Pakistan Sugar Industry - souring its sound performance!
[Business Recorder]

ARTICLE (July 29 2004): The first four seasons on the advent of 21st century, of the Pakistan sugar industry, by its performance yardstick, have been remarkable. Sugar production during these years has been on dramatic surge, as can be gauged from the relevant figures.

TABLE A
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Season    Sugarcane Crushing (tons)    Sugar production (tons)    Recovery%
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2000-01           29,410,790                          2,466,788                  8.38
2001-02           36,708,638                          3,197,745                  8.71
2002-03           41,911,034                          3,662,050                  8.74
2003-04           43,468,073                          3,996,701                  9.19
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Consistent upsurge in sugar production, no doubt, was admirable, as it provided rising surplus, which logically ought to have been exported by requisite facilitation in all, similar to all the sugar exporting countries invariably adhering to.

TABLE B
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Seasons    Sugar ** available (tons)    Domestic Consumption (tons)  Surplus(tons)
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2000-01              3,675,913                             3,042,043                     633,870
2001-02              3,912,590                             3,275,441                     637,149
2002-03              4,231,525                             3,472,422                     759,103
2003-04 (Estimate) 4,560,000                           3,600,000                     960,000
( ** Refers to opening stock, raw sugar production & import)
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Pakistan Sugar Mills Association, performing its part of duty, gave repetitive calls to the authorities for export of surplus sugar, enabling conditions conducive for its operations and results.

Answer being not timely, load of surplus sugar influenced in plummeting of prices. Fall on average in price line was alarming, beyond capacity and ability of the sugar industry to absorb.

TABLE C
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Season Sugar average Wholesale price / ton                Price fall / ton
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2000-01                           24,159                                       -
2001-02                           20,416                                    3,743
2002-03                           18,299                                    2,117
2003-04                           17,099                                    1,200
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The national sugar industry could not bear the brunt of steep fall in sugar prices, as cost of sugar production and so also cost of sugar sales were ruled under rigid regime by policy format of the Government of Pakistan.

As a result, superb performance of the sugar industry, as distinct by high tide of production, marred its economic potential and health, due to price fall being like proverbial nine pins and not recovering rigidly fixed costs of production and sales. It eventually squeezed liquidity and eroded equity of the sugar mills.

This write up, as such, briefly deals with the problems facing the national sugar industry, and pushing it under dire financial stress, a distinctly odd phenomenon against putting up robust operational performance.

1. Sugar cost-price paradox Sugar production cost is determined to the extent of 87.11% by the GoP policy. It contains the following cost structural element.

Sugarcane support price is fixed by the Government which formed in the range of 65 to 77 percent of sugar production cost. Likewise other costs, such as wages, utilities, depreciation and other fixed costs (in production process) have been additional in the range of 13.52 to 18.70 percent.

Thus on average cost of production (in variable form) has been at about 87.11 percent, (sugarcane 71% + production costs 16.11%).

Similarly cost of sales has been tightly held, with tilt of upswing, due to revenues losses, net losses and increased borrowings creating more debts and their servicing, compounded by increasing inventory pileup.

Sugar Industry invariably has disadvantage of relatively higher indebtedness of inventory financing by its seasonal working character of four month and sugar sales stretch to at least a year.

As a result its debt servicing cost tends to be 137.5% more than of a round the year operational industries. Following table sketches production, sales and inventory pileup due to short seasonal operative span
 

TABLE D
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Sugar production, sales & inventory scene
Production     Production       Sales      Inventory      Cumulative
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span                   %                %              %             inventory %
December            25             8.33          16.67             16.67
January               25             8.33          16.67              33.34
February              25             8.33          16.67              50.01
March                  25             8.33          16.67              66.68
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Sugar suffers by inelastic demand Consumers of sugar tend to buy it in small lots through out the year, irrespective of price trend. Sugar industry has, as such, to hold stocks through the season/year.

As such, by oversupply situation of sugar, price fall tends to be more than in proportion of the excess sugar availability. Besides, inventory with the sugar industry continuously increases.

This compels for more desperate sales to pay sugarcane farmers. Cost of financing of inventory pileup, as such, consistently swells, denting earnings.

2. ECONOMIC REVIVAL: Economic revival of sugar industry can be achieved by taking the five following steps.

a) Creating of a definite policy to govern and structure to support sugar subsector for sustainable economic future and flourish.

b) Sugar industry be placed in focus.

