Khon Kaen Sugar Industries is one of the largest sugar producers in Thailand. The business is profitable, but expansion is generally limited due to restricted licensing by the government and narrow supply of raw material. Investors will have to take a close look at “green” by-products from the industry.
Interviewee: Chamroon Chinthammit, President and CEO
Thailand is the world’s second-biggest sugar exporter after Brazil, and as such sugar is a political commodity in Thailand, grown by a million farmers and with many more people dependent on it for their livelihood. Thus the industry is largely state-controlled and has quotas for domestic use and export. Due to high world market prices the sugar export is reasonably profitable, but opportunities for investors in the core business are scarce. However, bio-products from sugar or green production could offer chances for investors who bring in the necessary know-how.
Khon Kaen Sugar, which runs four sugar factories in the country and two in neighbouring Laos and Cambodia, is going the green way and also produces ethanol and power from biomass. One of its production facilities is designed as a bio-factory. The CEO sheds a light on the current market and on the business opportunities and restrictions in the following interview.
Q: Sugar is quite an important economic sector in Thailand. What is the current export share?
A: The production’s export share is 60 per cent, thus domestic demand is about 40 per cent or 2.5 million tons of sugar.
Q: Could you explain the current system of pricing and subsidizing and the quota system in the industry?
A: We have an A, B, C quota system. Quota A is for consumers and domestic use, and quota B, about 0.8 million tons, is for farmers to sell it through tenders to set the price of the sugar, and Quota C is set for export. B is fixed, A and C can change depending on our production. We have a committee for sugar cane with members from the ministry of commerce, industry, finance, and agriculture, and also farmers’ representatives.
Q: So the sugar sector is largely controlled by the government?
A: Yes, but we do not get subsidies from the government. We depend on our own. Farmers get indirect subsidies as the consumer price is regulated.
Q: To what extent have the floods affected the sugar production?
A: Not so much because sugar cane grows in the highlands. There is so far no need for rebuilding farmland. The land for sugar cane is currently spreading over 10 million rai, and next year we might expand to another 10 million rai. [1 rai = 1,600 sqm]
Q: You are using the sugar for producing ethanol also. What is the ratio between sugar and other products in your company?
A: Yes, we have our own bio-refinery. We have an ethanol power plant and one for biogas in the same complex. And we are also producing energy out of sugar. Most of the revenue comes from sugar, making eight per cent net profit. The profit of the power plant is 30 per cent higher, we are selling 42 megawatt to the domestic power grid and use another 50 megawatt by ourselves. And we make 100 million litres of ethanol per year.
Q: This means these other sectors are quite more profitable than the core product of sugar?
A: The profit from ethanol may be higher than from sugar at about 15 to 20 per cent, but the revenue is very small.
Q: Are you planning to expand this particular businesses, power and ethanol?
A: We only plan to expand sugar and the power plants. Ethanol not, because the government will not subsidize it. We use ethanol as a by-product from the sugar molasses; the production itself would be too expensive.
Q: Are you actively looking for investors to bring in some know-how into your production system?
A: We try to get some know-how to produce ethanol from the fibres; this is a cheap raw material, in order to compete with our company and to have no need to get subsidies from the government.
Q: Are you looking for any other partners for sugar trade or production?
A: Domestically yes, but internationally not at present. We deliver most of the sugar to South East Asia.
Q: The GCC is a very big consumer of sugar; do you have any contacts there?
A: We have many customers in the GCC, and trading partners in the region.
Q: If somebody from abroad, from some international company, wants to start a business in Thailand which involves sugar or ethanol, what advice would you have?
A: There are 47 sugar factories in Thailand, and we are the third-biggest organization. For new players, it is not easy to get a license, and all the places for sugar farming are already occupied. The government will issue 20 new licenses, but the players are all lined up. We ourselves have four sugar factories now, but will get a fifth license for another one. Will all licenses issued, the country will almost have too many factories, because we would need 200 million tons of sugar cane, at the moment we can get only 95 million tons per year.
Q: Anyway, if somebody wants to start a sugar business, whether it is a Thai company or not, are there any incentives for sugar and/or ethanol production? Is there any help from the government for sustainable farming or environmentally friendly production?
A: It’s for farmers only, not for companies. Subsidies in the sugar business come from the consumer price, and now the export price is also very high, so the business is profitable and can sustain without subsidies. And our raw materials are green anyway, so we can declare we have a green product. And one of our factories is a bio-factory.
Q: What are the major export countries for Thailand’s sugar?
A: All over South Asia. And beyond, major markets are the US and EU. But they have import quotas. We have two factories in Cambodia and Laos, so we can use the US and EU import quotas set for least developing countries. If policies change in Myanmar, we can also go there and open a factory. Vietnam does not offer land.
Q: And are you exporting ethanol?
A: The policy of Thailand is not clear. Currently, supply is greater than demand. We produce more than we can sell. Some factories stopped operating, there is no market, and the price will erode. Thus we target export, currently to the Philippines, where there is a higher demand.
Q: The government will introduce the new minimum wage next year in April [2012]. What impact do you expect for your business?
A: The cost of production will be higher, but we still can absorb. It’s not a problem; we still have a lack of labour.
Q: Will the 300 baht per day change much in the salary structure?
A: Now we pay 185 per day for the workers minimum, so the costs will rise more than 40 per cent. We have about 4,000 factory workers. But the labour costs’ share of our entire costs is only about seven per cent. Industries such as electronics will be more affected than us.