sugar sector - pacra
TRANSCRIPT
Sugar SectorAn Overview
December 2020©The Pakistan Credit RatingAgency Limited
OMC | Global MarketTable of Contents
Global Industry Pg NoFood & Fuel 1Production Process 2Production & Consumption 3Production Share | Country Wise 4Consumption Share | Country Wise 5Exports & Imports 6Local Industry Pg NoIndustry Position 7Industry Snapshot 8Sugarcane Cultivation & Production 9Sugarcane Utilization 10
Sugarcane Prices 11Sugar Production & Consumption 12
Local Industry Pg NoSugar Prices 13CCP Enquiry Report 14Market Shares 15Business Margins 16Cost Structure | Sugar Mills 17Financial Risk | Working Capital Management 18Borrowings & Interest Costs 19Sugar By-Products 20Sugar Crop Cycle 21Porter 5 Forces 22SWOT Analysis 23Regulatory Framework 24Rating Curve 25Conclusion | Outlook 26
OMC
Source: FAO,ISO
Sugar | Global Overview
Food & Fuel
1
Approximate Produce from 1
ton of sugarcane cut
120 Kg Sugar
38 Kg Molasses
36 kg Filter Mud
250 kg Bagasse
60 kg Straw
100 kg Tops
According to International Sugar Organization (ISO) “"Sugar" means sugar in any of its recognized commercial forms derived from sugar cane or sugar beet, including edible and fancy molasses, syrups and any other form of liquid sugar, but does not include final molasses or low-grade types of non-centrifugal sugar produced by primitive methods.”
Sugarcane is a crop primarily grown in tropical countries.
It serves as a source of food and is a key biofuel feedstock (ethanol).
Sugarcane supplies ~86% of the globe’s sugar (the remaining coming from beet).
~75% of the sugarcane produced globally is consumed by the food manufacturing sector and households; the balance is used in biofuel production.
Sugarcane cultivation and processing currently provide employments for 100 million people across the world.
Harvested Cane Crushing-Milling
Bagasse
Liming, Heating & Clarification
Raw Juice
Thin Juice
Evaporation
Sugar | Global Overview
Production Process
Crystallization
Molasses
Raw Sugar
Distillation
Ethanol
Source: SUCDEN, ISO 2
OMC Sugar | Global Overview
The Fall of Production & Consumption
3Source: USDA, World Bank
World Sugar Balance-mln TonsPeriod MY15 MY16 MY17 MY18 MY19 MY20World Opening Stock 44.8 48.8 44.1 42.0 49.5 49.2World Production 177.6 164.9 174.0 191.8 179.7 166.2World Imports 50.2 54.7 54.2 53.7 52.5 50.7Total World Sugar Supply 272.6 268.4 272.2 287.5 290.3 266.1Less:World Exports 55.0 54.0 58.7 63.1 62.8 54.1World Consumption 168.9 170.3 171.5 174.9 178.3 170.8World Closing Stock 48.8 44.1 42.0 49.5 49.2 41.2
• Global Sugar sector experienced an overall production and consumption decline during MY20* due to the outbreak of Covid-19 pandemic.
• Historically, world production and consumption have increased at a CAGR of ~1.5% and ~1.4%, respectively, from MY15 to MY19.
• During Covid-19 crisis, due to worldwide imposed lockdowns, sugar production witnessed an annual decline of ~11.7% in MY20. Global consumption also reduced by ~4.2% in MY20.
• Thailand experienced ~43.2% decline in its production. India faced ~15.7% decline and USA had ~10.9% production fall.
• Given the economic recovery due to eased lock down situations in the world, it is estimated that global production of sugar may rebound by ~13.1% and consumption may grow by ~3.6% in MY21.
*MY refers to “marketing year” – Brazil & China MY is “April to March”, India, USA & Pakistan MY “Oct-Sep”
320330340350360370380390400410
Jun'20 July'20 Aug'20 Sep'20 Oct'20 Nov'20 Dec'20
Global | Average Sugar Prices/Ton-USD
OMC Sugar | Global Overview
Brazil and India|Largest Share of the Pie
4Source: USDA, World Bank
• Asia is the largest sugar producing region of the world with a share of ~38.2% in MY20 (~38.9% in MY19).
• In terms of countries, Brazil held the largest share in production, ~18.0% , in MY20 (18% in MY19). However, over the years Brazil’s share has reduced by ~2.0% with India gaining.
• In MY20, due to extended lockdown amid COVID-19 pandemic, the entire value chain of India’s sugar crop has been disrupted. India’s production of sugar reduced by ~15.7%.
• According to the Indian Sugar Mills Association (ISMA), nearly INR 0.7bln has been stuck in unsold sugar and ethanol inventories in sugar mills, the demand for ethanol has also fallen due to the severe dip in fuel consumption. These elements have knocked the cash flow of sugar mills and impaired their ability to pay cane farmers. Moreover, shortage of labor and critical inputs like lime, sulphur, packaging material and other related challenges has led to reduced production of sugar in India.
