The Ministry of Industries and Pakistan Sugar Mills Association (PSMA) seem to be in a tussle lately. Apparently sugar millers are not happy with the ministrys statement on domestic sugar prices as well as its deflated assessment of sugar production cost.
The Ministry cannot fathom why sugar prices are being raised despite ample stocks available in the country till December 2011. Sugar supply of 4.7 million tons, it says, is poised to be well in excess of the demand of 4.3 million tons. Apparently not!
In the absence of demand studies or consumption surveys, nothing concrete can be established about potential sugar surplus or shortage. Some voices in the industry term the official sugar consumption estimates of 4.3 million tons as conservative and put the potential demand at 4.6 million tons.
It must be noted that in 2007, sugar consumption was also estimated at 4.2 million tons. Even with an annual consumption growth rate of two percent (well below the population growth rate), sugar consumption in 2011 comes to around 4.54 million tons.
Fresh sugar production this year is estimated at 4.16 million tons while 0.35-0.4 million tons of sugar is available with the Trading Corporation of Pakistan (TCP). So, the total sugar availability would likely hit a maximum of 4.55 million tons. Private imports are not feasible because local sugar prices are below international rates.
This fragile supply-demand equilibrium stands to be seriously disrupted in that annually 0.2-0.3 million tons of sugar is smuggled to Afghanistan, Iran and other Central Asian countries. With international sugar prices trading around $870 per ton, the landed cost of imported sugar at Karachi comes to around $920 per ton. Owing to cheaper domestic prices, sugar stocks will likely deplete due to smuggling.
Clearly the gap between supply and demand could rise up to 0.3 million tons.
This was also highlighted in a report in May 2011 by the United States Department of Agriculture (USDA). It stated, "Pakistan remains a net importer of sugar as it would have to import 0.25 million tons of sugar this year". It cited decline in planted area of sugarcane due to strong competition for acreage from high-priced cotton and sunflower crops as the major reason.
As for the sugar price hike, it seems to be on account of two reasons.
Firstly, with the change in taxable value of sugar in March 2011 - from a fixed Rs28.8 per kg to the market value at time of levying - the eight percent sales tax automatically raised the sugar price. With the passage of Finance bill 2011 into an Act, sugar is now exempt from sales tax and special excise duty, while eight percent federal excise duty will be levied on the commoditys market value.
Secondly, sugar millers are unable to sell in bulk and have to hold on to large inventories, thereby paying Rs0.7-1.0 in monthly interest costs per kilogram of refined sugar, say industry sources. There is no export permit for sugar due to a lack of exportable surplus. PSMA estimates average sugar production cost at Rs64 per kg.
Going forward, sugar prices will likely be higher. Ramadan is also coming in the heat of summer this year, which will increase sugar consumption in eatables and liquids. According to industry sources, sugar consumption might exceed 0.5 million tons in August due to this.
With sugar production commencing in November, there will be serious pressure in coming months on the remaining sugar stocks from the previous crushing season ending March 2011. In such a scenario, current sugar stocks of 2.01 million tons may not last until December 2011.
Concerned authorities must check industry practices vigilantly. Incidences of hoarding, smuggling and shrinkage would make the matters only worse, put pressure on prices and eventually force the government to import sugar at higher prices.
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