1

Industry Analysis- JDW Sugar Mills

Ltd

Group 5- Section 1
Maheena Achakzai
17110029
Hajra Habib
17110160
Abdullah Ismail
17110145
Myra Imran

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
SINDH
No of
8
Sugar Mills
4000-6000 TCD

PUNJAB
9

KPK
5

AJK
0

TOTAL
22

SINDH
14

PUNJAB
22

KPK
1

AJK
1

TOTAL
38

SINDH
10

PUNJAB
8

KPK
0

AJK
0

TOTAL
18

No of
Sugar Mills
6000 AND ABOVE TCD
No of
Sugar Mills

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

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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).

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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.

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).

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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, 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).

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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.

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.

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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

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(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-punjabfurious-at-federal-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/