I have great pleasure in presenting the Annual Report of the Pakistan Sugar Mills Association for the year ending 30th Sept’2002. This Annual General Meeting is being held at the conclusion of the term of the Chairman and the Central Executive Committee elected for the session 2000-2002. The names of the newly elected Management for the term 2002-04 will be announced at the end of this meeting. I will now refer to the events that has haunted the sugar industry for the past two years.

1999-2000

Sugarcane production 1999-2000 failed to yield the estimated sugarcane and sugar, though the plantation area was same as that of the current year. Severe effects of the drought and large-scale infestation ignored by the Government’s data controllers, resulted in production of sugar as low as 2.40 million tonnes that signaled immediate shortage of sugar in the country. Inspite of the intermittent pauses due to short supplies crushing was totally closed before end March’2000.

Due to delay in the import of sugar the prices soared, as traders were not happy with the available margin. To help the importers, import duty was reduced by the Government from 45% to 25% in May’2000, and again reduced to 15% in July’2000 as the international prices moved upward from US$ 191/- in April to US$ 259/- in Sep’2000. Inspite of the import duty reduction the landed price had a direct impact on the sugar retail prices, which jumped from Rs. 26/- to over Rs. 30/- for a short period of end 2000, till the arrival of domestic production 2001-02. During this period the stocks at mills had already exhausted, but the industry was labeled as the culprit of this havoc which was actually created by the sugar importers.

Since then the sugar industry remained under pressure and on its toes, defending itself against excessive imports. Inspite of maximum efforts, presentations, lot of protestations and meetings to increase the duty as further imports were not at all required, surprisingly the import duty was further reduced to 10% in June’2001 readjusted to 20% later in Sept’2001. Other sugarcane development schemes / visions and constitution of sugar Board etc. did not materialize any further despite enthusiastic start, indicating abandonment of sugar industry’s future development.

2000-2001

After the bad experience during 1999-2000, Government and the industry agreed to supplement the domestic sugar production by allowing 500,000 tonnes of duty free raw sugar import during 2000-01. Moreover the Government did not monitor the import of refined sugar which was entering Pakistan at a fast flow on low tariff, as well as subsidized from the country of its origin. Furthermore inspite of written opposition from the Association the Government allowed 100,000 tonnes of raw sugar to add to the sugar glut. All this resulted in an accumulated availability of 3,671,000 tonnes against low consumption of 3,050,000 tonnes.

The high availability during a shortfall year directly effected the sale price of sugar, with retail prices sliding down to Rs. 24/70 by September 2001, indicating further continuing downward trend. High stocks and ill-monitored imports thus caused a huge financial loss to the industry.

The year 2000-01 production supplemented by import of about 600,000 tonnes raw sugar and a similar quantity of refined sugar ended with a surplus of over 600,000 tonnes and a substantial quantity lying in the market. In other words a self created glut like situation and a surplus stock of 620,000 tonnes was carried over to the year 2001-02.

2001-2002

During the year 2001-02 MINFAL’s preliminary estimates were very low expecting only 2.40 million tonnes sugar. The information gathered by our members was very encouraging as we expected a production of 3.2 million tonnes. PSMA’s estimate of sugarcane, 10.0 million tonnes in excess of MINFAL’s estimate remained an obstruction during all our meetings as a strong point against our plea. Though imports had now stopped, the surplus was not reconciled till the season 2001-02 ended at above 3.20 million tonnes, making total availability at 3.9 million tonnes. Obviously the import built carryover stock was responsible for such a huge availability.

The excessive carryover stock from the previous year started showing its impact on the domestic prices sharply. Domestic prices came down to an average retail price of RS. 21/90. At the corresponding ex- mill price, the industry could not recover the production cost. The industry suffered a minimum loss of at least Rs. 7.0 billion and is now faced with severe cash flow problems including outstanding payments of Banks, DFIS, growers, sales tax etc.

The situation was appreciated by PSMA well in advance and Government was approached on numerous occasions to seek some relief in the shape of: -

a) immediate export of a part of surplus sugar through Government means, the Government having been responsible for the excessive imports.

