Annual review
Annual Review 1993
The chairman’s review of the season as published by the association.
| Annual Review 1993 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Altaf M Saleem | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Chairman) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dear Members: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The Sugar Industry of Pakistan consisted of merely 2 Sugar Mills in 1947-48 with a production capacity of 10,000 Metric Tons of sugar. In the first twenty years the number of Mills increased to 17 and sugar production to 232,000 Metric Tons. By 1988 we had 44 Mills and sugar production jumped to 1.78 million tons. During the last 5 years the Sugar Industry has seen a period of phenomenal but unplanned growth. During 1992-93 season 61 Mills were operational with capability to produce 4 million tons of sugar. Due to unplanned growth, availability of raw material did not keep up with the requirement and the Industry went into a phase of under utilization of capacity. It has been observed that area under sugarcane does not increase in direct proportion to the installation of new capacity. However with increase in capacity, utilization of sugarcane by the Mills increased from 38.46 percent in 1982-83 to 71.67 percent in 1992-93. . |
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| Some portion of sugarcane is used for Gur and Khandsari as these commodities
have their own place in our rural culture. This requirement will always
be there and it is wrong to expect that with increase in production capacity
of white sugar, we will succeed in diverting 100 percent sugarcane to the
Mills. It is, therefore, counter productive to increase sugar production
capacity any further unless there is a break through in per hectare yield
of sugarcane. Sugarcane yield has unfortunately remained static between
35 Metric Tons and 43 Metric Tons per hectare during last ten years. Sugar Production Capacity and Consumption The consumption of main sweeteners (Sugar and Gur) in Pakistan has remained between 26-34 kgs with an average of 30 kgs per capita per year. The share of Gur in sweeteners consumption per capita has been falling. It fell from 60 percent in 1982-83 to 31 percent in 1987-88. The future forecast of sugar demand on the basis of substitution of Gur with refined sugar is given in Table 2. |
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| It can be seen that against a projected consumption of 3.4 million tons
of refined sugar in 1998, we will have a production capacity of 4.4 million
tons in 1994.
National Loss Unplanned and haphazard growth of Sugar Industry during last 5 years has cost the nation heavily. This policy has permanently damaged the Sugar Industry and the country lost great opportunities for all time to come. Trend world over is in favour of vertical expansion of the Sugar Industry, to achieve economies of scale. Compared to a standard capacity of 4,000 tons in Pakistan the world sugar industry is moving towards 10,000 to 20,000 tons capacity by vertical expansion. Long term damage inflicted on the Sugar Industry as a result of defective Government policy during the last 5 years is summarized below: 1) Instead of vertical expansion, sugar production capacity has been increased mainly through 3000 TCD to 4000 TCD mills. These new Mills are uneconomical as these have been established against the principle of economies of scale. Scope of expansion of established Sugar Mills has been permanently blocked. We have landed in a situation where production capacity is 4.4 million tons, present domestic demand is 2.67 million tons and majority of Mills are 3000 TCD to 4000 TCD. 2) All new Mills installed during last 5 years were set up in undue haste and without looking into the latest technology options available worldwide. All new Mil1s have traditional low pressure boilers. By ii1stalling high pressure boilers, these Mills could supply 300 MW electricity to the National grid without using extra fuel. 3) Sugar Industry has been pushed in toe regime of under utilization of capacity because of rapid expansion of industry without corresponding increase in raw material. We need to increase sugarcane output by 4-5 percent against actual growth rate of 2 percent for last 10 year. Importance of Sugar Industry for National Economy Sugar Industry is vital for national economy. It utilizes sugarcane which is a major cash crop grown in Pakistan. Sugar and sugar based products are essential ingredient of common man's food. Sugar is the cheapest source of energy in our diet. Pakistan Sugar Industry has done well by increasing domestic sugar production of 10,000 tons at the time of partition to 2.4 million tons in 1992-93. With this level of sugar production we have not only achieved self sufficiency in sugar but are now in a position to export. Sugar Industry acts as an effective catalyst of rural uplift by providing a ready market for the produce of farmers in these areas. Sugar Industry along with the farmers contributes funds for provision of basic infrastructure like roads in rural areas. The industry contributed Rs.200 million under this head in 1992-93 alone. Our contribution to national exchequer in shape of Excise Duty and other state levies is even higher. Sugar Industry contributed Rs.5.1 billion towards Central Excise Duty in 1992-93. This constituted 14.1 percent of total Central Excise Duty collected by the Government. |
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| Option for the Sugar Industry Defective sugar policy during the last 5 years has landed the Sugar Industry virtually in an impossible situation.