• Nonetheless, it is estimated that India’s production may recover again in the coming year by ~16.7%.
Sugar Production SharePeriod MY15 MY16 MY17 MY18 MY19 MY20
Asia:India 17.2% 16.6% 12.8% 16.9% 18.0% 17.4%China 6.2% 5.5% 5.3% 5.3% 5.7% 6.1%Thailand 6.1% 5.9% 5.8% 7.2% 7.5% 5.0%Pakistan 3.5% 3.9% 4.3% 4.3% 3.6% 4.0%Other Asia 3.6% 3.7% 4.2% 3.7% 4.2% 5.6%Total Asia 36.6% 35.7% 32.4% 37.4% 38.9% 38.2%South America:Brazil 20.2% 21.0% 22.5% 20.3% 18.2% 18.0%Other South America 4.6% 4.4% 4.3% 3.8% 3.9% 3.5%Total South America 24.8% 25.5% 26.8% 24.1% 22.1% 21.5%North America 8.0% 8.9% 8.4% 7.7% 7.8% 7.7%Central America 3.2% 3.3% 3.2% 3.0% 3.0% 3.0%Europe 10.9% 9.0% 11.0% 11.4% 11.2% 10.8%Former Soviet Union 3.9% 4.6% 5.3% 5.1% 5.1% 6.4%Oceania 2.8% 3.1% 3.0% 2.6% 2.7% 2.6%Other Regions 9.7% 9.9% 9.9% 8.7% 9.2% 9.9%Total World 100% 100% 100% 100% 100% 100%
*MY refers to “marketing year” – Brazil & China MY “April to March”, India & USA & Pakistan MY “Sep-Aug”
OMC Sugar | Global Overview
Biggest Sweet Tooth
5Source: USDA, World Bank
-10.00%
-5.00%
0.00%
5.00%
10.00%
MY15 MY16 MY17 MY18 MY19 MY20
Population & GDP VS Sugar Consumption
World Sugar Consumption Growth World Population GrowthWorld Real GDP Growth
• Sugar consumption, GDP and Population are directly proportional to each other.
• Top 5 sugar consuming countries accounted for ~51.9% of total global consumption in MY20(~52.2% in MY19).
• India is the largest sugar consuming country with a share of ~14.0% in MY20(~15.4% in MY19).
• India witnessed the highest decline in its total consumption (local plus exports) due to extended lock-down and decline in exports i.e. by~13.1%.
15.7% 15.7% 14.9% 15.2% 15.4% 14.0%
11.1% 11.0% 10.9% 10.7% 10.5% 10.6%
11.7% 11.2% 10.8% 10.9% 10.7% 10.6%
9.2% 9.3% 9.1% 9.0% 8.8% 8.9%6.5% 6.4% 6.5% 6.5% 6.4% 6.4%
45.8% 46.4% 47.8% 47.8% 48.1% 49.5%
0%
20%
40%
60%
80%
100%
MY15 MY16 MY17 MY18 MY19 MY20
Global Sugar Consumption Share
India EU South America China USA Others
Top 5 Sugar Consuming Countries-mln MTPeriod MY15 MY16 MY17 MY18 MY19 MY20
India 26.5 26.8 25.5 26.5 27.5 23.9EU 18.7 18.7 18.7 18.8 18.8 18.0South America 19.8 19.0 18.5 19.0 19.1 18.2
China 15.6 15.8 15.6 15.7 15.7 15.2USA 10.9 10.9 11.2 11.3 11.5 11.0Grand Total-Top 5 91.5 91.2 89.5 91.3 92.6 86.3Other Countries 77.4 79.1 82.0 83.6 85.7 84.5Total World Consumption 168.9 170.3 171.5 174.9 178.3 170.8
*MY refers to “marketing year” – Brazil & China MY “April to March”, India & USA & Pakistan MY “Sep-Aug”
OMC Sugar | Global Overview
World Trade Share
6Source: World Bank
0%
20%
40%
60%
80%
100%
MY18 MY19 MY20
Global | Sugar Exports Share
Brazil Thailand India Australia Guatemala Mexico EU Others
0%
20%
40%
60%
80%
100%
MY18 MY19 MY20
Global | Sugar Imports Share
Indonesia China USA Bangladesh Algeria Malaysia UAE Others
• Brazil, the largest producer, is also the highest sugar exporting country with a share of ~35.7% in MY20 (~35.0% in MY19), followed by Thailand with a share of ~19.8% in MY20 (18.9% in MY19).
• Based on World Bank’s forecast, World Trade is expected to boost post lockdown. Brazil’s exports are expected to increase by ~46% in MY21 from ~19.3mln MT in MY20 to ~28.3mln MT in MY21. Thailand is expected to witness an increase of ~3% in MY21 from ~10.7mln MT in MY20 to ~11.0mln MT in MY21.
• Indonesia and China are the largest importers of sugar with a share of ~7.9% in MY20 (~10.5% in MY19) and ~8.1% in MY20 (~8.0% in MY19), respectively.
