Industry refuses to accept sugar price fixed by govt

LAHORE: The new sugar price, fixed by the Ministry of Industries and Production (MoIP) after consultation with the Pakistan Sugar Mills Association (PSMA) on the Lahore High Court (LHC) instructions, was not accepted by the industry.

The industry claimed that the price of sugar fixed by the MoIP was in complete defiance of the restraining orders of the Peshawar High Court (PHC), and in violation of the criteria, set by the LHC in its July 23, 2021 order.

Contrary to the PSMA claims, the order issued by the MoIP on July 30, 2021 stated that the meeting with the sugar industry was held on July 27, 2021 in compliance of the court orders issued on July 23, 2021. The cost structure of mills was reviewed in the presence of the sugar industry/ PSMA and its viewpoint was heard at length. The data provided by 32 sugar mills was examined, and the average of the cost formula was shared with the PSMA members.

“At the outset, the Punjab sugar mills asked for employing the costing model, used by the Punjab government for price fixation notification dated April 7, 2021, and to use the same numbers contained in the said working, except for the sale rate of molasses and overhead charges,” the order stated. The data, documents and arguments put forth, however, showed that if the contention of sugar mills was accepted, the ex-mill price of sugar works out to be Rs105.76 per kg, which is flawed. “As even on 27th of July 2021, the ex-mill price ranged between Rs97 per kg to Rs98 per kg.” Thus, the suggested price, being higher than the current market price, is not tenable, the order added.

The cost element in this work has been shown at Rs77.52/kg, whereas the self-declared data provided by 32 mills for six-month period shows an average ex-mill price of Rs72.16 per kg. Even ordinary business prudence demands that no business can sell its product at less than the cost of the product for such a long period of time, in which more than half of production is sold.

Moreover, the federal government played an advisory role in the earlier exercise, and the Punjab government was at liberty to adopt either of the two formulations, worked out by the federal government. Data obtained in response to the said notice showed that earlier working did not include cost recovery through sale of bagasse and mud. The recovery of bagasse, sale price of bagasse, recovery of sugar mud and sale price of sugar mud was obtained from the data of 32 sugar mills, which is 4.05%, Rs3.8/kg, 3% and Rs0.843/kg, respectively, the order said.

Further, the MoIP received information from cane commissioners on recovery rate of sugar based on primary evidence that showed recovery rate of 10.4% for Punjab (laboratory report), which was shared with the sugar industry. The sugar industry contended that the laboratory reports are not accurate as some of the sugar content goes into mud and bagasse. Thus it is lower than the laboratory report. The sugar industry asserted that the sugar recovery rate is 9.3%.

Similarly, the purchase price of sugarcane for the season as reported by the cane commissioner Punjab shows an average purchase price of Rs259/40kg, based on evidence gathered from banking records of the mills. The sugar industry contended that the cane price is Rs265/40 kg. However, the industry could not refute the bank record as shown by the cane commissioner Punjab.

The sugar industry claimed that it is 9.3% on the basis of figures declared by all sugar mills in Punjab. The MoIP, keeping in view the figures as well as the earlier two advisory calculations, shared by the ministry with the Punjab government, the sugar recovery rate works out at 9.9%, which is hereby adopted.

However, the rate of purchase of sugarcane was adopted at Rs259/40 kg for Punjab, based on banking records for calculations of the cost instead of the rate of Rs265/40kg, claimed by the industry.

The MoIP worked out Rs20/kg for the sale price of molasses on the basis of average sale price of molasses, calculated from the data provided by the industry and adopted it for cost determination. Furthermore, the recovery of bagasse and sale price of bagasse was adopted as 4.05% and Rs3.8/kg, respectively on the basis of data provided by the industry.

Similarly, the recovery rate of mud sugar and sale price of mud sugar is adopted as 3% and Rs0.843/kg, respectively on the basis of data provided by the industry.

The MoIP stated that the data regarding overheads, as provided by 32 mills, varied between Rs11.94/kg to Rs75.26/kg, showing an enormous variance, which appears improbable for a homogenous, undifferentiated product like sugar, which sells at a very similar price across the country.

Moreover, no details or documents in support of such costing were presented by the industry. As such, the best available alternative for calculation of overhead costs remained the data used for the calculation of export subsidy in 2017-2018, where overheads were worked out on the basis of the calculation by the Finance Division at Rs7.7/kg as approved by the Economic Coordination Committee of the Cabinet.

Incorporating 10% inflation (even though there was no increase in energy costs as mills use bagasse and even wages have shown less than 10% increase) per year, this year's overhead cost estimates work out as Rs9.24/kg, which is adopted accordingly.

The data provided by the industry to the MoIP shows an average net loss of Rs9.66/kg of sugar. However, it will be fair to award the businesses a profit of at least KIBOR+5.5, i.e.13%.

Thus, the price of sugar for Punjab (highest amongst provinces) works out at Rs72.22/kg, which is still higher than the declared average sale price of Rs72.16/kg (for December 20 to May 21 period), as reported by the sugar industry to the MoIP and at which price most of the sugar has already been sold by the mills. Thus, an ex-mill price maximum of Rs84.50 (inclusive of sales tax) was fixed, the MoIP order stated.

According to the sugar industry officials “the MoIP is trying to implement a premeditated price in a manner similar to solving a jigsaw puzzle to now arrive at an ex-mill price of Rs84.50 and a retail price of Rs89.50. The MoIP has deviated from major components of the cost which were earlier in agreement with the industry including the sugarcane recovery, which was adopted at 9.39 has now been increased to 9.87, cost of sugarcane reduced to 259, instead of 265, sale price of bye-products i.e., bagasse and mud increased by Rs2.34/kg; the overheads of 9.24/kg based on working of export subsidy in 2017-18 by the Finance Division at 7.70/kg by incorporating 10% inflation for three years, whereas it comes to 10.24/kg if same formula is applied, thereby deliberately reducing the cost by Rs1/kg in its working. The viewpoint of industry was to at least allow the same amount of 12.90/kg overheads, which were provided to the joint investigation team (JIT) by the MoIP during the sugar price-hike investigation, as the government is not considering the financial, administrative and selling costs. The profit margin is also reduced from 15% to 13% as against the costing submitted to the LHC.

The industry officials said that the MoIP, in its notification, dated July 30, alleged that sugar mills could not produce any documents to counter the evidence, put forth by the cane commissioner for the sugarcane price. The PSMA was never asked to submit any data by the MoIP and only a questionnaire was sent asking for various production related components.

The calculation of retail price of sugar 2020-21 is completely unrealistic and unworkable and restricts the unfettered working of the industry. According to industry sources, fixation of unfair sugar rate by the MoIP will only lead to disaster and eventual insolvency of sugar sector in the province of Punjab, the industry official added.