The Industry has to make the best out of this difficult situation. We can not sit back and see this vital Industry perish. Government needs to understand the gravity of the situation. Quick corrective
action is required to salvage the situation. Pakistan Sugar Mils Association
has always drawn the attention of the Government and Government owned
financial institutions towards the ill affects of defective policy. I
wish to report with some satisfaction that, lately there has been some
realization at Government level and corrective action is underway. Following
urgent steps are required to save the situation from getting worse: Capacity Utilization Another country that could become a burden for the world market is Pakistan. That country has apparently embarked on an uncontrolled expansion process which could soon lead to unmanageable surpluses of mill sugar. To eliminate imports quite a number of new sugar mills have been put into operation in the past few years and the country's 54th sugar mill commenced grinding in 1992/93. However this is not the end of the expansion process and about 15 new mills in the Punjab and 9 in Sindh may be put into operation within the next few years. According to informed sources this could lead to the accumulation of surpluses and eventually to a collapse of the industry and already in 1992/93 the country will have a surplus even though no sugar will be officially exported. But unofficial exports to neighboring countries such as Afghanistan and Iran are estimated to reach more than 100; ()()() tons each year. If production does develop as expected official exports can be foreseen especially if the country continues to import sugar for internal political reasons. But as in the case of India this could require export subsidies which could prove to .be a burden for the milling industry. Production and Consumption, World Sugar Scenario Stocks are forecast to decline 1.1 million tons to the new 'stocks to
consumption ratio' of 19.9 percent, down from 21 percent in 1992-93 and
21.9 percent in the year before. |
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| Option for the Sugar Industry Defective sugar policy during the last 5 years has landed the Sugar Industry virtually in an impossible situation. • Over capacity of 1. 7 million tons, on the basis of domestic
demand of 2.7 million tons in 1993-94, has been created. Government needs to understand the gravity of the situation. Quick corrective
action is required to salvage the situation. Pakistan Sugar Mils Association
has always drawn the attention of the Government and Government owned
financial institutions towards the ill affects of defective policy. I
wish to report with some satisfaction that, lately there has been some
realization at Government level and corrective action is underway. Following
urgent steps are required to save the situation from getting worse: It will be a deadly option for the Sugar Industry to operate at a low level of capacity utilization. As surplus capacity has been installed, it has to be utilized in the best national interest. Sooner or later raw material availability will also improve. However, the key factor will still be disposal of surplus sugar in the international market. Pakistan Sugar Mills Association is projecting a sugar production of 3 million tons for 1993-94. This will position the industry to enter the export market with 500,000 tons of refined sugar after leaving a substantial buffer stock for domestic market. A brief comment about the sugar scenario in Pakistan is reproduced below from F.O.Licht's International Sugar and Sweetener Report: Another country that could become a burden for the world market is Pakistan. That country has apparently embarked on an uncontrolled expansion process which could soon lead to unmanageable surpluses of mill sugar. To eliminate imports quite a number of new sugar mills have been put into operation in the past few years and the country's 54th sugar mill commenced grinding in 1992/93. However this is not the end of the expansion process and about 15 new mills in the Punjab and 9 in Sindh may be put into operation within the next few years. According to informed sources this could lead to the accumulation of surpluses and eventually to a collapse of the industry and already in 1992/93 the country will have a surplus even though no sugar will be officially exported. But unofficial exports to neighboring countries such as Afghanistan and Iran are estimated to reach more than 100; ()()() tons each year. If production does develop as expected official exports can be foreseen especially if the country continues to import sugar for internal political reasons. But as in the case of India this could require export subsidies which could prove to .be a burden for the milling industry. Production and Consumption, World Sugar Scenario Stocks are forecast to decline 1.1 million tons to the new 'stocks to
consumption ratio' of 19.9 percent, down from 21 percent in 1992-93 and
21.9 percent in the year before. |
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| Domestic Production Versus Imports It is often said that domestic cost of production is higher than the world sugar price and as such Pakistan is an inefficient sugar producer. It is further argued that local production of sugar is a burden on the national economy and there is no justification of having a domestic Sugar Industry in Pakistan. It is said that the country would be better off by importing its total requirement of sugar. We can not draw any hasty conclusion from these arguments without looking at the bigger picture.