• Overall exports and imports are expected to increase by ~20.5% in MY21, post lock-down.
*MY refers to “marketing year” – Brazil & China MY “April to March”, India & USA & Pakistan MY “Sep-Aug”
OMC | Global Market
Source: PBS
Sugar | Domestic Overview
Economy Overview | Sugar Industry Position
7
“Important Crops” | Composition-Output Period FY15 FY16 FY17 FY18 FY19 FY20Important Crops 100% 100% 100% 100% 100% 100%Food Crop:Wheat 38.6% 42.2% 41.0% 37.7% 39.2% 40.0%Maize 8.8% 10.1% 11.0% 10.3% 12.9% 13.5%Rice 12.5% 12.9% 12.3% 13.1% 13.8% 14.1%Total Food Crops 60.0% 65.3% 64.2% 61.1% 65.9% 67.6%Cash Crop:Sugarcane 12.1% 13.5% 14.5% 15.6% 13.5% 13.3%Fibre Crop:Cotton 28.0% 21.2% 21.3% 23.2% 20.7% 19.0%
Economy
Agriculture(19%)
Crops (35%)
Top 5 Important
Crops (63%)
Sugarcane (13%)
Other Crops (37%)Others(65%)
Manufacturing(19%)
Sugar(6%)
Services(62%)
• Sugarcane is an important industrial and cash crop of Pakistan. It contributes ~13% to the “important crops” and ~8% to the overall crop output of the country.
• Sugarcane crop alone contributes ~0.71% to the country’s GDP (~0.84% in FY19).
• Sugar Industry consist of ~6% of the manufacturing sector.• In Pakistan, sugarcane is largely grown in the province of
Punjab. Area under cultivation has increased lately due to favorable crop conditions. In Punjab, it increased by ~20.7% in 1QFY21 from SPLY, in Sindh by ~1.0% from SPLY, while, it declined slightly by ~0.8% in KPK from SPLY.
64.4%
25.5%
10.1%
Province Mix | Cultivated Area FY19
Punjab Sindh KPK
64.9%
25.2%
9.9%
Province Mix| Cultivated Area FY20
Punjab Sindh KPK
OMC
Source: PSMA,CCP,SBP
Sugar | Domestic OverviewIndustry Snapshot
8
Price Elasticity of DemandPeriod FY16 FY17 FY18 FY19 FY20Elasticity 0.6 0.3 0.3 0.01 0.08
Sugar MillsProvinces No. of Sugar Mills Operational
Punjab 45 89%Sindh 38 84%KPK 7 85%Total 90 87%
Industry Summary
Period FY19 FY20
No. of Sugar Mills 89 90
No. of Listed Mills 28 29
Sugarcane Cultivated Area-mln Hec 1.1 1.0
Sugarcane Production-mln MT ~67 ~67
Sugarcane Utilization Rate ~74.1% ~71.8%
Domestic Sugar Production-mln MT ~5.2 ~4.9
Domestic Sugar Consumption-mln MT ~5.2 ~5.3
Total Crushing Capacity-mln MT ~70,000 ~70,000
Average Mill Crushing Capacity-Tons/Day ~6000 ~6000
Recovery Rate 10.4% 10.1%
Domestic Market Revenue-PKR ~406bln ~440bln
Contribution to GDP ~1.1% ~1.1%
Regulatory BodyProvincial
Government, CCPProvincial
Government, CCP
Association PSMA PSMA
• Pakistan has two planting seasons for Sugar Crop: (1)Spring (Feb-Mar) and (2) Autumn (Sep-Nov). Harvesting for each season is conducted after 8-10 months of plantation.
• Punjab and Sindh plants cane in both the seasons, while, in KPK, plantation is carried out in the autumn season only.
• Cane yield for the month of September (Spring crop) is higher than the other season.
• Sugar is defined as “basic commodity” by Essential Commodity Act 1957. Being an essential need and having very less substitutes makes sugar’s demand inelastic. Pakistan sugar industry provides direct employment to ~1.5mln people and indirect employment to ~9mln people.
OMC | Global Market
Source: PBS,USDA,IRSA
Sugar | Domestic Overview
Sugarcane Profit Potential Pulls Farmers Away From Cotton.
9
Sugarcane Cultivation Area & ProductionPeriod FY15 FY16 FY17 FY18 FY19 FY20Pakistan Cultivated Area-mln Hec 23 23 22 22 22 22Area Under Sugarcane as a Percentage of Total Cultivated Land
4.9% 5.0% 5.5% 6.1% 5.0% 4.7%
Sugarcane Production- mln Tons 63 65 75 83 67 67
• Over the past 5 years, sugarcane crop has witnessed two opposing trends on an average basis; decline in area under cultivation, and increase in overall production. While cultivated area reduced at a CAGR of ~1.8% from FY15-FY20 , the sugarcane production has increased at a CAGR of ~1.3% over the last five years. Major reason is attributed to increase in yield/hectare which rose by ~3.2% in the same tenure.
