Group 5

Industry Analysis- JDW Sugar Mills Ltd

Group 5- Section 1
Maheena Achakzai

17110029

Hajra Habib

17110160

Abdullah Ismail

17110145

Myra Imran

17110193

Manahil Zahid

17110238

Contents
A.

The Sugar Industry of Pakistan: An Overview ......................................................................... 4

HIGH DEPENDENCE ON RAW MATERIAL .................................................................................... 4
LABOR INTENSIVE CROP.............................................................................................................. 4
GOVERNMENT REGULATION OF PRICES ..................................................................................... 4
LOW BARRIERS TO ENTRY ........................................................................................................... 4
FLUCTUATING PRODUCTION ...................................................................................................... 5
BY-PRODUCTS OF SUGAR............................................................................................................ 5
Major Players .............................................................................................................................. 5
JDWS ........................................................................................................................................... 6
ANALYSIS IN TERMS OF PORTERS FIVE FORCES MODEL............................................................ 6
Threat from Competitors ........................................................................................................ 6
Threat from Substitutes .......................................................................................................... 7
Bargaining Power of Suppliers ................................................................................................ 7
Bargaining Power of Consumers ............................................................................................. 7
Barriers to Entry ...................................................................................................................... 7

B.

Revenue Drivers ...................................................................................................................... 7

Population Growth...................................................................................................................... 7
Seasonality .................................................................................................................................. 8
Subsidies by Government ........................................................................................................... 8
Import Regulations ..................................................................................................................... 8
Consumer Dynamics ................................................................................................................... 8

C.

Cost Drivers ............................................................................................................................. 8

Manufacturing Costs ................................................................................................................... 8
Operational Costs........................................................................................................................ 9
Administrative Expenses ............................................................................................................. 9

D.

Problems ............................................................................................................................... 10
Uncertainty in Production......................................................................................................... 10
Government Issues ................................................................................................................... 10
Pest and Diseases ...................................................................................................................... 10

Export Conditions...................................................................................................................... 10
E.

Economic Factors .................................................................................................................. 11

Technology ................................................................................................................................ 11
Interest Rate ............................................................................................................................. 11
Inflation ..................................................................................................................................... 11
Exchange Rates & Tariffs........................................................................................................... 12
Land Use .................................................................................................................................... 12

F.

Appendix A ............................................................................................................................ 13
(Pakistan Sugar Mills Association) ............................................................................................ 14

WORK CITED .................................................................................................................................. 15

A. The Sugar Industry of Pakistan: An Overview

The Sugar Industry of Pakistan has become the second largest industry of the country, after the
Textile Industry, over the last 50 years. It is enormously contributing to the economy of the
country today (Sugar Industry of Pakistan-An Academic Report, Ravi Magazine)
Pakistan had only two sugar mills at the time of independence. These sugar mills (at Rahwali
and Takhtbai) had the capacities of 600 and 1200 TCD (tonnes crushed per day) which meant
that the annual capacity was around 10,000 TCD per year. It was during 1970-1980, that the
country witnessed a tremendous expansion in the sugar sector, with about fifteen more sugar
mills established, with a capacity of 30500 TCD.
A lot of sugar mills in Pakistan are established in rural areas, because of which a lot of economic
developments have taken place in their vicinities. There are a lot of factors that affect the
health of this industry and some of them are intrinsic (related to the nature of the industry
itself). Some of them are briefly mentioned below and will be explained in detail in latter part of
the report.

HIGH DEPENDENCE ON RAW MATERIAL

The sugar industry is highly dependent on the raw material i.e. sugar cane. This means the
production and quality of sugar cane is a major contributing factor to the production of sugar in
the country. KPK makes use of sugar beet instead of sugar cane in the production of sugar
which constitutes only 0.5% of the production of sugar in the country.

LABOR INTENSIVE CROP

Sugarcane is a labor-intensive crop, and requires about 134 man-days/hectare; hence, it
provides employment to about 12.14% of the total agricultural labor force. Hence, the
availability of labor force during the production spell is extremely important to the crop.