It can be seen from Table-5 that world sugar price was as high as 42.30 cents per pound in October 1980. The price dipped to a low 5.90 cents per pound 5 years later in 1985. It has been fluctuating between 11.60 cents and 13.39 cents per pound during 1993. It is obvious that sugar price can not be guaranteed at 13 cents per pound for the next few years. In other words, world sugar price was US$932 in 1980 and came down to US$130 per ton in 1985. It is now being traded at US$300 per metric ton. |
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| World Sugar Price and Domestic Cost of Production World sugar price is not the world cost of production. Only 15 percent of sugar production is traded in the free world market. All major sugar producing countries in world are protected by subsidy, import quotas, tariff protection or a combination of these measures. The USA and BC countries are major examples of this. Protectionism in one form or the other is rampant and surplus or over flow sugars find their way on the free world market which in effect is a 'dumping market' with the price that is very low and has no relation to the production cost. . Table-6 gives average world retail sugar price in selected capitals for 1984-1992. A look at the figure for 1992 shows that retail sugar price is atleast 3 times higher than the world sugar price in the free market. It is very clear from this data that Pakistan is not an inefficient sugar producer and it is not fair to expect that the cost of production can be brought down to the level of world free market sugar price. It is not the case for any sugar producing country and can not be true for Pakistan either. |
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| Sugar Export Vital But Not Possible Without Government Support With sugar production capacity being much in excess of our domestic requirement, surplus sugar will have to be exported. If we are unable to achieve this objective, huge stocks will pile up. Financial position of the industry will be adversely affected. Farmers will not be paid in time and we will get into a vicious cycle of fluctuations in sugarcane crop and under utilized capacity. As explained earlier in this review, sugar export is not possible without GovemJ11ent support. World free sugar trade at 17 million tons is very small. It will not be easy to get a share of 500,000 tons to start with. As all major sugar producing countries in the world are protected by subsidy, import quotas and tariff protection, Pakistan can not be an exception. Protected domestic market is essential to compensate for the loss on
exports. Sugar exports can help us improve our trade balance. We can earn
up US$125 million by exporting 500,000 tons of sugar in 1993-94. Foreign
exchange earnings will increase in future years. The Government can support
export efforts by taking following steps: 2) A twenty-jive percent export duty levied on export of Molasses may be withdrawn. Sugar Mills will be compensated to some extent by way of higher molasses price. However some of the molasses is being converted to value added products like Industrial Alcohol. If the export duty is removed from molasses, the Alcohol Industry will suffer and there will be a need for an equivalent rebate to protect this value added product. 3) A fifty percent subsidy on freight may be considered. We understand that similar subsidy on export of agricultural products like flowers and vegetables are given. It has been observed that the Government is very sensitive to retail
price of sugar. Frequent hasty decisions are taken to adjust import duty
on sugar. This makes imported sugar economical in the domestic market.