• COTTON: During April’20, farmers of Punjab and Sindh decided to switch cotton crop with sugarcane, due to sugarcane’s better productivity and resistance to climate fluctuations. Many local farmers reported ~60% lower yield of cotton due to inconsistent temperature, and increasing cost of production and pesticides. Thus, sugarcane production is likely to increase in FY21.
• In FY19 specifically, the production levels of sugarcane declined to ~67mln tons from ~83mln tons in FY18, a fall of ~19%; the same production levels were retained in FY20. nevertheless, yield per hec increased to ~64,308kgs/hec in FY20 (~60,956kgs/hec in FY19). Sugarcane is a water intensive crop; the yield mainly increased as Pakistan witnessed a rainfall that was ~41% above normal levels in FY20. Moreover, the irrigation supply in Indus Basin was also adequate.
55,062
57,897
61,972 62,09660,956
64,308
50,000
52,000
54,000
56,000
58,000
60,000
62,000
64,000
66,000
FY15 FY16 FY17 FY18 FY19 FY20
Sugarcane Yield Trend | KG/Hec
OMC | Global Market
Source: PSMA,PBS
Sugar | Domestic Overview
Sugarcane | Province Composition & Crushing
10
0%20%40%60%80%
100%
FY15 FY16 FY17 FY18 FY19 FY20
Province Mix | Sugarcane Production
Punjab Sindh KPK
Sugarcane Utilization by Factories/Millers
Period FY15 FY16 FY17 FY18 FY19 FY20
Sugarcane Crushed (mln Tons) 50.8 50.1 71.2 65.7 49.8 48.2
Sugarcane Utilization 80.9% 76.4% 94.4% 78.8% 74.1% 71.8%
0.0%20.0%40.0%60.0%80.0%
100.0%120.0%
Punjab Sindh KPK
Province Mix | Sugarcane Utilization
FY19 FY20
• On provincial level, Punjab has the highest producing area of sugarcane with a share of ~64.3% in FY20 (~66.8% in FY19), followed by Sindh with a share of ~23.5% in FY20 (~24.8% in FY19).
• CRUSHING & UTILIZATION: Sugarcane crushing decreased at a CAGR of ~1.0%, while sugarcane utilization by sugar millers decreased at a rate of ~2.3% over the last five years.
• While Punjab has the highest cultivated area for sugarcane, Sindh has the highest utilization. In FY19, Sindh sugar mills utilized ~104.9% of the sugarcane crushing capacity as market share of sugar mills located in Sindh increased.
OMC
Source: PBS
Sugar | Domestic Overview
Sugarcane Prices | A High Value Cash Crop
11
Sugarcane Minimum Prices (at factory gate)-PKR/40KGPeriod FY15 FY16 FY17 FY18 FY19 FY20 FY21Punjab 180 180 180 180 180 190 200Sindh 182 172 180 180 180 192 -KPK 180 180 180 180 180 190 -
• Minimum Price levels for sugarcane are set by the respective provincial governments, considering the cost of production to farmers.
• As of Oct’20, the Government of Pakistan (GoP) has set sugarcane price at PKR~200/40KG for the new crushing season 20/21. Punjab government has thus made the decision to raise the prices as per Federal government’s decision. The decisions by KPK and Sindh’s government are still pending as to date.
• Overall sugarcane crop value has increased at a CAGR of ~2.4% over the last five years (FY15-FY20). Due to low yields and production in FY19, sugarcane crop value declined substantially to PKR~302bln from PKR~375bln in FY18 – a fall of ~19% in line with the production fall.
283295
340
375
302319
200
220
240
260
280
300
320
340
360
380
400
FY15 FY16 FY17 FY18 FY19 FY20
Sugarcane Crop Value- PKR bln
Regional Countries Sugarcane PKR/40KgPeriod FY18 FY19 FY20
India-INR 198 220 250
Bangladesh-TK 130 160 190
Source: CCP,USDA
Sugar | Domestic Overview
Sugar Production & Consumption
12
Sugar Production & Consumption Statistics- mln TonsPeriod FY15 FY16 FY17 FY18 FY19 FY20Opening Stock- A 1.2 1.1 1.1 2.8 2.9 2.2Production- B 5.2 5.1 7.1 6.6 5.2 4.9Availability- A+B= C 6.4 6.3 8.2 9.4 8.1 7.1Domestic Consumption- D 4.6 4.9 5.1 5.2 5.2 5.3Exports- E 0.64 0.27 0.28 1.34 0.63 0.07Closing Stock- C-D-E 1.1 1.1 2.8 2.9 2.2 1.8
.0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
FY15 FY16 FY17 FY18 FY19 FY20
Sugar Recovery Rate-(Sugar Produced/Sugarcane Crushed)
Punjab Sindh KPK Overall Industry
• Pakistan’s annual sugar consumption hovers in the range ~5-5.5mln tons. • Domestic sugar consumption has increased at a CAGR of ~2.9% from FY15
onwards. Along with local consumption, some portion of sugar output is also exported. Since prices served in the Export market are more competitive, the risk that Sugar Millers may prefer Export over local sales is mitigated by the Government (GoP) through setting a sugar export quota of around 1-1.1 mln MTs.