To export a portion of surplus 2001-02 continuous efforts were put in with options and means of getting rid of the surplus, which included :-
i.) subsidizing the export by extra sales tax that Government would earn by stabilizing the domestic prices.
ii.) by gifting or selling the sugar to Afghanistan bearing the losses,
iii.) involving TCP in buying and exporting through tenders like rice, wheat and cotton etc.
Inspite of, the fact that some of these efforts were made under the guidance of the Government, the exercise was a waste of time.

b) measures to curb further import, threatening the domestic industry due to low international prices, by levying additional import duty.

After enough imports had taken place till Nov’ 2001, and domestic retail price was down to Rs 21/58, the import tariff was raised to 30%, that short lived till June 2002, when maximum tariff scale was brought down to 25%. Through our Pre-budget suggestions we proposed higher tariff and levy of 30% regulatory duty. Later the same plea along with justifications, was referred to Anomalies Committee of Budget 2002-03.

After promulgation of Ordinance XXXI of 2002 to provide for the imposition of safeguard measures and a number of meetings we were convinced to file an application to the Tariff Commission of Pakistan for levy of regulatory duty, and Ministry of Commerce and Industry will support the case for quick application.

The puzzle was soon resolved by NTCP stating that Pakistan has bounded sugar rates in the schedule of concessions under Article II of GATT 1994 at 150 percent import duty on sugar. Thus, under the WTO tariff regime, the duty on sugar can be increased up to the bounded level of 150 percent. NTC could examine the application once the bounded rate has been reached and the threat of dumping persists; safeguard measures could only be applied when it is required to impose a duty beyond the bounded rates.

On receipt of the reply the case is once again back with the Ministry of Commerce and Industry, who appreciate the situation fully. We hope they can enhance the import tariff satisfying the IMF conditions.

2002-03

Statistics show that over 600,000 tonnes of sugar would be available with the mills, on 1st October 2002. The supply of irrigation water is satisfactory, and the crop condition promise a bumper harvest. Our conservative estimates are for over 3.50 million tonnes of sugar, which will raise the availability of sugar to over 4.10 tonnes against estimated consumption of 3.35 million tonnes.

High domestic production at the time of global surplus and expected further low prices, the sugar industry foresees a gloomy picture and finds no reason to be jubilant. In the national interest the promising crop and the sugar production is a matter of great satisfaction, as long it is handled properly for its perpetual progress.

Appreciating the situation PSMA proposes delay in start of crushing season 2002-03 by two month, and arrangements of atleast 500,000 tonnes of sugar export by the start of the crushing season 2002-03, to avoid a total disaster during the ensuing season.

Domestic Consumption

Realizing the impact of a reliable consumption data, we have reproduced the main features already presented in our last Annual Report 2001. The data is improved and projected further forming a model base for use as guideline for future planning.

In the recent past 21 kg was being used as per capita consumption of refined sugar. In this case an estimated figure is applied to another estimated figure of population i.e. two uncertain figures are used, to arrive at an important figure of consumption, forming a base for planning and ascertaining import and exports of sugar, that has been causing controversies, resulting in over imports and obstructing export of surplus sugar.

In a recent study prepared by PSMA, precise collection of monthly imports, exports and supplies from mills, taking an account of carryover stocks, a fair model of 10 years consumption data was established. This shows pretty regular rate of growth in simple progression of about 3.48% annually with 1990-91 consumption taken as bench mark (2,342,158 Tonnes) Annual average increase in consumption, records 81,622 tonnes. Sugar consumption growth is slightly higher than the population growth of 2.96 % with 1991 population 112.6 million taken as bench mark (145.96 – year 2002). The difference marks the increase in the per capita consumption, now firmly established as 22 Kg, which coincides with our consumption figure of 270,000 tonnes conveyed to the Government. The attached projection forecasts consumption of around 3.5 million tonnes for the year 2004-05. The industry must be prepared to face the challenge.

Minor annual fluctuations, temporary in nature are always possible, which are due to:-

i.) End month’s mills sales , accounted for as supply in that particular month.
ii.) Similarly late import arrivals are included in the supplies, consumed later.
iii.) Substantial domestic price fall attracts higher sale for a short period.
iv.) Fluctuating supplies to Afghanistan can easily bring a substantial difference.
v.) Stocks held in market also fluctuate.

