Pakistan's Sugar Economy:

Pakistan’s Sugar Economy:

A facts based presentation

Presented by:

Pakistan Sugar Mills Association

2nd March, 2020

Sugar Cane – A high value cash crop

Source: PSMA, Economic surveys of Pakistan

65%

25%

10%

Punjab Sindh KPK

Area Under Cultivation

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2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19

Sugar Cane Plantation Area, Value of Crop

Area Value of Crop RHS

Mn Ha Pkr Bn

Average value of sugar cane crop grown in Pakistan

PKR 300+ Billion

5%: Sugarcane area versus total cultivated land of Pakistan

Source: PSMA, * estimated based on sugar production of 5.4mn tons for 2019 ,**based on 82 functional Sugar Mills

Pakistan Sugar Industry Highlights

Average Crushing Capacity

7,300TCD**

Directly Employed:

100k+

Indirectly Dependent:

1+ MillionHouse holds

Direct and indirect taxesPkr50-60bn per year*

0 5 10 15 20 25 30 35 40

India

Brazil

EU-28

Thailand

China

USA

Pakistan

Russian Fed.

Mexico

Australia

TOP 10 Sugar Producers 2018(million metric tons)

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India

EU-28

China

Brazil

USA

Indonesia

Russian Fed.

Pakistan

Mexico

Egypt, Arab Rep.

TOP 10 Sugar Consumers 2018(million metric tons)

Ranked 8th in the World

21.3 11.0

3.1 1.6 1.6 1.6

1.2 0.9 0.6 0.6

- 5.0 10.0 15.0 20.0 25.0 30.0

Brazil

Thailand

Australia

Guatemala

EU-28

Mexico

Pakistan

India

Colombia

Ukraine

TOP 10 Net-Exporters 2018(million metric tons)


Source: ISO Sugar Year Book 2019, Tables are on a calendar year basis


Pakistan sugar in global perspective

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World Per Capita Consumption of Sugar 2018

Source: PSMA, Economic Surveys of Pakistan

The journey to self-sufficiency

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Domestic Sugar Production & Consumption

Production Consumption

From 2010-11, Pakistan is consistently producing surplus sugar

The export of this surplus sugar earned the country roughly $2.3 billion in these 9 years by exporting six million tons of sugar to the world

Progress but not at the cost of other crops

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Are

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Cotton Sugarcane Rice Maize

Sugarcane has not contributed towards reduction in planted area of any other important crop of Pakistan

Source: Economic Surveys of Pakistan 2018-19, (P) Provisional

Cotton-421K

Rice+585K

Maize+383K

Sugarcane+2K

From 2012-13 to 2018-19: Rice +501K, Cotton -561K, Maize +258K, Sugarcane -27K

Area Under Important Crops (000 Ha)

Source: The Guardian , ISMA (Indian Sugar Mills Association, Paper titled “Sugar Industry is water efficient”

Sugar cane compares well with other crops on water

Paddy 325mm

Cotton 150mm

Soybean 150mm

Sugar Cane 150mm

Jowar 100mm

Monthly Water Consumption By Crops

Cotton 10,000Lts

Groundnut 3,100Lts

Rice 2,500-3,400Lts

Sugar 1,500-2,000Lts

Water Required Per Kg of Output

Sugar Industry is net generator of water

For every tonne of cane crushed, 700Lts of water

is generated

500Lts is used in factory sugar

processing

Remaining 200Lts is given

back for irrigation, after due treatment

Total carbon and water footprint of sugarcane up to point of consumptionis much less than other crops that require further processing

https://www.theguardian.com/sustainable-business/2015/mar/20/cost-cotton-water-challenged-india-world-water-day

Source: PSMA, SBP

Third largest export sector of Pakistan in 2017-18 & 2018-19Export Revenues from Sugar and Ethanol only lagged behind Textiles and Rice in FY2017-18 and FY2018-19

28

529

287 322

132 161

508

223 159

90

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387

406

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1,000

FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

Sugar Ethanol Ethanol Avg Price RHS Sugar Avg Price RHS

188mn

619mn 601mn 576mn

352mn

441mn

895mn

629mn

USD mnSugar Price – USD cents/kg

Ethanol Price – USD cents/Liter

Depreciation of rupee has increased export potential of sugar

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Monthly International White Sugar Prices (US$/Ton)2006-2020