• In terms of Sugar recovery rates, Sindh tops the provinces. Recovery rate of Sindh(~10.6%) is greater than that of Punjab(~9.8%) as Thatta region is ideal for sugarcane production due to its humid environment and higher water retention rate.
• In consequence of a recent attempt to create artificial shortage of sugar for better prices (by the Sugar Millers – cartel), the GoP had decided to import ~0.3mln Tons of sugar in the country in order to meet the local demand. Till Oct’20, around ~0.15mln tons of sugar has already been imported.
4.00
4.50
5.00
5.50
6.00
FY15 FY16 FY17 FY18 FY19 FY20
Sugar Total Consumption
Total Sugar Consumption-mln MT
Domestic Consumption Imports
Source: CCP
Sugar | Domestic Overview
Price Trend
13
.
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
0.0
20.0
40.0
60.0
80.0
100.0
120.0
FY15
FY16
FY17
FY18
Dec'
18
Jan'
19
Feb'
19
Mar
'19
Apr'1
9
May
'19
Jun'
19
Jul'1
9
Aug'
19
Sep'
19
Oct
'19
Nov
'19
Dec'
19
Jan'
20
Feb'
20
Mar
'20
Apr'2
0
May
'20
Jun'
20
Jul'2
0
Aug'
20
Sep'
20
Ocr
'20
FY19 FY20 1QFY21
Domestic | Average Sugar Retail Price
Avg.Sugar Retail Price-PKR/KG Percentage Change (RHS)
• The graph above shows prices of sugar in Pakistan. Average price per kg was PKR~100/kg. • However, price spiked as high as to PKR120/Kg during a few days at the end of August’20.
Over the last 3 years, sugar retail prices were rapidly increasing due to shortage of sugar supply in the country. In FY20, the GoPdecided to import ~0.3mln MT of sugar due to its portrayed scarcity in the market, despite sugarcane being abundantly grown in Pakistan. Resultantly, the CCP conducted an Inquiry in this regard report of which was issued on Oct 21, 2020.
CCP Findings:• Sugar industry in Pakistan and its state of competition.• Existence of collective dominance or any anti-competitive strategy.• Collective decision by sugar mills for not supplying sugar to tenders floated by USC or any form of bid rigging.• Players’ decision to cease crushing of sugarcane during crushing season 2019-20.
CCP Conclusion:• As per CCP, Pakistan Sugar Mills Association aided cartels among its members not only to protect inefficient mills but also
keep the commodity’s prices high.• Over the last 22 months prices have been artificially increased by~66.8%.• PSMA was maintaining an illegal balance between sugar mills with variant cost structures.
Source: CCP
Sugar | Domestic Overview
CCP Enquiry Report
14
.
Source: CCP, PACRA Database
Sugar | Domestic Overview
Fragmented Market
15
Market Share as per Installed CapacitiesPeriod FY20JDW 14%Hamza 6%Shakarganj 5%Almoiz Group 3%RYK 3%Tandlianwala 3%Etihad 3%AKT 3%Chashma 3%Sheikhoo 3%Deharki 3%Layyah 3%Two star Kamalia 2%Hunza 2%Madina 2%Fatima 2%Indus 2%Alnoor 2%Ashraf 2%Habib 2%Other Players 32%Total 100%
• Pakistan has 90 sugar mills currently operative in the country. Top 5 of them, however, account for ~28% of the market share.
• Listed companies primarily dominate the market.
• Top market players are mainly owned by political groups.
Top 5 Sugar Mill Location
JDW Pujab,SindhAlmoiz Group Punjab,KPK
RYK Punjab
Tandlianwala Punjab,KPKShakarganj Punjab,KPK
*MY period Sep-Aug
Source: PACRA Database
Sugar | Domestic Overview
16
19.8%
16.4%
12.5%12.4%
14.1%
9.3%8.1%
4.9%4.2%
6.7%
0.7%2.2%2.0%
1.0%
3.9%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
9MY20MY19MY18MY17MY16
Profitability Margins
Gross Profit Margin Operating Profit Margin Net Profit Margin
• Pakistan’s sugar market size increased to PKR~440bln in FY20 (PKR~406bln in FY19), up ~8% YoY majorly due to price change. Demand for sugar remains largely price inelastic due to sugar being one of the essential food items. The country’s total sugar demand hovers in the range from 5-5.5mln tons per year.
• Even during the outbreak of Covid-19 pandemic, sugar demand was one of the least impacted in the country as it is a main food item. The industry was also included in the ‘exception list’ for continuity of operations during lockdown. It did, however, face a slight set back on the demand during complete lockdown days due to closure of restaurants.
• As sugar prices have increased on a step up basis by the millers in MY20, their profitability margins have also improved. Gross profit margin for 9MY20 clocked in at ~19.8%(~16.4% in MY19) and operating margins recorded at ~9.3% for 9MY20(~8.1% in MY19).
