Hike in sugar price: CCP says millers minted Rs70b extra profit

ISLAMABAD: The Competition Commission of Pakistan (CCP) has found the sugar sector continuously behaving on pattern of cartelisation and using lobbying for manipulating stock position and getting export permission, thus in totality hiked the prices in domestic market to gain Rs70 billion extra profit.

The CCP in its inquiry report found that Pakistan Sugar Mills Association (PSMA) still pursues policy of protectionism. It established through evidence that the prices increased because of cartelisation especially in Punjab Zone whereby sugar mills were divided not on the basis of geographical location, but on the basis of production capacity, so overall prices went up to Rs98 per kg in domestic market from Rs60 per kg during the last one and a half year period.

The CCP conducted its inquiry on the directives of the Sugar Inquiry Commission to ascertain anti-competitive activities in the sugar sector.

After the decision of allowing export of sugar during the PTI-led government, the price of sugar escalated by 48 percent or Rs18 per kg in domestic market so two-third price surge was pocketed by sugar barons with this sole decision. Allowing export of sugar benefited the sugar barons to the tune of Rs40 billion through exports and Rs 29.2 billion in the shape of subsidy. However, the CCP did not find any evidence with regard to abuse of dominance by any individual miller. The availability of sugar to Utility Stores Corporation of Pakistan (USC) for tender of 20,000 metric ton sugar with closing date of March 28, 2019 the mills of PSMA Punjab Zone took a collective decision and fixed and divided the quantity of sale among the members thus found involved in bid rigging. The CCP also found that the average cost of production of mills varied widely as the cost of efficient mills stood at Rs43 per kg while the cost of inefficient mills went up to Rs78 per kg.

“This is especially notable in the consecutive four months from March to June 2019 when as a consequence of sizeable export volumes, per kg price of sugar increased by Rs3 each month. Overall, during 2019, the cumulative price hike was Rs18/kg.

Therefore, it appears that starting from 2012 to date, the conduct of PSMA and all its members vis-à-vis collective discussion on stock positions leading to a decision on the quantity to be exported tantamount to fixing or setting/controlling supply within the relevant market. This has resulted in price hike that is not based on actual/available supply and demand,” the CCP inquiry report released on Thursday disclosed.

The CCP calculations show that the benefit accrued to mills on account of rise in domestic prices due to exports alone was approximately Rs40 billion in revenue during the period Feb-19 to Sept-19. It would be relevant to add that an amount of Rs29.22 billion was also paid as subsidy.

The CCP inquiry noted that since sugar production is cyclical in nature, stock positions are a crucial determinant of prices in the relevant market. Evidence available shows that from 2012 to date, PSMA devised a collective strategy to reduce domestic sugar stocks through exports with the purpose of achieving desired domestic price levels. Whenever exports were allowed, the price of sugar in the market increased.

The CCP spokesperson in background discussions told a select group of reporters that they confiscated record through raid on JDW and named Mohammad Rafique, one high-up of JDW sugar mills (owned by Jehangir Khan Tarin) for running a WhatsApp group of Punjab Zone of Sugar mills for talking about stock position with the purpose to “stabilise” the prices. This stability in the prices was meant to manipulate the market so that the domestic prices could be escalated with different steps including managing stocks, seeking export permission and lobbying for getting subsidies.

This created zonal divisions for the purposes of coordination among respective mills on local sales as the phrase ‘Sales committee comprising one member from each zone to meet periodically’ indicates. Share of each zone vs total production in Punjab is mapped out which shows that the coordination in sales is based on share in production.

This zonal division and coordination on sales, stock positions and production quota appears to be none other than monitoring the position with respect to each mill to control local sales and quantity to be sold which is a prima facie violation of Section 4(1) read with Section 4(2)(a) of the Act.

The monitoring of production/consolidation of stocks -- sharing of sensitive commercial information to limit supply in the market, it appears that from as far back as 2012 to July 2020 there has been continuous involvement of PSMA in collection and coordination of stock positions amongst its member mills. It appears that these positions are then used to control supply and price of sugar in the market. The coordination of stock positions is also used to influence policy decisions regarding allowance of exports (in case of surplus stock) and import decisions (in case of an impending shortage).

