heavy profits for both the years.
In Pakistan, it is the general trend not to pay dividends even if the company is earning heavy profits. This is mainly because there was nobody there to protect the rights of the minority shareholders and the company exploited the situation fully. Now with the setting up of SECP, the companies have been woken up and they have paid heavy dividends to avoid the wrath of the SECP. The directors and the family members of the company hold the majority shares and they decide to “plough back” the profits, as it will give them a better return for the next year.
The total dividends paid by the sugar industry for the year 1997-98 was Rs. 122 million, which was 8% less than what was paid last year. The SECP has been really strict on the companies who are declaring profits and then not passing on the benefits to the minority shareholders. So this year it is expected that majority of the mill owners will declare dividends at last. The highest dividend was paid in the year 1995-96 when the total dividend was Rs. 236 million. The industry needs major improvement in terms of the dividend payout. The top dividend payers are given in the following table.
|Company Name||Dividends Paid (Rs. Million) 1997-98|
|Habib Arkady Ltd||45|
|Habib Sugar Mills Ltd||32.4|
|Al-Abbas Sugar Mills Ltd||17.36|
|Sindh Abadgar’s Sugar Mills Ltd||10.43|
|Premier Sugar Mills Ltd||9.38|
|Noon Sugar Mills Ltd||7.76|
Source: VIS 1998
The sugar industry is the second largest industry of Pakistan after the Textiles sector. All out efforts have to be made to get this major industry back on track so that it starts earning profits. Some of the major recommendations that we think could help are:
- Efforts have to be made to rationalize both the sugarcane and the sugar prices so that the mill owners are given a level playing field. If the sugarcane prices are increased so should the sugar prices so as to compensate the mill owners as well as their costs are increased while the selling price is still kept the same. This is sheer injustice.
- The major requirement is to try and increase the sugarcane production either through increasing the yield per hectare or by increasing the area under cultivation. If this is done, then the sugar industry will be able to utilize its capacity and also there will be chances of lowering the costs as they will be spread over a large volume.
- Export potential exists and it should be pursued vigorously. But for that our costs have to be brought down drastically to match the world prices of $ 200 per ton. This can only be done if the support prices are rationalized and also more sugarcane is also produced. Subsidies can’t be given all the time as there is already a major budget deficit and this will drastically increase it.
- Quality of the sugar should also be improved so that they fetch a good price in the international market. For this emphasis should be laid on ISO certification. Very few companies have acquired this certification. This number has to increase to create a better image of our industry in the international market as a quality conscious industry.
- BMR needs to be done as well so that the new technology replaces the old ones and this will bring down the costs as well. The government should provide credit for this at discounted rates like it plans to do for the Textile sector.
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