• However, net profit margins of the Industry reduced to ~0.7% in 9MY20(~2.2% in MY19) due to increase in financial costs (resulting from an increased policy rate of ~13.3% in MY20).
*MY period Sep-Aug*Weighted Average of Top 30 Players
Business Risk | Margins
Source: CCP
Sugar | Domestic Overview
Business Risk | Cost Structure Disparity
17
• The Sugar Industry is subject to variant cost structures due to different recovery ratios of cane type, technology used economies of scale, conversion cost and purchase price of sugarcane. Due to this, even mills located in the same area may have different cost structures.
• Most highly efficient mills are the ones which have maximum recovery ratio and other economies of scale due to larger capacity and better technology. The inefficient mills are the ones with obsolete technology, low recovery ratios and high conversion cost.
• Sugar recovery rates vary from ~8% to 12%.
• In Pakistan the cost of cane varies from 65% to 96% of the cost of production of sugar for different mills, which demonstrates an excessively high share of sugarcane - often with low sucrose content.
• The Industry shows a considerable variation in terms of obtaining cane yield levels and value addition.
Sugar Mills Cost Disparity-PKRProvince Minimum Price/Kg Maximum Price/Kg Disparity
Punjab 43.6 78.6 80.3%Sindh 47.2 66.7 41.3%
FactoryCrushing Capacity-
metric TonsCost of Sugar-
PKR/KgRecovery
Cost of Cane-
PKR/Kg
Component of Cane in Total Cost
JDW Sugar Mills 4,620,000 46.96 11.29% 40.08 85%Hamza Sugar Mills 2,940,000 49.29 10.82% 41.58 84%Al Moiz Industries 2,290,000 57.06 10.60% 42.21 74%Thal Industries 2,208,000 64.86 10.19% 45.14 70%Macca Sugar Mills 1,485,000 97.27 9.03% 49.84 51%Noon Sugar Mills 1,400,000 56.95 10.01% 43.95 77%Sindh AbadgharSugar Mills
1,280,000 54.32 10.78% 45.71 84%
Shakaranj Sugar Mills
1,268,000 67.76 10.13% 44.42 65%
Khairpur sugar mills 980,000 55 9.81% 46.38 84%Adam Sugar Mills 826,000 66.41 8.91% 51.62 78%Chanar Sugar Mills 768,000 65 9.50% 50.29 77%Pattoki Sugar Mills 68,964 56.95 8.21% 54.81 96%
*Data as per FY20
Source: PACRA Database
Sugar | Domestic Overview
Financial Risk | Working Capital Management
18
0
50
100
150
200
9MY20MY19MY18MY17MY16
Working Capital Cycle
Inventory Days Trade Receiveable Days
Trade Payable Days Net Working Capital Cycle
3.4
2.73.12.8
1.7
0.0
1.0
2.0
3.0
4.0
9MY20MY19MY18MY17MY16
Current Ratio
• Inventory levels of sugar mills are at its peak during the crushing season i.e. Dec-Feb and Apr-May. As soon as Pakistan hits summer season-June, the sales start to boost(cold drinks and beverages) and inventory levels begin to reduce.
• Net (average) working cycle condition of sugar industry increased over the last five years. Inventory days increased to ~161 days for the period 9MY20(~102 days in MY19) from ~69 days in MY16.
• Restrictions on export by government contributed to increase in inventory levels during May20-Jun20.
• Trade receivable days have also increased to ~50 days in 9MY20(~35 days in MY19).Trade Payable days improved to ~76 days in 9MY20(~53 days in MY19).
• As a result net working cycle has experienced a rise to ~136 days in 9MY20(~102 days in MY19).
• One of the major reason for increased working capital cycle is Covid-19, which impacted payments.
• Due to increase in working capital requirements, industry’s short term financing has augmented.
• Current ratio has improved to ~3.4 times in 9MY20(~2.7 times in MY19). However, this may be a sing of inefficient management of industry’s current assets.
*MY period Sep-Aug*Weighted Average of Top 30 Players
Source: PACRA Database
Sugar | Domestic Overview
Financial Risk | Borrowing & Interest Costs
19
3.4
2.42.02.2
2.9
0.0
1.0
2.0
3.0
4.0
9MY20MY19MY18MY17MY16
Interest Coverage
10.6%
12.9%
7.2%
10.0%
15.3%
10.9%11.9%
6.5%
8.9%
6.1%
0.0%2.0%4.0%6.0%8.0%
10.0%12.0%14.0%16.0%18.0%
9MY20MY19MY18MY17MY16
Average Cost of Borrowing
Avg Cost of Borrowing Avg KIBOR
66.8%63.0%65.2%64.9%49.2%
68.2%72.5%69.4%61.7%
39.7%
0.0%20.0%40.0%60.0%80.0%
100.0%
9MY20MY19MY18MY17MY16
Borrowings
Total Borrowing/(Total Borrowing + Equity) Short Term Borrowing/Total Borrowing
• Sugar Industry total borrowing book clocked in at PKR~1,845mln as at June’20 (PKR1,643mln – June’19) up ~13% YoY basis.