Sugar Industry is made to subsidize the consumer. PSMA has time and again
pointed out to the Government that domestic industry pays a fixed Central
Excise Duty of Rs.2150 per metric ton. Import duty on sugar must be kept
at a level which allows the industry to recover its cost of production
and a reasonable profit. Sensitivity to domestic sugar price is not justified.
Increase of Rs.1 per kg of sugar results in increase of Rs.1O0 per annum
for a house hold of 5 persons. Moreover increase in sugar price compared
to other food items has been on the lower side during the last 10 years.
It is an established fact that no industry can survive by selling its
production below the cost of production. Oversupply in the Indian Sugar Industry: Thanks to the rapid output growth of the last four years, both the public and private sugar milling sectors are experiencing considerable financial stress on the eve of the 1992/93 crushing season. The situation is particularly acute in North India, where state governments have regularly ignored the calculus by which the central government sets a national minimum purchase for sugarcane. At the end of the crushing season in mid-July, sugar mills in Utta Pradesh owed farmers 3.25 billion rupees ($114 million) for cane delivered but not paid for. Such arrearages are not unusual in the Indian sugar business, but this was two and a half times what the mills owed farmers at the same time last year. Arrearage problems, although on a more limited scale, also have occured in most other states. It has been expected that state governments would provide debt relief for those public sector (cooperative and government-owned) mills which were in the red at the end of each production year. Last year the bill came to about one billion rupees ($40 million), but this year it could come to 2.5 billion rupees, at a time when state resources are tight and the central government is pushing the states to cut back their annual budget deficits. Exports are a possible solution to the current domestic oversupply problem.
Unfortunately, export prices have remained far enough below domestic prices
that it has been difficult to keep exports fl9wing. By statute, exports
are handled by the Indian Sugar and General Industry Export Import Corporation
(ISGIEIC), a trading body linked to the national sugar mill associations.
Losses on exports are offset by profits on small quotas for A number of economists from Indian research institutions and multilateral lending agencies have been raising questions about the wisdom. of encouraging further growth in the sugar sector when the end-product is in surplus, when exports are possible only with subsidies, and when the country appears to be slipping into a deficit position in food grain production. Industry Financial Problems: There has been a tremendous build-up in Indian sugar inventories over
the last three years. Production has risen 22 percent and off take has
increased only 10 percent. As a result sugar stocks now stand at over
5 million tons. The government has allowed sugar to pile up a the mills,
knowing that releasing stocks too rapidly would cause a collapse in open
market prices, pushing weaker mills even closer to bankruptcy. With the country suffering from a substantial oversupply of sugar, and
water scarce in several of the states where. mills are planned, it could
be argued that more mills are not needed. However, the construction of
new sugar mills enjoys enormous political support. Farmers like cane,
especially at current prices, because it is easy to grow and provides
relatively dependable cash income. Local politicians see mills both as
engines of rural growth and, it is alleged, as excellent sources of campaign
finance as well. Higher sugar and molasses prices, a reduced sugar levy percentage, and subsidies for some of the mills' stock-holding expenses will give the mills a measure of financial relief. Although consumers will not be happy with higher retail prices, the Food Ministry can persuasively argue that had prices not been allowed to rise, the drop in cane area this year might turn into a collapse next, followed by tight supplies, skyrocketing prices, and emergency imports. The policy steps taken should allow for the continued expansion of sugar output in India.