In case of shortfall sugar, import is facilitated in earnest to protect consumers. No similar proactive interest and step has been identified and put in place to act orderly in case of increased sugar production to protect sugar industry, though it is bound by almost rigidly fixed cost of sugar production and cost of sugar sales.

Export policy format to offload surplus sugar is non-exist. It needs to be evolved as it is vital to set sugar industry on right track.

c) Creating linkage in between cost of sugar production and sugar price.

Sugarcane price is bound by support price mechanism. Sugar price is left to market forces. Ironically in market forces it is single factorial, the supply based pricing, as demand of sugar is inelastic.

Supply remains predominant by imports in shortage, contrasted by exports restraints in increased production. Sugar industrial subsector, as such, remains under continues duress.

This has become vivid and irrefutable by experience of the latest four years in succession.

However, existing market phenomenon insulates sugarcane farmers by support price.

It greatly benefits farmers in case of shortage of sugarcane crop by sugar factories chase for economies raising the sugarcane price to sugar price level and often higher in proportion.

Thus the existing sugarcane marketing system and pricing is security for sugarcane farmers with equally insecure future for sugar industry.

This current problem can be overcome by arranging offtake of surplus sugar by the Government of Pakistan through: i) export facilitation and ii) strategic stock keeping.

d) Strategic stock keeping strategic stock keeping for commodities, sugar being one of them, is prerequisite for food security and steady availability at stable price. It provides protection to public economic interest and also of the stakeholders.

e) Export facilitation: Export of surplus shall form integral part of the economic stability for each segment of the economy. Sugar deserves similar treatment, in consonance and parity with all sugar exporting countries.

4. SUGAR BE EXEMPT OF SALES TAX: Sugar has been a subject to an effective sales tax stress @ 18% which is recovered from the sugar industry. This is due to sugar sales outlets being grocery/provision stores in the localities which do not want registration in tax net.

Consumers buy sugar in small lots of a couple of kilograms. As a result sugar industry has to absorb the stress of three percent further tax, making a total of 18%. All the food items are exempt of sales tax but sugar.

This is creating discrimination. About 65% of sugar is consumed indirectly in sweetmeats, biscuits, confectioneries, bakery products, jams, jellies, juices, hotels and restaurants, etc.

If sugar is exempted from sales tax and not the other process products mentioned using sugar, core direct consumers of sugar would find economic relief and sugar industry saved from excessive sales tax stress.

RELIEF IN HESITANCE: Recently the Government of Pakistan have taken two good steps that may bring relief to hard pressed sugar industry. These being felt too soft to solve the compounded problems, underline their being taken with reluctance!

The GoP decided to procure through Trading Corporation of Pakistan 100,000 tons sugar each in November 2003 and January 2004 and another 300,000 tons sugar has been process of such lifting.

From a surplus of a million plus tons, about 50% has thus been procured, leaving still as much a load with the sugar industry to bear. Procurement of 500,000 tons sugar through TCP has, so far, been retained as buffer stock rather readying it for exports. Its effective overload of surplus sugar in the country has kept tendency of sugar prices depressed, not enabling the sugar industry real relief.

By the taxation reform measures of the budget 2004-05, Sales Tax rate has been reduced across the board to a single maximum 15%. It is to save three percent drain of further tax on sales of sugar to unregistered persons.

The relief, however, is not sugar specific, as urged by the PSMA and warranted in core consumers interest to exempt sugar from sales tax net, being a food and nutritional intake.

However, the relief of three percent sales tax, may be more than set off by rigours contained in section 73 of the Sales Tax Act on being made operative.

The trade and industry may not fully vouchsafe of the suppliers chain, often in a large number, particularly to the industrial sector, their depositing payments made by the industry, in formers business accounts. Besides it, locational distances of suppliers and their respective dealings at different directorates may cause delays.

Cases of long delayed input claims cases tend to be a fair evidence, enough to reconsider implications of this and preferable suitable amendment in support of the genuine business.

The advent of the 21st century for the sugar industry heralded contrasting trends, more and more production contrasted by more and more problems, losses of revenues and earnings, leading to eroding equity of a large number of sugar mills, for none of their fault.

This is attributable to skewed policy format and its operative structure. These need to be brought in fine tune and rhythm enabling sugar industry have prosperity in context with its production trend and potentials. - Business Recorder.