International Sugar Prices (US$/Ton)

Current cost $375

With a stronger rupee, Pakistan sugar wasable to compete in global market only 60%of the time. However, now we expect that itwill be competitive 90% of the time, if caneprices are not increased

At cane price of Rs.190:• Above US$375 (70% of evaluated

period), Pakistan is competitive in theworld market and the industry canexport in excess of 1.5 Million tons peryear if in surplus

• With international market between US$325-375 (22% of evaluated period),Pakistan sugar is only competitive inAfghanistan, due to freight advantages,and China due to preferential tariffs. Thequantity expected is around half amillion tons and realized ex-mill pricearound $375-$425

• Below $325, it is not viable for Pakistansugar mills to export to any marketSource: investing.com (London #5), *as of February 28, 2020

Current International Price $396.6*

• Most of the production growth has come from increased sugar production per hectare and only moderately from increase in area

• Economics of the industry has improved significantly due to:

− Sugar yield

− Ethanol (through molasses price)

− Power cogeneration (through bagasse price)

− Scale (Production of sugar per mill)Capacity utilization has dramatically increased as increased cane supply has resulted in longer seasons

Sugar Production in Pakistan

2009-10 2016-17 Increase

Sugarcane Area (Hectares)

942,870 1,225,000 30%

Total Sugar Production

(MMT)3.14 7.05 125%

Sugar Yield(Tons/Hectare)

3.33 5.79 74%

Functional Sugar Mills

80 82 3%

Avg. Sugar Production per

mill (Tons)39,250 85,975 119%

Revolution in 8 years

Source: Economic Survey of Pakistan, PSMA

Source: PSMA, ASMC

Potential for becoming a major sugar exporter

• Productivity is still low as compared to majorsugar exporting countries but Pakistan’ssugar industry has been on the right pathand there is still a lot of room to keepimproving if the economics remains positive

• Current export potential of sugar andethanol is US$ 1 billion

Potential in 5 Years:

Without any increase in historical acreage andinputs usage, improving yields to 8 Tons/Ha,Pakistan can potentially raise sugar productionto 9mln tons, and if 2000MW of electricityexport can be achieved, sugar industry can havea combined annual balance of trade impact of

US$ 3 billion• Including US$ 2 billion in direct exports

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s/H

a)

Year

Pakistan’s Sugar Yields (2008-2019)

Tons of sugar per harvested hectare

Projected Trendline

Australia’s Yield: 12.35 T/Ha X

Current Trendline

3.05 T/Ha

5.79 T/Ha

Brazil’s Yield: 9-10 T/Ha X

Source: Economic Survey of Pakistan

Net sugar price is still below its retail price which was prevalent 8-10 years ago. In the meanwhile, sugarcane support price has been more than doubled by the provincial governments

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Retail price trend of essential commodities in Pakistan

Wheat Flour Veg. Ghee Sugar Fresh Milk Basmati Rice

Local sugar prices still lower than 9 years ago

Source: Pakistan Bureau of Statistics

Sugar retail price 10 years range between Rs50/kg to Rs90/kgRs/kg

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Monthly sugar retail prices/kg Rs/kg

Source: Economic Survey of Pakistan

Sugar has been losing its importance in consumer budgets

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wheat flour and gur retail prices/kg as a % of sugar retail prices/kg

Wheat Flour Gur (Sup. Qlty)

Weak Linkage between Cane and Sugar Prices

Source: PSMA, Economic survey of Pakistan 2018-19 provisional data

47%

57%

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45%48%

57% 58%

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30%32%

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Cane Min. Price (CMP)/40kg Sugar Avg. Retail Price/kg Retail Price % Of CMP (RHS)

Over the years, ratio of sugar retail price as compared to cane minimum price has decreased considerably

Retail prices are usually Rs.5 to 8 more than ex-factory rates

From 2003-04 till 2011-12, sugar retail prices were 52% of cane minimum price on average

This ratio fell to between 30-35% in the surplus years

Sugar in Pakistan(Million Metric Tons)

