Pakistan's ethanol producers are facing challenges due to a surplus in production capacity compared to available feedstock. High molasses prices are driving up production costs, while a strong currency has reduced competitiveness in international markets. Exports reached a record level in 2014 but most gains occurred early in the year, before global prices fell and competition increased. Looking ahead, high costs and weaker demand pose difficulties for the industry unless conditions change.

1. 17 February 2015
Market Update:
Pakistan – Sailing into the Wind
Summary
Pakistan’s ethanol producers are facing testing times. The industry
has a surplus of production capacity when compared to available
feedstock. Production costs are being magnified by stubbornly high
feedstock prices, and a relatively strong currency has eroded their
competitiveness on international markets. The industry expected to
benefit greatly from the EU’s granting of “GSP Plus status”, but
European demand has deteriorated and prices are falling. In other
markets, Pakistan is facing increased competition from new entrants
or returning competitors. In this article, we will look at the current
state of Pakistan’s ethanol industry and its future prospects.
Too Much, Too Little - Pakistan currently has a
surfeit of production capacity. Figures provided by Karachi based
analyst, Rizwan Hussain and displayed here in the first graphic and
table, show the country’s ethanol production capacity is
concentrated around the two main sugar cane growing regions, in
the Sind (green) and Punjab (yellow) provinces with some additional
production in Khyber Pakhtunkhwa (KP) (blue). Punjab has ten
distilleries with combined production capacity of 1.47 mln L/day
while the Sind’s seven distillers can produce 0.985 mln L/day. KP has
four mills with combined capacity of 0.25 mln L/day but one of those
is inactive and another is not expected to commence operations
until 2H 15. If extrapolate Mr Hussain’s figures and assume that all
distilleries were able to operate for 330 days each year, then the
industry could produce 893 mln L.
Production, however, is constrained by feedstock availability with
insufficient molasses available for producers to operate throughout
the year. Many producers also have limited storage capacity for
molasses, which reduces their maximum capacity. Molasses
feedstock is supplied by Pakistan’s sugar industry. The country’s 86
sugar mills (Punjab (46), Sind (33), KP (7)), crushed around 55 mln mt
of cane for sugar. Sugar recovery rates are relatively low at around
10% with sugar production of around 5.5 mln mt in 13/14 (this graph).
Sources at the Pakistan Sugar Miller’s Association (PSMA) suggest
2014/15’s result should be similar despite a late start to the harvest in
Sindh. This should result in production of around 2.75 mln mt of
molasses in 13/14 and 14/15 (1st
graph P2). Pakistan’s distilleries have a
relative low conversion rate, using around 5.5 mt of molasses to
1 Unicol Limited 200
2 Habib Sugar Mills Limited 175
3 AlAbbas Sugar 160
4 Shahmurad Sugar Mills Limited 125
5 Dewan Sugar Mills 125
6 Matiari Sugar Mills (Matol) 100
7 Ansari Sugar Mills (Pinnacle) 100
8 Shakarganj Sugar Mills 250
9 United Ethanol 125
10 Colony Sugar Mills 125
11 Crystalline Chemicals Industries 100
12 Premier Chemicals (Lhr) 337
13 Abdullah Sugar Mills (Haseeb Waqas) 220
14 Tandlianwala Sugar Mills 125
15 Noon Sugar 60
16 Crescent Sugar 31.25
17 Hunza Sugar Mills 100
18 Premier Sugar Mills 50
19 Frontier Sugar Mills 50
20 Khazana Sugar Mills* 50
21 Premier Chashma 100
Total 2,708
Company Name# Capacity (kL/day)
8.0
8.5
9.0
9.5
10.0
10.5
11.0
0
1
2
3
4
5
6
90-91
92-93
94-95
96-97
98-99
00-01
02-03
04-05
06-07
08-09
10-11
12-13
14-15
Recovery % Prodn (LHS)
Pakistan: Sugar Recovery & Prodn
mln L %