GOVERNMENT REGULATION OF PRICES

The government monitors 80-85% of the costs of the industry and the sugarcane support price
forms 60% of the current cost of production. Since the margins are extremely low, the industry
can be categorized as a fully regulated industry.

LOW BARRIERS TO ENTRY

The barriers to entry are very low in the industry, because of relatively low capital requirements
because of which the number of mills has nearly doubled in the last 10 years.

FLUCTUATING PRODUCTION
The sugar production fluctuates each year; we had two exporting years after two decades of
importing sugar. Currently, the production is not enough for fulfilling the domestic needs.

BY-PRODUCTS OF SUGAR
One of the by-products of sugar is Molasses. It is a common ingredient in baking, often used
in baked goods such as ginger bread cookies. In Pakistan around 80% of the molasses produced
is exported.
Another by product is Ethanol. Pakistans sugar industry produces more than half a million
tons of ethanol per annum from cane molasses, over 50 per cent of which is exported at an
average price of about $500/MT. Main destinations include: Europe, Far Eastern (Korea, Japan,
Taiwan and the Philippines) and Middle East (Dubai and Saudi Arabia).
Lastly, another important by-product is Bagasse. It is produced in the mill house in a quantity
of about 30% of the crushed cane. The bagasse contains 50% moisture It is used as a fuel for
boilers (processing stage). Bagasse is also used for chip-board and paper manufacture. (Sugar
Industry in Pakistan, Agribusiness)

Major Players
As far as production is concerned, Punjab is the highest producer of sugar with a production of
3.1 million metric tonnes approximately, followed by Sindh with a total production of 1.25
million metric tonnes. KPK lags behind with a production of around 287000 tonnes. As far as the
biggest Sugar Mills in Sindh and Punjab are concerned, they can be seen in Appendix A. JDW
Unit I, stands second to Hamza Sugar Mills in terms of production in Punjab, while JDW Unit III
has the highest production in Sindh. The number of sugar mills on the basis of their capacities
and geographic dispersion are given below. (Overview of the Sugar industry, Lahore Chamber of
Commerce).
BELOW 4000 TCD

No of Sugar
Mills
4000-6000 TCD

SINDH
8

PUNJAB
9

KPK
5

AJK
0

TOTAL
22

SINDH
14

PUNJAB
22

KPK
1

AJK
1

TOTAL
38

SINDH

PUNJAB

KPK

AJK

TOTAL

No of Sugar
Mills
6000 AND ABOVE TCD

No of Sugar
Mills

10

18

JDWS
Sugar Manufacturing is the core business of the JDW Group. It has three units where all of its
sugar manufacturing takes place (JDW official website)
Unit I (JDWSML), located in Rahim Yar Khan has a crushing capacity of 20500 TCD, and its
principal activity is the production of crystalline sugar. This was incorporated as a public limited
company in 1991 and is listed on both the Karachi and Lahore Stock Exchange.
JDW Unit II (formerly United Sugar Mills Limited) was acquired by JDWSML in 2005. This Unit
has a crushing capacity of 8500 TCD and is located near Sadiqabad (45 km from Unit I). A lot of
money has been spent on the up gradation of this plant to bring it up to the level of Unit I.
JDW Unit III (formerly Ghotki Sugar Mills (pvt) Limited) has a crushing capacity of 13000 TCD
and is located in District Ghotki, Sindh. It is located at a distance of 145 km from Unit I.
The net sales and profitability trends for the years 2010 to 2015 are given below. The graphs
clearly depict an increase in the sales of Sugar for GDWS over the years, reaching a level of
Rs.35 billion (8% higher than 2014). While there has been a drastic decline in the profits in the
year 2012, after which they have increased in 2015. This has mainly been possible because of
the favorable sugar prices, sale of electricity from JDWs new co-generation plants and increase
in sucrose recovery. (JDW official website)

