Food Security Expert

Many sugar mills in Pakistan face bankruptcy

Reference from: The News

LAHORE: Around eight to 10 sugar mills in Punjab are likely to face bankruptcy by the end of the ongoing crushing season owing to financial crunch after sugar prices crashed in the province and the Sindh government lowered the sugarcane price in the province.

These mills started the current crushing season with around Rs500 to 700 million losses in average in piled-up sugar stocks and they are now unable to even reach the break even cost which may cause collapse of the sugar industry in the province.

In case the financial crunch continues, an amount of over Rs60 billion payable to sugar growers will get stuck up this season. This will directly hit the rural economy, which is already passing through adverse times after crash of cotton and paddy prices during the last season.

The Punjab-based sugar mills crush almost 60 percent of the total sugarcane in the country. This year almost 55 to 57 million metric tonnes of sugarcane is available for crushing, out of which around 36 million metric tonnes would be crushed in Punjab.

Thus, it will crush almost Rs162 billion worth sugarcane during the 2014-15 season, while the industry is likely to default on payment of over Rs60 billion to the sugarcane growers.

The saner millers, anticipating the loss, have not started crushing so far, while National Sugar Mills Sargodha, Kohinoor Sugar Mills Sargodha and Gojra Samundri Sugar Mills were sold during the last season after incurring losses, an industry official disclosed to The News. However, the new entrants, who bought these mills, are also facing a similar situation.

On the other hand, Chishtian Sugar Mills, Phalia Sugar Mills and Huda Sugar Mills did not start their operations during the ongoing crushing season anticipating huge loss due to carried-over stock and good sugarcane crop, depressed international market and other factors.

There are 45 sugar mills in Punjab out of which only two are owned by the ruling family of the province — one each by Prime Minister Nawaz Sharif and Chief Minister Shahbaz Sharif — while 12 out of 37 sugar mills of Sindh are owned by the province’s main political family.

The Punjab government has fixed the minimum purchase price of sugarcane at Rs 180 per 40kg, which is Rs 155 per 40kg in Sindh, thus creating disturbance in the market.In the past, there has hardly been Rs 2 to 5 per 40 kg difference between the Punjab and Sindh sugarcane price resulting in a stable market.

On the other hand, the average sugar recovery in Punjab is 9.5 per cent against 10.5 per cent of Sindh. Thus, the breakeven cost of sugar for Punjab-based sugar mills is Rs 56 per kg at Rs 180 per 40 kg sugarcane price, while it is Rs 47 per kg with Rs 155 per 40 kg price in Sindh.

As the sugar production cost in Sindh is Rs 9 per kg lower than Punjab, the millers are dumping their produce to market in Punjab, distorting the sales of local producers.The total sugar consumption in the country is around 390,000 metric tones, out of which 225,000 metric tones are supplied by Punjab, 100,000 metric tones by Sindh and the remaining by rest of the country.

Currently, the Sindh mills are dumping around 100,000 tones of sugar in Punjab.During the crushing season, the sugar mills sell their produce in the market to run the day-to-day affairs and maintain their cash flows. However, there is a crisis after sugar dumping from Sindh.

The present ex-mill rate in Punjab’s markets is ranging between Rs 49 to 50 per kg while Sindh mills breakeven cost is Rs 47 per kg, thus creating a cushion of Rs 2 to Rs 3 per kg.According to dealers, trucks transporting sugar from Sindh are selling their stocks on a count basis – a formula on the basis of which the sugar mills of Sindh send their vehicles. These truckers sell the goods in different markets at the spot and then return.

The price is still viable for the Sindh millers as compared to Punjab whose breakeven cost is Rs 56 per kg. Adding into the financial woes, the government did not pay two-and-half-year old promised export rebate to the industry.

The industry has exported surplus sugar while the government committed to pay the rebate. The millers are running pillar to post to get the amount but unable to get find an affirmative response.

The financial crisis had surfaced during in 2013-14 when the crushing season was started with surplus stocks while the government delayed the decision on allowing export of surplus.

And the start of crushing season with surplus stocks generated a financial spiral. The problems multiplied as the industry started the new crushing season with a surplus of 638,000 metric tones.

However, the Economic Coordination Committee has allowed the export of 650,000 metric tones of sugar by giving Rs 2 per kg inland freight subsidy and Rs 8 per kg rebate on exports. But the Pakistani sweetener is unable to compete in international market due to the price slump.

Currently, the sugar price in international market is around $395 per metric tones with the FOB cost of $23. If this FOB cost is subtracted then it comes to $372 per metric tone or Rs 37 per kg, while local breakeven cost for Punjab millers is Rs 56 per kg and Rs 47 per kg for those in Sindh. Thus, exporting the commodity is impossible for the local industry while completely unworkable for Punjab-based millers.

But the neighbouring India has given $65 per metric tone rebate against the raw sugar exports. The cost of production for raw sugar ($100 per metric tone) is lower than the refined sugar, thus promoting its industry to export raw sugar more to consolidate its place in international market.

The Pakistani sugar industry has also created a $2 billion worth import substitute window for the country. If Pakistan starts importing sugar for local consumption then it will need $2 billion annually for the purpose, while it will also adversely affect the growers as they cannot shift to other crops easily. Moreover, only sugarcane can be cultivated in many farms (areas) due to the soil quality-related issues.

Ahmed Ibrahim, executive committee member of the PSMA Sindh, said historically, Sindh produced surplus sugar (more than the requirement in the province) and thus sold to other markets. “So is the case this year too,” he said.

He further said sugar mills in upper Sindh usually sold their produce in south Punjab, while “it is now feasible for the lower Sindh millers too to sell sugar in Punjab due to freight charges. “We consider upper Sindh and South Punjab a single market,” he added.

 

He suggested that the government either fully regularise or de-regularise the sugar industry in order to resolve the sugarcane and sugar price issue as mixed policies created controversies after every few years.

 

The sugar millers of the Sindh said that the Sindh Government first fixed sugarcane price at Rs 155 per maund as compared to the last year price of Rs 172 per maund. However, when the Punjab government fixed sugarcane price of Rs180 per maund for the crushing season 2014-15 after increasing Rs10 per maund from last crushing season, the Sindh government revised its prices and issued Rs 182 per maund price. The sugar mills of the Sindh challenged this decision before the Sindh High Court. After dismissal of the petition, the millers approached the Supreme Court for relief where the appeal is pending adjudication.

 

Federal National Food Security and Research Secretary Seerat Asghar said the federal government had nothing to do with sugarcane price as it was a provincial subject. If the difference in sugarcane prices of the two provinces was creating distortion in market the provinces should deal with the issue, , he added.

Sindh Agriculture Secretary Shahid Ali Sheikh said they were aware of the situation and working on the issue to sort it out in the coming days.

Punjab Agriculture Minister Dr Farrukh Javeed said the provincial government had taken up the issue with the federal government and the Ministry of Food Security and Research. “The federal government has asked Sindh to implement Rs182 per kg price as announced earlier rather than the current rate of Rs155 paid by the sugar mills.”

Due to the price disparity, he said, the sugar mills in Punjab were facing difficulties which also delayed payment to sugarcane growers. He questioned why the political government in Sindh was not safeguarding the growers’ interests.

Author:

Jawwad Rizvi
Friday, January 30, 2015