• The Industry is highly leveraged. Borrowings to Equity increased to ~66.8% in MY20(~63.0% in MY19). Total Infection ratio (Non-Performing Loans) of sugar industry increased to ~3.8% in CY19 from ~2.0% in CY18. For 1HCY20 NPLs stood at ~2.5% of the Borrowing Book (~2.0% SPLY).
• Despite increase in financial costs, interest coverage showed a sign of improvement to ~3.4 times in 9MY20(~2.4 times in MY19) due to increased margins resulting in higher free cash flows available.
• Average cost of borrowing rose from~7.2% in MY18 to ~12.9% in MY19. For 9MY20, average borrowing cost was recorded as ~10.6%. This is expected to reduce with the policy rate cut by 625 bps.
*MY period Sep-Aug*Weighted Average of Top 30 Players
Source: CCP, PACRA Database
Sugar | Domestic Overview
BY-Products
20
Molasses & Ethanol Production-mln MTPeriod FY15 FY16 FY17 FY18 FY19 FY20*Molasses Production 2.2 2.2 3.1 3.0 2.2 2.1Less: Export 0.1 0.1 0.1 0.2 0.1 0.1Molasses Available for Ethanol 2.1 2.1 3.0 2.8 2.1 2.0Ethanol Produced 0.6 0.6 0.8 0.8 0.6 0.6Ethanol Exported 0.3 0.3 0.3 0.6 0.4 0.4
Bagasse and Mud Production-mln MTPeriod FY15 FY16 FY17 FY18 FY19 FY20Bagasse 1.48 1.46 2.07 1.91 1.45 1.40Mud 1.52 1.50 2.14 1.97 1.49 1.45
• Average recovery rate for molasses is ~4% of the sugarcane crushed.
• Average recovery rate for ethanol is ~28% of molasses.• Recovery rates for bagasse and mud are ~2.91% and ~3%,
respectively.• Pakistan has a total ethanol production capacity of ~3,075 MT
per day.• Ethanol prices and margins are heavily dependent upon cane
yield.• Ethanol Industry is highly exposed to rupee fluctuation in
terms of exports as ~50%-60% of ethanol produced in Pakistan is exported.
Top 5 Ethanol Producers
Madinah GroupShakarganj
TandlianwalaShahmurad
Unicol
0.4 0.42
0.33 0.33 0.36
0.51
0
0.1
0.2
0.3
0.4
0.5
0.6
FY15 FY16 FY17 FY18 FY19 FY20
Global Average Ethanol Prices- USD/Ltr
• Low sugar production
• Low sugar availability
• Increase in Sugar Prices
• Improved Profitability
• Prompt payments to farmers
• Low cane arrears
• Increase in area under Cultivation
• Higher cane production
• Higher cane for sugar
3-4 Years
• Higher sugar production
• Higher sugar availability
• Decrease in sugar prices
• Lower Profitability
• Delayed payment to farmers
• High cane arrears
• Decrease in area under cultivation
• Lower cane production
• Lower cane for sugar
2-3 Years
Sugar | Domestic Overview
Sugar Sector Cycle Nutshell
• Farmers in Pakistan have very limited power. Their cash cycle is mainly influenced by large sugar mills.
• Even in the current scenario of price spurs and high profitability margins, many farmers are paid much less than the minimum price levels set by the government.
• Payments of farmers are long deferred by some of the strong sugar mills.
21
• Medium level of threat
• No governments restrictions on entry
• Cost of entry relatively low
• Many inefficient mills operating in market
POTENTIAL NEW ENTRY
• Low power• Consumers will
purchase, no matter what the price levels are
• Possibilities and history of producer cartels
BUYERS
• Low threat of substitutes(artificial sugar)
• Basic Necessity
SUBSTITUTES
• Large number of suppliers(farmers)-Limited power
• Farmers are protected through minimum price policy of government
• Farmers tend to easily switch between crops if they do not find favorable terms
SUPPLIERS
• High Rivalry• ~90 Players• No differentiation
on price basis• Differentiated on
the basis of quality, availability and delivery
COMPETITIVE RIVALRY
Sugar | Domestic Overview
Porters 5 Forces Model
22
Sugar | Domestic OverviewSWOT Analysis
• Excessive regulation and control by government• Vulnerable to political interest• Unhealthy competition and cartels• Changing climate patterns due to global warming• PKR devaluation leading to declined export margins• High level of competition• Varying quality of seeds and cane• Production of sugarcane decreases the productivity
of land
• Growing population and food consumption• Value added by- products• Export market potential due to produced
surpluses.• High potential to increase yield and recovery
ratios• Pakistan GDP recovery and reduced finance
costs leading to opportunities for investment• Development of value chains• Reduced corporate tax rates
• Lack of research and development initiative and outdated technology with farmers
• Lack of proper knowledge and training to farmers• Water management problems and small holding of
land by farmers• Lack of proper recycling systems• Low Yield and recovery ratios and varying cost of
sugarcane to mills• Inefficient plants running
• Availability of land and raw material• Low cost skilled and unskilled labor• Suitable weather for crop yield• Profitable crop due to government incentives• Large domestic market with increasing demand• Influence on government policies• Simple to operate plants• High crushing capacity
