‘Hire top audit firm to determine cost of sugar production’

An interview with Asim Ghani Usman, CEO Al-Abbas Sugar Mills Limited

Asim Ghani Usman is the young face of Al-Abbas Group of Companies, a Karachi-based business conglomerate. The group was founded by his father, Haji Usman Ghani, a titan of Pakistan’s capital markets whose name needs no introduction. Today, the conglomerate is most-known for its sugar milling and allied operations, with business interests in construction and cement industries, financial services, and real estate, among others.

As the young face of the family, Asim currently serves as the CEO of Al-Abbas Sugar Mills. Given his command over sugar industry’s dynamics, he also serves as the Chairman of Pakistan Sugar Mills Association (PSMA), Sindh Chapter; and Chairman of Pakistan Ethanol Manufacturers Association (PEMA).

BR Research recently sat down with Asim in Karachi to learn from his outlook for the sugar industry given grim predictions of declining production levels in the ongoing season. Given his position as Chairman PEMA, Asim was also able to share insight on the dynamics of ethanol export market, a much-ignored area.

Below are the edited excerpts of the interview:

BR Research: What are industry’s projections for sugarcane production volume this year? Have growers shifted to other crops due to delays in payments witnessed at the time of 2017-18 harvest?

Asim Ghani: In Punjab, sugarcane production is expected to decline by 20-25 percent, whereas the decline in Sindh is projected to come close to 30 – 35 percent. This is primarily as a result of drought conditions in Sindh due to lower than expected precipitation.

Now that we have witnessed substantial rain during winters, it is expected to support off-season sowing in February that takes place in certain areas of Punjab. However, growers in Sindh shift to other crops during Rabi; therefore, output here is going to be lower.

Yes, sowing may have been lower compared to last year levels, but lower production this season is primarily due to water shortage, which has brought yield down. For example, if average yield per acreage last year was between 700-800 maunds, it is expected to decline to 400-500 maund due to water shortage.

BRR: Did crushing begin with delay this year as well?

AG: No; for example, our mill began crushing in December. The common misunderstanding about crushing period stems from Cane Act, 1950, which defines beginning of crushing season from October 01st, and latest by November 30th.

However, over time, weather patterns have changed and so have the sowing and harvest patterns. The ideal crushing period now begins in December, because it allows for cane harvest to mature and ensure maximum sucrose recovery.

BRR: As the chairman of PSMA’s Sindh chapter, can you confirm industry’s consensus position on support price?

AG: There are only two-way forwards if the sector is to achieve long term sustainability: either remove the support price and let the market forces dictate cane prices; or, impose price controls on both raw material and final product.
At the current support price level of Rs180-200 per 40kgs, raw material alone costs Rs44 per kilo of sugar. FBR has imposed 11 percent sales tax on white sugar calculated on the basis of Rs60 per kg; whereas sugar is being sold at ex-mill rate of no more than Rs51-52 per kg.

What about manufacturing costs, overheads, or road cess? Do we not have salaries to pay; is the industry exempted from contributions to Workers Welfare Fund or EOBI?

We often hear the argument that millers mint profit through other business divisions; that may be true for some groups. But what about medium-sized, which do not have diversified revenue streams? How can they breakeven at current support price levels? The existing policy essentially seeks to subsidize farmers through sugar mills.

BRR: Yet a perception prevails that the industry is dominated by political families. Why would politicians seek to retain support price if it hurts their own business interests?

AG: It is a false perception propped up by media. Right now, there are 36 mills in Sindh out of which up to four have already closed operations due to poor profitability. Most mid-sized mills in the province belong to memon community, such as Faran, Mehran and Shahmurad, among others.

As chairman of association’s Sindh chapter, I want to be on record that speculation in the media is unfair: most mills in the province are run professionally and have no association with any political family.

BRR: Who then represents the lobby for support price? Don’t you agree that retention of support price serves as an excuse for millers to extract subsidies on export?

AG: Support price has become a political issue because political parties are afraid of losing rural vote in case they lower or remove support price. When something becomes a political problem, it becomes impossible to take what appear to be harsh measures even if such actions may benefit public in the long term.

Our suggestion is for the government to task top three audit firms to estimate actual production cost of millers, so that either ex-mill price of sugar is set accordingly, or support price is lowered. Everybody in the value chain from farmer, wholesaler and retailer is making money, except for millers. At a time when banks are paying ten percent return, millers who have locked in capital worth billions of rupees, are not even entitled to normal profits?

Regarding subsidy on export, it is not as if it is extended to anyone business group; all players in the industry enjoy equal opportunity to benefit from the subsidy schemes.

Until last year, it was argued that Sindh government unfairly supports the mills in the province. Could you please explain why Punjab government has announced a subsidy of Rs5.35 per kg this season? Punjab has a new government with fresh faces this time; why would it follow Sindh’s flawed example, unless we agree that is the only way the industry can survive given current support price levels.

In the past, Sindh government has provided timely support to the industry. It understood that if millers refuse to begin crushing due to surplus stocks, it would prove disastrous not just for the industrialists but also for the farmers and landowners. However, due to malicious propaganda in the media recently, it appears that the provincial government has become hesitant, even as Punjab has followed in its footsteps, and announced freight support on export.

