WEB DESK: The Economic Coordination Committee recently decided to raise regulatory duty on sugar to 40 percent; its decision drew an instant and strong worded protest by traders through the Karachi Chamber of Commerce.
Their argument against this move is that sugar mills interests are being unjustly served; the price of cheap international sugar is raised and the mills get to keep selling at the high prices – a sort of collusion. While this argument holds substance on the surface, there is more to this story.
Firstly, if mills are selling at such exorbitantly high rates to reap profits, why are the balance sheets of so many mills in the negative? BR Research wrote about the problems that the sugar industry is facing earlier this month (see The sugar failure, published July 01, 2015). The problem, in a nutshell, is the unreasonably high support price of sugarcane.
When mills purchase sugarcane at the support price of Rs180 per 40kg, they must sell the sugar at around Rs65-70 just to break even. Reportedly, an overwhelming majority of mills have been selling sugar at losses, between Rs52-54 per kg to traders, who then sell it at the higher price to reap profits.
Secondly, the sugarcane they procure – which forms around 80 percent of their costs – can give varying recovery but is priced the same; a batch of sugarcane which gives a recovery of 3 percent will be equivalent to the batch of cane that gives 9 percent. With mills having such disparities in their recoveries, how can collusion take place?
Finally, consider this; the price of white sugar internationally is around Rs38 per kg, whereas in Pakistan it is at Rs64. A regulatory duty of 40 percent puts the price of imported sugar at around Rs53 per kg. That is still at a discount of Rs11 per kg to the domestic price. So, if anything, the import duty fails to protect sugar mills as it is. Earlier this month, it was reported that sugar stocks in the country are 1.9 million tons.
So, there is certainly no need for further sugar imports. However, there is a dire need to cut the support price of cane to bring down this unnecessarily inflated price of sugar, not to mention make mills competitive in the international market and get rid of this surplus stock.
SOURCE: BR Research