2016-17 2017-18 2018-19 2019-20

Production 7.05 6.6 5.2 4.9*

Consumption 5.10 5.2 5.2 5.2*

Export 0.50 1.95 0.8 0.0*

Carryover(at start of new

season) 1.66 1.3 0.5 0.2*

Source: PSMA, *Estimates

Industry Outlook – Balanced

• The return to a more balancedsituation in terms of demand andsupply is creating a viablesituation for farmers and industry

• 2019-20 production is expected tobe lower by about 10% butexpected to rebound in 2020-21due to high cane prices prevailing

• In a challenged economy, PSMAexpects demand for sugar to beflat to negative

• If the government takes a prudentview of the situation, Pakistancan return to being a regularexporter of sugar

Cost of production of Sugar for 2019-20 season

Source: PSMA

Cost Summary including net profit margin %age

Cost of sugarcane 48.48 58.0%

Overheads net of all by-products 12.90 15.4%

Sales tax, income tax & withholding taxes 15.20 18.2%

WPPF & WWF 0.57 0.7%

Net profit margin 6.44 7.7%

83.59 100%

Major Assumptions Unit ValuesInstalled capacity TCD 8,000

Capacity utilized %age 80%

Crushing days Days 100

Sugarcane price Rs./40 kg 190

Sucrose recovery %age 10.00%

Molasses recovery %age 4.25%

Molasses price Rs/ton 12,000

Cost Summary including net profit margin Rs/Kg %age


Overheads net of all by-products 12.90 15.4%Sales tax, income tax & withholding taxes 15.20 18.2%

WPPF & WWF 0.57 0.7%


83.59 100%

75%-80% of sugar production costs are determined directly by the federal and provincial governments

Cost of production of Sugar for 2019-20 season

Source: PSMA




WPPF & WWF 0.54 0.5%


99.81 100%




Sugarcane price* Rs./40 kg 230




Cost Summary including net profit margin %age


Overheads net of all by-products 12.90 15.4%

Sales tax, income tax & withholding taxes 15.20 18.2%

WPPF & WWF 0.57 0.7%


83.59 100%




Sugarcane price Rs./40 kg 190







WPPF & WWF 0.57 0.7%


83.59 100%

*Expected cost of sugarcane for

season 2019-20

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Pakistan

Sri Lanka

India

Thailand

Bangladesh

China

Indonesia

Philipines

Despite highest % GST, Pakistan has lowest retail sugar price in the region

Retail Sugar Prices/kg in different Countries as on Feb 07, 2020*

Pakistan 17%

Sri Lanka 15%

Bangladesh 15%

China 13%

Philipine 12%

Indonesia 10%

Thailand 7%

India 5%

GST on Sugar

By maintaining average correlation between cane minimum price and sugar retail price i.e. 52%, from 2003-04 till 2011-12, Retail Sugar Prices in Pakistan

should be 94Rs/kg that make us stand between India and Thailand

Source: Business Recorder, SBP, sunsirs.com, chinimandi.com, USDA, cbsl.gov, dhakatribune.com, sra.gov.ph, globalprice.info, avalara.com, psa.gov.ph

Sugar Retail Prices are Converted into Pkr/kg

Country Currency Pkr Equivalent

Philipine 1 Peso 3.05

Indonesia (April 4'19) 1 IDR 0.01

China 1 CNY 22.10

Sri Lanka 1 LKR 0.85

India 1 INR 2.16

Thailand (Dec 12'19) 1 BHT 5.14

Bangladesh (Jan 4'20) 1 BDT 1.83

*Currency Exchange rates as on Feb 07, 2020

Market disruptions by the Federal and Provincial Governments

• Despite increasing prices but balanced to surplus supply, sugar sales have been slow since June 2019 giventhe push by the Government to increase regulatory oversight of the economy:

I. CNIC Condition: The Government now requires sugar mills to obtain CNIC numbers of buyers.

Approximately 72% of sugar sales in the domestic market are made to unregistered parties i.e.small traders, non-regulated segment of the economy who are not willing to provide theiridentification (CNICs)

II. Axle Load Restrictions: The NHA has reduced Axle Load approximately by 50% which has

resulted in increased costs of transportation

III. Administrative actions by provincial governments: Since June 2018, Punjab Government

has consistently notified a sugar retail price which was Rs.5-10 below the market and used it as anexcuse to harass and arrest shopkeepers and wholesalers of sugar. Other provinces are starting tofollow suit.