2. Green Pool Brazil Update 17 February 2015
make 1 mt of ethanol (expressed another way, 1 mt of molasses can
produce around 230 mln L). There is some molasses lost to exports
(2nd
graph) and other uses, and we expect Pakistan to produce just
over 525 mln L this year. This translates to capacity utilisation of
around 58% using the maximum capacity figure calculated above.
COP This!
Molasses prices both internally and on the export market (2nd
graph)
have been rising in recent years. Molasses feedstock prices
represent around 70-75% of costs of production (COP). Internal
prices have been in excess of US$100/mt delivered distillery in
recent years but global ethanol prices were sufficiently high to cover
the high molasses cost. While internal and export molasses values
have both fallen this year, major producers indicate they have still
had to pay $90-95/mt delivered distillery for molasses in 14/15 and
with additional overheads of $175/mt for producers in Punjab, total
COP remain stubbornly high at around $680-690/mt ($550 – 558/cu
m) of ethanol. Some producers, believing that the absence of
Brazilian production in Q1 15 would support prices are believed to
have paid as much as $120/mt for their molasses before the cane
harvest began, which translates to COP as high as $835/mt. now,
distillers when faced with the choice of producing ethanol at a loss
or exporting molasses may decide to pull back on their production.
However, while molasses prices in some internal markets remain
high, prices for globally traded molasses have begun to fall. Pushing
out additional molasses exports may quickly erode returns.
Those sorts of cost may have been easily covered in the past but
global prices have been in freefall since Oct 14 with weaker oil prices,
strong US production and exports and weaker demand in Europe all
impacting on demand. In the past, producers were almost
guaranteed prices in excess of $830-850/mt ($670 - 690/cu m) FOB
Karachi for ENA Hydrous 96% but since Oct 14 values have been
following global prices lower. Europe, the traditional market for
Pakistan’s ENA Hydrous, has increased its own production, helped by
lower grain feedstock prices, in a period when demand growth has
been sluggish. ENA values are now indicated under the $680/mt
FOB Karachi that Punjab based producers need to cover costs. REN
Hydrous values have also been under pressure, with traditional
Korean markets seeing more active competition from alternate
suppliers including the US, Brazil and some smaller Latin American
producers, like Guatemala and Cuba, in the latter months of 2014.
A Fist full of Rupees
The relative strength of Pakistan’s Rupee vs the US dollar and the
currencies of key competitors (this graph) has impacted on Pakistani
ethanol’s competitiveness. While Brazilian domestic prices have
risen, the weakness in the Real allowed it to remain competitive in
0
40
80
120
160
0
500
1,000
1,500
2,000
90-91
92-93
94-95
96-97
98-99
00-01
02-03
04-05
06-07
08-09
10-11
12-13
Vol (LHS) Average Price
Pakistan: Molasses Exports
'000 mt PKR/mt
650
700
750
800
850
900
Jan13
Feb13
Mar13
Apr13
May13
Jun13
Jul13
Aug13
Sep13
Oct13
Nov13
Dec13
Pakistan ENA Hydrous Prices
2013
2014
2015
mid point $/mt
0
500
1,000
1,500
2,000
2,500
3,000
94-95
96-97
98-99
00-01
02-03
04-05
06-07
08-09
10-11
12-13
12-14
Pakistan: Molasses Production
'000 mt
-20%
-15%
-10%
-5%
0%
5%
10%
Jan14
Mar14
May14
Jul14
Sep14
Nov14
Jan15
Pakistan Brazil
Guatemala India
Percentage Change in Key Currencies

3. Green Pool Brazil Update 17 February 2015
0 100 200 300
East Asia
Europe
Other
Europe
Middle East
Africa
mln L
2014
2013
Pakistan: Ethanol Exports by Region
the latter part of 2014. While Pakistan’s rupee is still 4% stronger than
it was at the beginning of last year, the Brazilian Real is 16% weaker.
Guatemala, a key competitor into European markets is suffering
similar problems to Pakistan with currency strength. India, which
competes with Pakistan into some African and Middle Eastern
markets, has maintained a largely unchanged currency. If weakness
in Brazil’s Real continues into SH 2015, it could still play a role
supplying North Asian markets of Japan and South Korea. Brazil may
then need to import more US fuel grade ethanol to balance its own
domestic requirements, but this is not unprecedented when relative
premiums justify it.
Off the Record?
Pakistan actually managed to export a record 487 mln L of bulk
ethanol in 2014, up 19% on 2013’s 409 mln L (1st
graph P3). However,
most of those gains were racked up before the new export paradigm
emerged. Exports peaked in May 14 with 62.6 mln L shipped (2nd
graph). Shipping activities are usually concentrated in the first nine
months of the year, matching the peak in molasses availability and
production. FH 2014 bulk exports were at 289 mln L, compared to
197 mln L in SH 2014. Matching that strong performance achieved in
early 2014 may be difficult. During FH 2014, the US was still relatively
tight and production and exports were curtailed by wild winter
conditions. The North Asian market is also reportedly long currently,
with fresh buying interest not likely to emerge until later in Q2 2015.
South Korea was the leading buyer for Pakistan ethanol in 2014,
securing 204.6 mln L, up 17% on the year. This figure is likely to
include exports to Japan and other North Asia destinations. Korean
customs data show only 56 mln L of Pakistani ethanol imports in
2014 compared to 204.6 mln L in Pakistan shipping agency data, but
Japan’s customs data show 97.2 mln L of Pakistani ethanol imports in
2014 while none are recorded in Pakistani shipping agent’s figures.
Turkey is Pakistan’s second largest destination, taking 63 mln L,
doubling 2013’s 30 mln L, while exports to the European shipping
hub of the Netherlands were unchanged in 2014 at 54 mln L. The
shipment of 3.8 mln L to China in Dec 14 was the first bulk shipemnt
to the country that we have seen.
East Asia was Pakistan’s dominant export region in 2014, taking 243
mln L or 50% of total shipments (3rd
graph here). However, that was
down on 2013 when 266 mln L or 63% went to the same region.
Exports to EU account for 19% of total, followed by Turkey (13%) and
Middle East (12%).
As shown in the final graph here, the producer Sharkarganj
maintained its position as the largest export supplier, taking 15%
share of total bulk exports in 2014, but down from 17% achieved in
2013. Premier (9%) and Unicol (8%) took second and third spots on
the export rankings.
0
100
200
300
400
500
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Pakistan Ethanol Exports
mln L
0 20 40 60 80
SHAKARGANJ
PREMIER
UNICOL
HABIB SUGAR
SHAHMURAD
ABDULLAH SUGAR
TANDLIANWALI
HUNZA
DEWAN SUGAR
UNITED
CRYSTALIN
ALABBAS
METOL
PAK ETHANOL
COLONY
NOON SUGAR
CHASMA
mln L
Pakistan: 2014 Exports by Producer
0
20
40
60
80
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
2008 2009 2010 2011 2012 2014
Pakistan: Mthly Bulk Ethanol Exports
mln L

4. Green Pool Brazil Update 17 February 2015
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