Every year before the crushing season, the sugar milling industry raises hue and cry over the artificially high held indicative pricing of sugarcane. Given the developments of the last two years, considerable consensus has evolved around the detrimental effects of the support price mechanism. Most recently, even the State Bank noted that the cane pricing system needs to be rationalized (Read “Sugar year roundup: II” published in these pages on December 12, 2018).
The new government’s approach seems to be no different than those of the previous government; although one could argue that the government is caught up with more important decisions at the time, and for all purposes, an industry that contributes less than 1 percent of GDP appears to be secondary.
Meanwhile, it appears that the entrepreneurial millers have resolved to come up with innovative ways to stay solvent while the storm is weathered. A cursory look on the crushing data from the 29 sugar mills listed on the stock exchange reveal interesting trends, that on surface appears to negate millers’ claim that excess supply is forcing them to roll back operations.
For MY17 the last full year period for which industrywise figures were published by Pakistan Sugar Millers Association, total sugarcane crushed increased by 42 percent. Not only was this a historic year for the total industry output, but also a period of highest-ever crushing 21 out of 29 listed mills. Twenty-five of these recorded double digits increase in year-on-year crushing output; surely, not a sign of scaled back production.
So how does the industry still manage to claim poor fortunes? For one, the sector has no standardized number of operating days. This means that while plant capacity per day is reported in tons of sugarcane crushed, mill actual or rated capacity per annum is not reported. Instead, rated TCD (tons crushed per day) is multiplied by actual days of operation, which gives out capacity utilization. As number of days operated varies for not only across firms but also year by year, it becomes difficult to compare mill-wise utilization, which is usually a healthy indicator of firm’s outlook of demand and supply.
Moreover, while the industry association publishes a comprehensive annual report that indicates various productivity factors, including volumetric and price data, the association stopped reporting firm wise installed capacity after 2011. No reason has been explained by industry members for the same.
Thus, actual tons of sugarcane crushed by mills becomes a proxy metric of industry’s output. Here, basic statistical analysis of listed firms’ performance over the five year indicates an interesting trend. While the volume crushed varies in absolute terms, mill wise percentage share in total sugarcane crushed by the industry varies barely.
Out of a total of 29 listed firms, only three recorded a standard deviation in percentage share of over 50bps. Most medium sized players saw little to no change in their market share (in total sugarcane crushed) of les than 30bps. Most significantly, listed mills, which are only one-third of total number of firms in the industry, recorded no change in output, which remained at 46.5 percent of total, throughout the period.
The industry association should make public data on sector wise installed capacity so that estimates can be drawn over the extent of idle capacity in the industry, resulting from high indicative pricing. A stronger case cane be made for scrapping of MSP if the millers can demonstrate with evidence that substantial levels of capacity installed remains unutilized due to the faulty policy currently in place. But not if the millers fear that the truth may set the ‘farmers’ free!
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