The recent hike in sugar prices appears to be the direct result of misreporting in sugar stock positions (of which PSMA was aware of) that led to a decision to delay sugar imports. When the issue of mismatch in stock positions was raised at SAB, PSMA denied that it collects stock information. However, evidence to the contrary was found. The inquiry committee observed that the decision not to import in a timely manner caused a rise in sugar prices between July to September 2020 by Rs11.6 per kg.

The inquiry committee found that since 2012 onwards, the platform of PSMA is being used by its member mills in Punjab Zone to share stock information amongst themselves which is considered as sensitive commercial information and such information having a direct bearing on the current and future price of sugar, thereby used to control prices and restrict and distort competition in the relevant market in prima facie violation of Section 4(1) read with Section 4(2)(a) of the Act.

Issue III (d) With respect to Section 4 whether there has been any prima facie violation on account of major players in the sugar industry collectively decide to cease crushing of sugarcane during crushing season 2019-20,

Based on the findings, it appears that during the crushing season 2019-20, PSMA Punjab Zone ceased to crush sugar from December 30, 2019 to January 11, 2020. As evident from the data received from the Cane Commissioner Punjab, this closure was a collective decision on part of PSMA Punjab wherein 15 mills appear to have ceased crushing on the call of the association. Evidence impounded from PSMA indicates that during this period PSMA Punjab held back to back meetings with the agenda of sugarcane procurement. The purpose of holding these meetings appears none other than to coordinate on taking decision on crushing and procurement of sugarcane as merely procurement is a commercial decision and does not appear to hold relevance for collective deliberation using the association platform. Therefore, prima facie PSMA Punjab Zone particularly the 15 units named by the cane commissioner Punjab, are taking a collective decision on procurement in violation of Section 4(1) read with Section 4(2)(a) of the Act.

It appears that using the platform of PSMA, sugar mills have taken various decisions which have the object and effect of restricting competition in the relevant market. This ties up with findings of the commission’s previous inquiry report into the sector (October 2009) which found multiple evidences and instances wherein the association indulged in collective decisions in matters of purchase of sugarcane, production of sugar and sale or trade of sugar.

In the instant matter, the inquiry committee observed that from 2010 to date, PSMA seemed to have exceeded its legitimate mandate and continued indulging in anti-competitive activities albeit with different modus operandi. Whereas in the past it had focused on directly fixing prices in the instant matter, it appears that it has sought to keep prices stable, which also amounts to price fixing and such prices are kept ‘stable’, by controlling supply of sugar available in the relevant market.

Reiterating the general economic principle that price is a function of demand and supply, with the demand for sugar remaining fairly constant, as evidenced by consumption patterns, the supply of sugar becomes a key determinant of price. Since sugar production is undertaken in three months its supply cannot be increased throughout the remainder of the year thus making stock positions crucial for determining domestic prices of sugar.

It appears that PSMA has managed to adopt a strategy whereby based on coordination of stock positions calculations on export quantities were made. Evidence reveals that PSMA and its member mills were cognisant that exports would lead to two pronged benefits for them: (i) export earnings and subsidy payments; and (ii) achieving/maintaining desired price levels in the domestic market. Policy makers/government were then pursued to allow exports (along with subsidy) on the pretext that mills would be unable to pay sugarcane growers unless they were allowed to do so. Price data suggests that whenever the exports were made domestic prices faced an upward pressure. Calculations show that the benefit accrued to mills on account of rise in domestic prices due to exports alone was approximately Rs40 billion in revenue during the period Feb-19 to Sept-19. It would relevant to add that an amount Rs 29.22 billion was also paid as subsidy.

Despite the depressed picture of the industry portrayed by PSMA, financial statements of various companies suggest that they were making profits.

Published accounts of a sample of 16 sugar mills, from 2017 to 2019, reveal that the sugar mills were earning profits from their operations. Average gross profit margins were 11 percent, 8 percent and 13 percent in 2017, 2018 and 2019, respectively. Average net profit margins were 2.8 percent, 0.4 percent and 2.4 percent, respectively. From the commission’s perspective, it is not about the profit margin but more with the manner and conduct involved in making such profits.

Now the CCP will issue a show cause notice to all sugar mills and PSMA for initiating proceedings under CCP law and its final verdict is expected to be given in next six months to one year period.