I would like to add that while much is made of the export subsidy given last year, most of this amount has not been disbursed. Out of the Rs20 billion announced last year, up to 60 percent stands unreleased. Similarly, funds against subsidy announced through TDAP back in 2013 remain undisbursed till date.
Mills bear a financial cost due to such bureaucratic delays that they are not compensated for. Federal finance minister cannot make time to meet industry representatives; whereas provincial government claims that it does not have adequate funds available.

BRR: How is wholesaler in a better position to earn profits compared to millers?

AG: Current ex-mill rate of sugar is no more than Rs52-53 per kg on average, which represents wholesalers purchase price. Yet, sugar is currently being retailed for up to Rs60-65 per kg. The difference represents wholesaler’s gain.

At the very least, the government should remove this distortion. If the government is charging us sales tax at Rs60 per kg basis, then it should procure sugar from mills directly at this rate.

BRR: But by most estimates, household consumption of sugar is no more than 20 percent of total domestic off take. If primary consumer of sugar is B2B sector, to what extent does wholesaler dictate selling price?

AG: The customer profile is not uniform across mills. While it is correct that final consumer of sugar is largely B2B (such as beverage makers, and confectionaries), some procure it directly from mills while others purchase from wholesalers. It really depends on miller’s market penetration.

BRR: Have delays been witnessed in release of payment to farmers against sugarcane procurement during ongoing season?

AG: I can only speak for my firm. As per my knowledge, regular payments are being made to farmers within 5-10 days of procurement.

BRR: Coming now to the dynamics of ethanol business. As chairman of Pakistan Ethanol Manufacturer’s Association, could you confirm respective share of domestic consumption and export in total output pie?

AG: Ethanol produced by members of PEMA goes hundred percent towards export. As a biofuel, ethanol represents an environment friendly fuel source. However, this has failed to receive the attention of policymakers. Therefore, all domestically produced output goes to foreign markets.

BRR: But back in mid 2000s, PSO had launched an ethanol-blend. Did the sector not receive support from successive governments?

AG: It is ironic that you speak of government support. Rather than support, I believe the existing policy framework is hurting our prospects, even though currently Pakistan’s ethanol manufacturers are very export competitive.

Currently, there is no restriction or excise duty on export of molasses, which serves as the raw material for ethanol production. Molasses is exported out of the country even though demand of local distilleries goes unmet.

BRR: Why have more sugar mills not set up distillery operations if it offers an obvious opportunity to diversify revenue stream and earn foreign exchange?

AG: Various forces are at play here. For example, back when some mills were setting up distillery operations, others chose to set up cogeneration plants to achieve energy efficiency. There are other players who simply do not have the financial muscle to put up a project of that scale due to many years of losses.

But most importantly, levels of molasses currently produced by the industry are insufficient to meet the demand from existing distilleries; ethanol sector’s installed capacity is thus underutilised. This deters new entrants from entering an already entrenched market, even though demand for ethanol persists on export side. Moreover, when millers can earn profits by exporting molasses with zero value addition, why should they lock capital in setting up a distillery?

The business drivers are just not as enabling any longer. That is not to say that the business is not profitable; however, margins have eroded.

BRR: Considering that cost of sugarcane is held artificially high, what drives the competitiveness of locally produced ethanol in export market?

AG: Molasses, the raw material for ethanol production, is a freely traded good. Thus, cost of sugarcane does not necessarily dictate the competitiveness of ethanol. It is instead driven by quality and not price. Ethanol produced here is better in quality compared to standards followed in Brazil or India.

This is due to a variety of factors from quality of molasses to plants operating on modern technology. The quality of molasses is in turn affected by quality of cane, which is better suited for ethanol extraction due to unique climatic conditions when compared to crop from competing regions.

BRR: Which industries are the primary consumers of ethanol? Is locally manufactured ethanol fuel grade?

AG: It is mostly used in the production of ethyl acetate, glints, pharmaceuticals, perfume industry (after denaturing). Breweries are also one of the many buyers of the chemical. Fuel-grade ethanol requires further distillation; however, is not done locally due to lack of demand.

BRR: Countries such as Brazil use an alternate production process where most of the sugarcane is utilised directly towards ethanol production. Since domestic sugarcane production exceeds local demand, do you see Pakistani mills moving towards this process, instead of relying on government subsidy to get excess stock off the market?

AG: The production process you are referring to also leads to sugar production, but in syrup form. That sugarcane juice or syrup is used to manufacture ethanol. Our production process uses molasses as the primary raw material, due to which domestically produced ethanol is of better quality.

Brazil’s advantage lies in their strategy: when price of sugar in international commodity market shoots up, they gear the process towards white sugar production; when price of sugar is depressed, as it is currently, its industry manufactures more ethanol.

The process cannot be replicated by the local industry due to high cost of sugarcane. Sugarcane plantation is expensive due to inefficient farming practices, which is further protected by high sugarcane support price. At current price levels, the raw material is too expensive to only produce ethanol directly from sugarcane (and no white sugar). This may become feasible if price of ethanol in international markets increases substantially.

India, for example, has a three-tier pricing system whereby ethanol produced from C-molasses is priced lowest, from B-molasses at intermediate levels, whereas ethanol produced directly from sugarcane receives the highest price.