ANALYSIS IN TERMS OF PORTERS FIVE FORCES MODEL

Threat from Competitors
The number of Sugar Mills operating in the country has increased over the years, so the
industry is competitive in nature. However, the price regulation means that Sugar Mills can

compete on the basis of low costs and higher output only. JDW, according to Pakistan Sugar
Mills Association, has the highest sugar cane crushing and sugar production in Sindh. As far as
Punjab is concerned, its UNIT I and II, can be categorized in the top 3 in terms of production.
Threat from Substitutes
The consumption of Sugar has increased over the years, so much that the domestic produce is
not enough and it has to be imported to fulfill the needs of the domestic market. However, the
two common substitutes of sugar are Artificial Sweeteners and Gurh. Sometimes farmers prefer
making Gurh out of their crop or selling it at a higher price to the Gurh Makers, because of
which the Sugar Mills suffer. As far as the sweeteners are concerned, so the growing health
concerns among people are indicating a rising trend in the use of these sugar free sweeteners
in times to come, but these will be limited to domestic use only. (Dawn)
Bargaining Power of Suppliers
The government policies in the sugar industry are such that sugar manufacturers are usually at
disadvantage because the sugar price is not increased at the same rate as the sugar cane
support price because of which the suppliers can sometimes be at an advantage. However, the
sugar cane producers are usually small farm owners, so favorable agreements with them can
reduce their power.
Bargaining Power of Consumers
Usually the demand for price is inelastic, which limits the power of the buyers of sugar. The
prices are regulated so the sugar Mills cannot charge abnormally high prices for sugar which
means the buy remains protected despite having a low bargaining power.
Barriers to Entry
As mentioned above the barriers to entry are very low in the industry, because of low capital
investment required so the threat of new entrants is high in the sugar Industry.

B. Revenue Drivers
Just like other food products, the demand for sugar is inelastic but there are few key drivers
which impact the revenue and growth of this industry and hence JDW Sugar Mills Ltd.

Population Growth
The population of Pakistan is currently growing at a rate of 1.49% and expected to reach 192
million by the end of 2016. An individual consumes 22 kgs of sugar per annum on average. As
JDW is a key player with a large market share, this rising trend is favorable for the company
since an increase in population indicates an increase in the total consumption of processed
food items (of which 60% are sugar based products), and hence sugar.

Seasonality
The seasonality factor needs to be taken into account when assessing the increase or decrease
in revenue of sugar industry. In Pakistan during the month of Ramadan as the consumption of
beverages and other desserts increases, the demand for sugar is also surged temporarily.

Subsidies by Government
In the year 2015, the government of Pakistan gave JDW Sugar Mills Ltd. a cash subsidy of Rs. 8
per kg and freight subsidy of Rs. 2 per kg. The company on group basis was able to export
approx. 51,663 tons of sugar. Against sugar export quota of 650,000 tons sugar industry was
able to export 549,000 tons of sugar. The subsidies are expected to be continued in the coming
years and aim to increase production thereby increasing the revenue of the company.

Import Regulations
In addition to providing subsidies to the local industry, the government has also restricted the
import of cheap sugar using 40% regulatory duty. This is another step taken to protect the local
industry and favor existing companies (including JDW) to retain their market share.

Consumer Dynamics
In the current era the trend towards being more health conscious seems to be growing day by
day (Tribune). In Pakistan, with the introduction of artificial sweeteners and substitutes to sugar
the sugar the industry is bound to face a decline in the upcoming years.

C. Cost Drivers
The cost drivers can be broadly categorized into three categories, which are Manufacturing
Cost, Operational Cost, and the Administration Expenses that JDW incurs over the course of the
year. These three broad divisions have been explained in detail below.

Manufacturing Costs
Manufacturing of Sugar is the crux of the industry itself, and it is the main aspect that
determines the overall occurrence of the remaining costs that are incurred.

