Sugar companies seek new product lines ahead of 2012

Kenyan sugar millers have stepped up search for new product lines as they race to cushion earnings from competition that will come with the opening of the local market to regional least cost producers in 2012.

The millers are protected from intense competition by the Common Market for Eastern and Southern Africa (Comesa) safeguard, which limits the amount of sugar that can be imported from these countries.

But the safeguard is due to expire in 2012, opening up the local sugar industry to cutthroat competition from imports from the regional trading bloc.

Now, the millers are scrambling to set up alcohol, power generation and water bottling plants from their waste products with latest firm to unveil such plans being Sony Sugar.

Sony Sugar on Tuesday invited consultants to help it construct an ethanol and power generation plant.

“The main objective of the consultant is to determine plant configuration for energy self sufficiency, surplus power export, increased sugar production and ethanol production,” said Sony Sugar’s tender notice.

At present, the miller generates 4MW of electricity for its internal use and is targeting to grow its generation capacity to 15 MW, and sell the excess capacity to Kenya Power and Lighting Company (KPLC).

On Wednesday, Nzoia Sugar and Chemelil Sugar said they are working on similar plans with their focus on ethanol production and water bottling plants.

The twin firms generate power for their own use, but want to boost their generation capacity and sell idle capacity to KPLC.

Revenue from power

This came weeks after Mumias Sugar said it will commission an ethanol plant in December 2011 and 16 million litre a year water bottling plant by June 2011 as it seeks to add their new product lines to its electricity generation business.

In the year ending June, Mumias earned Sh359 million from power generation and Sh18.7 billion in revenues—which means that the company draws in about 97 per cent of its revenues from sale of sugar.

“The capital projects will result in product diversification with value added products to reduce risks of over reliance on sugar,” Mumias Sugar said in a statement. “As Comesa safeguards expire in 2012, sugar companies will have to lower their costs of production and expand their product range to create new revenue streams,” added Mumias.

Kenya’s production costs are higher compared to rival sugar producing countries within the Comesa trading bloc such as Swaziland, Malawi and Zambia, making it difficult for local millers to compete in duty free market.

While these rival producers plant the bulk of their sugar cane, Kenyan millers have to rely on independent farmers whose cane pricing is regulated by the Government, which owns at least five of the sugar firms’ including Chemelil, Sony and Nzoia.

For instance, it costs about Sh17,000 ($210) to produce a tonne of sugar in Zambia compared to Sh45,000 in Kenya.

Corruption and government bureaucratic red tape has also dimmed the efficiencies of these firms, making them feeble competitors in a free market.

The government, however, has set in motion plans to divest from these firms.

At present, sugar imports are subject to a 40 per cent import duty that is set to drop to 10 per cent next year before being eliminated in December 2011.

It is this duty elimination that is worrying local sugar executives f, spurring them to go overdrive on product diversification.

Kenya produced 548,000 metric tonnes of sugar in 2009 compared to demand at 750,000 metric tonnes—leaving the dependent of imports to plug the supply deficit.

Alcohol market

Already, the government has set the table for the sugar millers’ entry to the alcohol market after it issued regulations requiring all petrol sold in the Kenyan market will be mixed with alcohol to make gasohol.

Petrol—which is either imported or refined at Kenya Petroleum Refinery Limited (KPRL)— will be blended at Kenya Pipeline Company depots in Kisumu and Eldoret, close to the country’s alcohol producing plants and western Kenya’s sugar belt.

This will offer ready demand for the sugar millers’ ethanol. Molasses, a waste product from sugar mills, is used to produce alcohol.

On electricity, the sugar millers are betting on growing demand for power amid slowing supply to guarantee a market and better pricing.

At present the reserve margin— the gap between peak demand and what is available—has shrunk to below 10 per cent compared to the optimum limit of 15 per cent.

And the country is targeting to increase 800 mega watts to the national grid in the coming five years, but financing for the mega power projects remains a challenge.

source: businessdailyafrica