• Traders / investors / retailers have started to step back in large numbers from doing sugar business at atime when sugar mills must sell sugar to pay to growers

• These administrative actions have contributed to a slowdown in sugar sales and also a reduction in theamount of sugar in the pipeline. It is critical that Federal and Provincial Governments should take arealistic view of market realities to ensure ample supply of sugar to the masses

Suggested Way Forward – Near Term1. Sales TaxThe imposition of sales tax at 17% on sugar is an extremely harsh act in a country where sugar is considered an essentialand sensitive food item. This is the highest rate ever imposed in the history of Pakistan.

PSMA requests that sales tax on sugar be brought down to zero in line with other essential food items such aswheat flour, milk, vegetables and fruits. This will give relief of over Rs.11/Kg on price of sugar to the masses.

2. Mark up rates on financing for sugar millsThe industry crushes sugarcane for 3-4 months but has to hold and sell the sugar over 12 months. When coupled withrequirement of provincial governments to pay the farmers within 15 days of crushing cane, it can only be achieved byheavy borrowing from the banks through pledge of sugar. Increased mark up rates have added roughly Rs.3 to Rs.4/Kg incost of sugar.

PSMA requests that being an agricultural industry, cost of long term borrowing should be set by the state bankin line with LTFF on long term financing and for working capital it should be equal to export refinance.

3. Government should maintain strategic reserves of sugarThere is a natural cycle in agriculture where price changes lead to amplified production changes, exacerbating thesituation. Theory, logic and practice, all recommend that the government help reduce the volatility in essential food itemprices by keeping strategic reserves.

PSMA recommends that the Federal and Provincial Governments together hold about half a million tons ofsugar as strategic reserve. This previous practice was very valuable for price stabilization when Pakistan didnot have sufficient production in its history.

Suggested Way Forward – Near Term

4. Cost of production model should be agreed between PSMA and Government

There are many misunderstandings at the Federal and Provincial Governments with respect to sugar production and itscosts. These misunderstandings have very detrimental impact when sugar retail prices or minimum cane support pricesare being determined at the Federal or Provincial levels.

PSMA requests that the effort initiated by the Sugar Advisory Board to determine a cost production model forthe Pakistani Sugar Industry be completed as soon as possible.

Policy changes needed in the medium-term

Ministry of National Food Security/Ministry of Industries/Provinces

1. Rethinking archaic provincial rules and regulations regarding sugar industry:The Sugar Cane Act (nearly 70 years old) as implemented in all the provinces is archaic and a complete misfit for theneeds of the time. Provincial Governments over time have stopped following the majority of provisions themselves andoften arbitrarily pick and choose from the Act as well as associated rules and procedures that have been amendedcountless times. Often times businesses and farmers are not even clear on what applies to them and what doesn’t.

There is also an extremely important commercial aspect to this issue as a Minimum Cane Support Price based on the Actis still being announced and enforced by the provincial governments without the necessary commercial aspects(including price of sugar) addressed for the sugar industry.

Work needs to be urgently started on simplifying and modernizing the provincial rules and regulationsregarding the sugar industry by building consensus on deregulation with the provinces at the Federal level

Policy changes needed in the medium term

Ministry of Power

1. Consistent Power Purchase Policy for Sugar Mills:Currently only about 10 mills are selling about 200 MW to the national grid with pending agreements in the doldrumsfor another 384 MW.

Benefits of Bagasse outweigh almost every other fuel possible for power generation as it is not only indigenous andrenewable fuel just like wind and solar but also additionally base load (available consistently), agriculture based (whilenot taking away any area from a food crop) and well distributed across major load areas.

Bagasse should be made an essential part of the future energy policies of the country particularly theupcoming Renewable and Alternative Energy Policy.

Furthermore, as surplus generation capacity exists in some sugar mills, CPP (Cogeneration Power Policy) atappropriate tariffs should be continued for the benefit of the country

Given the right incentives, within 2-3 years sugar industry could cross 2000 MW in installed capacity. The benefits to theeconomy of Pakistan, particularly the agriculture sector are innumerable. Particularly if the majority of the industry canavail of this revenue stream, it will have a noticeable effect on reducing the price of sugar.

Thank You

Pakistan's Sugar Economy:

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