The manufacturing process in itself is quite extensive and has 9 steps that need to be
carried out with due care. The process includes Growing and harvesting the cane itself,
preparing the canes for milling, milling, clarification, evaporation, crystallization,
centrifugation, drying and refining. These processes are directly associated to the
manufacturing process and the cost for each of these processes fluctuates between the
companies depending on the type of equipment they use, and the logistical framework
they follow when it comes to harvesting these canes. More often, the cane, once grown
and harvested is processed through a single plant that takes care of all these steps in a

go. However, the cost of the plant is quite significant which does act as a barrier to entry
for the new mills. The cost of producing the sugarcane however is the most significant
chunk and it comprises about 62% of the total sugar manufacturing costs. Except for
these major processes, the manufacturing costs also inculcate the additional costs of
irrigation, fertilizers, and the equipment required for harvesting the cane itself.

An important component of costs is the cost of raw material, i.e. Cost of sugar cane. This
cost makes up a major portion of the total manufacturing cost; hence, it can be
recognized as a key cost driver. Sugar Cane Production is subjected to different subsidies
based on the policies of different provincial governments. For example, the price of
sugar cane in Sindh was Rs 160 per kg, whereas it was Rs 180 in Punjab in October 2015.
As these prices fluctuate, the cost of raw material is bound to vary as well (agricorner).

The use of mechanical harvesters and prime mover cane transport systems for
harvesting and transporting cane from farm to mill on timely basis has reduced the
transportation cost as well as the time taken to process the canes (JDW Annual report
2015).

Storage costs are deemed highly important too. The fact that sugar cane is a bulky item,
and needs to have a safe storage before crushing means additional costs for the mill
owners, since they have to ensure that the crop is safe from pesticide and water, in case
of flooding.

Operational Costs
Operational and Maintenance costs for the Sugar Industry are not that significant, because of
government relaxing the industry so that it is able to compete in the foreign market. However,
these corporations are subject to a tax on their operating profit at a rate of 32%, and this does
have a significant impact on the overall profitability and the cost structure of the firm.

Administrative Expenses
Administrative expenses are quite significant for the sugar industry, and more often than not, it
the management of these expenses that define the levels of profitability different firms in the
industry is able to achieve. They include wages, salaries, and depreciation, amortization, legal
fees, insurance etc. Wages amounted to 61% of the total administrative cost in 2015 for JDW.

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D. Problems
Uncertainty in Production
There has been a reduction of 7.91 % in sugar cane crushing and 6.63% in sugar production
over last year in the country. Overall, this reduction amounted to 8.02%. This discrepancy is
mainly due to the low yield experienced by growers due to unfavorable crop conditions caused
by almost no rains and non-availability of irrigated water. This uncertainty in production leads
to raw material procurement difficulty. However, JWD has tried to curb this problem by setting
up corporate farms for itself as an additional segment (JDW Annual report 2015).

Government Issues
Both the Punjab and Sindh governments impose support prices for sugar cane growers to be
paid by all sugar mills. The Sindh government recently reduced support prices to Rs 172 from Rs
182, where Rs 160 was paid to growers and Rs 12 was to be given by the government for
payment to the growers as subsidy. Sometimes these subsidies are not released, as in the case
of JDW, an amount of approximately Rs 800 million, was not released and a case regarding this
was filed in the Sindh High Court by JDW (JDW Annual report 2015).
Furthermore, Ministry of Finance has not yet released funds of inland freight subsidy to Trade
Development Authority (TDAP) hence payment amounting to approx. Rs. 306 million on
account of export of sugar is still receivable from TDAP by JDW. This unresolved issue is still
pending since last four years (JDW Annual report 2015).
These subsidies have not been accounted for in the books of accounts and will be accounted for
when it is certain that the amount will be realized.

Pest and Diseases

Due to the inherent nature of sugarcane crop, pest and disease outbreaks like red rot, pokah,
sugar cane pyrilla are a common feature. Also since the majority of our cane growing area lies
along the Indus River there is a greater risk of presence of harmful weeds and herbs. JDW has
established a separate bio-lab with a team of entomologists keeping check on the pest and
disease situation and other factors common to sugarcane cultivation (JDW Annual report 2015).