Our members as well as Government concerned officials will now have a clear understanding of the consumption and its growth, basically worked out on 12 months basis each year Oct/ Sept.

Pakistan Sugar Mills Association
Consumption (1990-91 to 2001-02) & projected
Sugar Year Oct- Sept.

Global Sugar Scenario

For the crop year 2001-02 World sugar production and consumption from different sources is averaged at 126.45 million tonnes against 122.6 million tonnes consumption (white values). The output exceeding the demand by about 4.0 million tonnes, the surplus would lead to global surplus stock of 60.0 million tonnes at the end of August 2002.

The crop year 2002-03 would be another surplus year with the world surplus already touching about 17.0 million tonnes. With the exception of India, where the crop expectation is 15-20% lower due to unfavorable monsoon, other major sugar producing countries are expecting massive cane crop, and hence there could be little doubt that market will remain over supplied for the next 18 months. It is an agreed fact by the global sugar experts, that the market can not recover un-till the surplus disappears, and consumption catches up with the production.

World Monthly Refined Sugar Prices (US$ Per Tonne)

With the global output seen at 131 million tonnes in 2002-03 crop year and consumption estimated at 125 million tonnes world sugar prices are to stay low for the next year or two according to major analysts, the start of the effect is depicted in the above graph.

The global surplus and the continued downward trend will invariably have direct impact on the countries like Pakistan, where domestic production cost is much higher than the major sugar producing and exporting countries.

Economy of the sugar production is measured by the ultimate product i.e. sugar in tonnes per hectare. Comparing the out put of the different countries in sugar production per hectare, indicates a combined result of the yield, recovery % age, efficiency etc. The following graph shows Pakistan’s best standing in comparison to the countries that matter as for as the production and Trade of the surplus is concerned.

Unless revolutionary measures are taken to improve the sugarcane quality and yield per acre it will have no standing to export its surplus in competition to other countries. Its production would always remain under threat to internal and external shocks.

The export of surplus sugar globally, is based on either very low production cost or supported by various subsidies. These subsidies include crop subsidies, subsidy on utilities to sugar mills, transport and sea freight subsidies, duty draw backs on imported components, land rent and sugar plants cost, lending rates and massive export rebate like that of around 450/- euros per tonne by European Union.

Conclusion:-

• Sugar Industry was not responsible for the price hike at end 2000.
• Excessive import has caused huge losses to the industry and a continued depressed sugar price.
• Present stock building and next year’s harvest is posing a serious threat of about 900,000 tonnes surplus for the year 2002-03.
• Global surplus indicates continuation of low prices for the year 02-03.

Under the circumstances it is obvious that the sugar industry can not sustain further losses. For the revival of the industry, to face the future challenges and meet the national demand, it is proposed that:-

(1) crushing campaign 2002-03 should be delayed for atleast two months.
(2) government should provide means against losses for exporting minimum 500,000 tonnes of sugar by the start of 2002-03 crushing season.
OR
(3) The sugar industry be authorized to limit its production to the domestic demand only.
(4) Immediate enhancement in import tariff on sugar be imposed by minimum 30% on top of present rate of 25% to curb import of sugar (Refined & Raw)
(5) Sale tax issues of additional 3% on sugar and sale tax payment deferment be attended to, at the earliest.
(6) First step taken by the government in getting rid of the support price system on sugarcane, be further tuned to free market mechanism by eliminating the indicative price as well, to stop controversies.

We hope that with little attention by the Government, persistent policy, vigorous effort towards research and development of the sugarcane crop, the industry can be revived to face the growing future challenges. Let us hope that objective efforts are jointly made to save the industry being called un-viable and victim to mismanagement etc. Government should also realize that to protect the interest of the consumer and the growers, the source is to be protected, strengthened and developed on priority as a base.

To conclude, I thank the Zonal Chairmen and members of the Central Executive Committee as well as the zonal committees for their support and co-operation. PSMA secretariats have always been maintaining data and vital information in support of PSMA’s stance on important issues, which has always been a great help when presenting our case to the Government. Our thanks to the central as well as the zonal secretariats for their dedicated efforts.