Margins fall: Sugar industry sees profits squeezed

Increased cost and lower prices set dim picture for sector.

KARACHI: Sugar mills saw their profits squeezed during the second quarter of FY2012-13 as increase in cost of raw materials and fall in sugar prices saw companies struggle to maintain margins despite increase in off-take. Government attempts to increase exports continue to fall short of targets.

According to analysts the price of sugarcane increased by roughly 16% YoY to Rs170/40kg during the current season, from Rs150/40kg during the corresponding period last year. Conversely average sugar prices fell by 6% in the second quarter, resulting in gross profits dropping by up to 23% YoY, a fall of 6 percentage points to 12.4% for the second quarter. Gross margins for the first six months of the fiscal year declined by 9% YoY, causing net margins to drop to 1.3% for the period, down from 2.8% for the corresponding period last year.

The expected increase in overall sales during the second quarter was effectively countered by increases in distribution and raw material costs. During calendar year 2012, the government authorised the export of 500,000 tonnes of sugar in an attempt to get rid of an existing surplus in sugar stocks and drive up deflated local prices. Due to falling international prices however sugar producers have been unable to meet the government’s export targets and continue to maintain surplus stocks, which in turn inhibit the government’s attempts to stimulate local prices. A continued surplus, cost pushes and falling domestic prices look to set a dim picture for the sugar sector.

Published in The Express Tribune, June 1^st, 2013.

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