Export Conditions
Despite the fact that Pakistan has been the 4th largest Sugar Cane Producing nation in Asia, yet
the export market does not seem to follow suite and Pakistan has still not been able to
strengthen its foothold in the global arena. Given the fact that Pakistan faces intense
competition from countries like India and Brazil when it comes to Sugar Exports, yet Pakistan
has been exporting Sugar on a regular basis to Afghanistan and Europe. Recently, Pakistan
acknowledges on agreeing to export 650000 tons of sugar to Europe and Afghanistan. However,

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this is still an unsatisfactory number because of the insurmountable potential Pakistan

possesses in increasing its produce.
The reason why this potential remains unexploited is primarily because of the high costs that
farmers incur. Given the fact that there are still underdeveloped irrigation methods, and
awareness regarding optimizing produce is an area still to be worked on, the majority of the
harvesters seem to be uninformed, thus resulting in a collectively low produce. Therefore,
higher costs as compared to competing nations means that Pakistan would inevitably find it
difficult to compete in the international market, which justifies the low staggering levels of
export the country has seen over the subsequent years (Dawn).

E. Economic Factors
Technology
Given that JWD sugar mills spend a lot on research and have a lot of labs set up for different
purposes like pest control and soil and water testing facility, it is highly likely that they face
price rises due to inflation for their testing equipment and technology. Intensive use of
technology means that they will have to spend further to keep their technology updated and
maintained.

Interest Rate
Another important economic factor is changes in interest rates. An important need for the
industry is the availability of working capital to run the production processes. This means that
the firms and mill owners have to arrange for this required money capital either by providing
equity capital or by taking loans from banks. They usually prefer to borrow funds for this
purpose. However, a constraint is the poor availability of credit and the fluctuation in interest
rates which leads to uncertainty in the availability of capital as well as the future expenses or
cash outflows.

Inflation
The countrys inflation level has a direct link with all costs, as these are bound to be affected.
These include wages, transportation costs, fuel & power and other factors.
Moreover, wages paid to the workers and farmers working in the field may differ over time
owing to market conditions whereby the workers may form labor unions to claim for wage
rises. The government can impose a minimum wage policy making JWD pay higher wages
leading to rise in its expenses.

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Exchange Rates & Tariffs

Governments provide subsidies to the mill owners to help reduce their costs. Often, export
subsidies are provided to reduce the prices of domestic produce internationally and provide the
domestic firms a competitive edge in the international market. However, international export
and import can be heavily affected by changes in exchange rates either reducing costs in case of
rising exchange rates making imports cheaper while reducing revenue as exports become
expensive and vice versa. The industry is also liable to pay excise duties, district council tax and
sales tax. It contributes around Rs. 7,415 million to the government sales tax per season. This is
an added cost to the firm.
In case of any surpluses with the mill owners, the government intervenes again and allows for
exports. An example is when the millers had a carryover stock of 1.1 million in December 2015
and the government allowed exports with a subsidy of Rs 13/kg. (The News)

Land Use
Other factors affecting the industry include small land holdings by farmers which means they
cannot produce on a large scale to benefit from scales of production. Furthermore, the land
available is underutilized in the industry as a whole. 100% available capacity is not utilized
which is setback for the industry.

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F. Appendix A

14

(Pakistan Sugar Mills Association)

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WORK CITED
"Sugar Industry of Pakistan- An Academic Report." Ravi Magazine.N.p., 5 May 2015. Web.
http://www.agricorner.com/different-cane-prices-sugar-millers-of-kp-punjab-furious-atfederal-government/
http://www.dawn.com/news/967659/gur-a-substitute-for-sugar
http://www.lcci.com.pk/rnd_reports/Sugar%20Sector%20(LCCI).pdf
http://www.psmacentre.com/sgindustry.php?sgid=4
http://www.jdw-group.com/