It is generally believed in Pakistan that better utilization of the By-Products
can reduce the price of sugar drastically. It is also believed that lower
cost of production in other countries - is because of better utilization
of By-Products. Actually position is different. Although development of
By-Products Industry can help in reducing the cost of production to a
small extent but major reduction can only result from lower cost of raw
material and lesser State Levies. The major problem for setting up Sugar By-Product industries is the
minimum economic size of the plant. Market for these By-Products is very
small at home and setting up of a plant with large capacity is not feasible
in absence of any export market. Production capacities of Citric Acid
and Furfrol in the world are more than the world consumption. Very few
Manufacturers monopolize both these products and make it impossible for
any new entrant to sell in the international market for this reason any
progress on production of Citric Acid and Furfrol in Pakistan does not
seem possible till such time that we have enough local market to justify
a plant of economical size. . Review of 1992-93 Season - Production capacity increased to 4 million tons but raw material availability restricted the sugar production to 2.39 million tons. This created a huge idle capacity. - Subsidized sugar imports were allowed at dumping prices resulting in weak domestic market having 'no relationship to cost of production. - Rampant inflation resulted in increase in transport cost, higher mark-up
on borrowings, increase in utility charges and increase in cost of spares
due to eroding value of Pak Rupee. . |
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| Duration of season ranged between a maximum of 226 days in case of Faran
Sugar Mills in Sindh and a minimum of 102 days in case of Premier 10 NWFP.
This was after excluding the new Mills in their first year of production
as Mirza Sugar Mills operated for only 11 days. Sindh had the highest share
of 49 percent in the country's sugar production followed by 46 percent in
Punjab. The balance was contributed by NWFP. Activities of PSMA in 1992-93 Pakistan Sugar Mills Association started the year with a long agenda. Several problems being faced by the industry were to be taken up with the Government. Since November 1992 we have seen 4 Governments. Fifth Government took office on 19 October, 1993. We took up the following major issues with 4 Governments in the last 12 months:- 1) Unplanned expansion of Sugar Industry In addition to these issues Zonal arms of PSMA took up numerous issues
at provincial level. PSMA worked closely with the Government and Financial Institutions on
this matter. Prime Minister established a Technical Assistance, Evaluation
and Review Committee (T AERC) for study on Sugar Industry. This task was
assigned to Planning and Development Division and PSMA was represented.
Much progress could not be made in this because of frequent changes in
the Governments.
Rebate on Central Excise Duty In order to provide incentive to the Sugar Industry to increase sugar production by transporting sugarcane from inaccessible areas a CED rebate is given. Sugar production in excess of last years production is subjected to 50 percent of normal CED. Recently some changes were made in this policy, which are against the very spirit in which it was introduced in the first place. PSMA has taken up this matter at the level of Finance Minister, Chairman Central Board of Revenue and Member Excise. We are happy with the progress so far are hopeful of a satisfactory outcome. Other Activities PSMA made further progress in its relationship with international agencies
like UNIDO of United Nations and USAID. . Ten member Mills participated in this programme. The experts visited
these Mills and later submitted a report to all participating Mills. A
comprehensive report on general aspects of Sugar Industry was also presented
with specific recommendations to the Government by PSMA. Though Sugar Mills in Hawaii have a major advantage of having a very long crushing season as compared to Pakistan yet we can see that some of our Mills having high crushing capacity have the potential of producing noticeable surplus power and transferring it to national grid. By doing so we can help the nation meet its power shortage and at the same time help economy of the Sugar Industry, for which few Mills have already taken the initial start of transferring 5 MW on trial basis. Financial Position Financial position of PSMA remains healthy. Your Executive Committee took austerity measures to cut costs. We were able to reduce the expenditure to Rs. in 1992-93 compared to Rs In 1991-92. Acknowledgement I would like to acknowledge the support and guidance provided to me during the year by the members of Central as well as Zonal Executive Committees. I would also like to place on record my appreciation for the staff at the Central Secretariat in Islamabad and Zonal Offices in Karachi and Lahore for their hard work and dedication. Future Outlook We are entering 1993-94 with new challenges and a totally new domestic
scenario for the Sugar Industry. We will be facing the problems of surplus
for a change. We will be looking for international markets in addition
to our traditional domestic market. PSMA will have new roles added to
its responsibilities. In addition to acting as representative of Sugar
Industry in our relationship with the Government. PSMA will handle distribution
of sugar export quotas to its members and issue sugar quality certificates. |
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