Strengths Weaknesses
ThreatsOpportunity
23
Source: CCP,SBP,GOP
Sugar | Domestic Overview
Regulatory Framework
24
• Export Policy Order, 2016• 2018, ECC allowed 1.1 mln metric tons of export quota• 2020, Removal of Sales Tax on imported sugar supply by TCP
Federal Government
• Sugar Act 1934 – Price regulation of sugarcane• Sugar Factory Control Act 1950- regulation of sugarcane supply and price to factories• Punjab Sugarcane Control Order 1972- regulating and prohibiting the movement, transport, supply, distribution and use or consumption
of sugarcane and trade and commerce therein.• Punjab Foodstuff Act 1958- continuance of powers to control the supply, distribution and movement of, and trade and commerce in,
foodstuffs in Punjab.• Sindh Foodstuff (Control) Act 1958 – an enactment made in public interest to provide for the continuance of powers to control the
supply, distribution and movement of, and trade and commerce in, foodstuffs in Sindh.• Price Control and Prevention of Profiteering and Hoarding Act 1977 – an enactment to provide for price control and prevention of
profiteering and hoarding.• Punjab Registration of Godowns Act 2014 – an enactment to register godowns, provide for a comprehensive system regarding stable
supply and availability of essential articles, and deal with ancillary matters.
Provincial Government
•Control over non-competitive strategies of the producers.•Competition Act 2010ns that regardless of whether the sugar industry is heavily regulated by the provincial governments, it is still
susceptible to being monitored by the CCP. Not only can the sugar mills and other private parties be looked at by the CCP, governmental bodies, such as the Sugarcane Control Board, can also be monitored.
Competition Commission
Sugar| Domestic OverviewRating Curve
Source: 25
A+ A A- BBB+ BBB BBB-Pacra 1 0 3 2 3 2VIS 0 2 11 1 0 0
0
2
4
6
8
10
12
No.
of R
atin
gs
Rating
Pacra VIS
• PACRA rates 11 players.• PACRA covers ~9% of the market
share in terms of revenue.
Sugar | ConclusionOutlook: Stable
Source: Agriculture Committee, Business Recorder 26
Sugar Production Forecast-mln MTSensitivity Analysis Cane Utilization RateSugar Recovery Rate 75.0% 80.0% 90.0%9.5% 54 57 6410.0% 56 61 6810.5% 60 64 72
• On the pricing front, it is expected that sugar prices will not soar as they have been doing since 2018. Current sugar price is around PKR~97/Kg. The price may reduce further to PKR80/Kg, given the impact of CCP’s Inquiry and increased supply expected in MY21. While GoP has set a target of Import quantum for the year, local prices already trade at a discount to the Imported sugar price. This is why, no significant impact is expected on local prices.
• Listed Companies(all in consensus) are predicting a crop surplus for MY21 and the overall Industry is looking at an output level greater than that of MY20 season.
• Resultantly, sugar production may increase up to ~12% which may lead to increased exports. Sugar export quota is, however, expected to remain stable at 1.1 mln MT.
• Another reason for increased production is expected because of farmers’ preference being shift from cotton crop to cane crop.• Data from IRSA and SUPARCO reveals that both irrigation water and rainfall has remained satisfactory throughout the Indus basin.• However, fertilizer offtake data has not portrayed any substantial increase growth. This does not point towards a lower yield, but it signals out that
the cane yield may not exceed the 10 years average of ~60ton/Hec.• It is estimated that sugarcane production will increase by 21.18% in Punjab, 0.53% in Sindh, 0.14% in KPK.• Sugar consumption is expected to grow at a rate of ~5% over the next marketing year.• The Country’s ending stocks as at June’20 were ~1.8 mln MT of sugar as per June’20 with an average price of ~PKR90/kg and average cost of
~PKR61/kg.
*Analysis as per Agriculture Committee Meeting OCT’20
Sugar | BIBLIOGRAPHY
• World Bank• United Stated Department of Agriculture (USDA)• Pakistan Bureau of Statistics (PBS)• Business Recorder• State Bank of Pakistan (SBP)• Pakistan Stock Exchange (PSX)• Pakistan Sugar Mills Association (PSMA)• Competition Commission of Pakistan (CCP)• Statista.com• PACRA in-house Database
DISCLAIMERPACRA has used due care in preparation of this document. Our information has been obtained from sources we consider to be reliable but its accuracy or completeness is notguaranteed. The information in this document may be copied or otherwise reproduced, in whole or in part, provided the source is duly acknowledged. The presentation should not berelied upon as professional advice.
ResearchTeam
SaniyaTauseefAsst. [email protected]
Aimen [email protected]
Contact Number:+92 42 35869504
27