3.Operation of Each Product Line

SUGAR

3.1 Sugar : Product Characteristics

The Company is a group of sugar manufacturers whose quality management
system is certified by SQF 2000, ISO 9001: 2000, and Hazardous Analysis
and Critical Control Point (HACCP) accreditations. Sugar produced by the
KSL group can be divided into four categories according to their types
and levels of purity as follows:

Raw sugar – Raw sugar has a color index higher than 1,500 ICUMSA. It is
dark brown, and has a high dirt index and a low purity index. Transfer
is done in bulk without the use of sacks. This type of sugar cannot be
consumed until it is refined or purified, turning into white sugar or
refined sugar.

High pol sugar - High pol sugar has a color index between 1,000 - 1,500
ICUMSA. It can be consumed without any further process needed.
Generally, the sugar is put in sacks before being transported. It is
priced lower than white sugar and refined sugar.

White sugar - White sugar has a color index between 46 – 200 ICUMSA with
a degree of polarization not lower than 99.50. It is widely consumed
among households and used as a raw material in food industries where
moderate purity is required.

Refined sugar – Refined sugar has a color index that does not exceed 45
ICUMSA. It is especially high in purity. The sugar is used in certain
industries where highly pure sugar is needed, such as pharmaceutical
industry, carbonated beverage industry, and energy drink industry.

After sugar manufacturing there is a residue called “molasses” that its
sugar content is so low that any further sugar extracting is
uneconomical. Molasses is a valuable by-product obtained from sugar
production. It contains 20% water, 30% sucrose, 32% invert sugar, 12%
non-sugar organic substance, and 6% ash. From one ton of sugarcane, the
corporate sugar mills have capacity to manufacture between 45-50
kilograms of molasses. An amount of molasses produced in a year depends
on a quantity of sugarcane crushed in the year. Molasses can be widely
used in such biochemistry industries as alcohol and distilling industry,
yeast industry, monosodium glutamate industry, animal food industry
(where molasses is mixed with cassavas and bagasse), vinegar industry,
and soy sauce and seasoning sauce brewing industry.

Other residues from sugar manufacturing process that are also useful
include bagasse and filter cake. Bagasse is the fibrous material
remaining after the last extraction of juice from sugarcane. Now the
Company uses burned bagasse as a source of energy for electricity and
steam generation used in sugar manufacturing process. Part of the
electricity generated is sold to the EGAT. Filter cake is a residue from
vacuum filtration. It can be used as a raw material for general-purpose
fertilizer. In the past, the Company gives away filter cake to sugarcane
farmers to promote sugarcane plantation in nearby areas. After the
Company’s subsidiary has continuously operated alcohol and chemical
production, wastewater from the factory can be mixed with filter cake
and bio-decomposed to produce organic fertilizer that is suitable for
sugarcane plantation. This completes the corporate value-added product
ranges.

3.2 Sugar : Marketing and Competition

Marketing and Industry Overview in Overseas Markets

The world sugar market: In 2006/07 sugar was produced 166.832 million
tons (raw value) worldwide. The 15.527 million-ton increase represented
a 10.26 percent growth rate compared to that in 2005/06. The world total
consumption amounted to 151.099 million tons. The 4.710 million-ton
increase represented a 3.22 percent growth rate compared to that in
2005/06. As a result, the ending stock increased from 63.476 million
tons in 2005/06 to 74.431 million tons in 2006/07. The stock represented
49.26 percent of the total demand likely to last for 5.91 month
consumption.

Chart 3.1: World Sugar Balance (Millions Tons, centrifugal sugar, raw
value, OCT/SEP)

[]

  Note: * 2007/08 estimated number

  Source : F.O.Licht, updated 15-11-2007.

According to Chart 3.1, in 2006/07, the production is 15.733 tons larger
than the consumption. The causes are as follows:

(1) In 2005/06, sugar prices were high in the world’s market resulted in
sugar producers, especially India, increased their production. The total
amount of sugar produced in India increased by 47 percent, from 20.942
million tons in 2005/06 to 30.707 million tons in 2006/07. Later in
2006/07, it was estimated that India had an 11.310-million ton sugar
inventory.

(2) In plantation year 2005/06, after 2 years of droughts in Asia the
climate was good for growing sugarcane again. Consequently, in 2006/07
there was an increase in a sugarcane crop around Asia. For instance,
China’s sugarcane crop increased from 9.584 million tons to 13.039
million tons. Thailand’s sugarcane crop increased from 5.076 million
tons to 7.038 million tons. Pakistan’s sugarcane crop increased from
2.823 million tons to 3.831 million tons.

Overall, the total of Asia’s sugarcane crop increased by 35.55 percent,
from 47.142 million tons to 63.902 million tons. As a result, there was
no more shortage of sugar for consumption in Asia. Other regions of the
world, such as Europe, a sugarcane crop was projected to reduce by 9.20
percent due to the EU’s policy of decreasing financial support for sugar
exportation according to WTO’s free trade agreement. Australia and
Pacific island countries’ sugarcane crop decreased by 5.37 percent due
to the fact that sugarcane plantation areas had been affected by storms.
North America and Africa experienced an increase in their sugarcane crop
by 7.44 percent and 5.59 percent respectively. South America, where
Brazil is the largest sugar manufacturer, experienced a slight decrease
in its sugarcane crop by 0.28 percent. The rising oil prices encouraged
more ethanol production using sugarcane.

F.O.Licht projects that in 2007/08 there will be around 169.191 million
tons of sugar produced, increasing by 1.41 percent. Asia will account
for most of the sugarcane increases, because climates in such countries
as India, Thailand, China, and Pakistan are good for sugarcane
plantation. The total increase, however, will be at a lower rate than
that of the previous year. This is because the world sugar prices
decreased in 2006/07. Also, India sugar inventory still remains highl.
Consumption is expected to increase by 2.51 percent, equaling 154.888
million tons. The world’s sugar inventory would increase from 74.431
million tons at the end of 2006/07 to reach 84,885 million tons in
2007/08.

Average prices in the world’s sugar market decreased in the previous
year as shown in Chart 3.2 indicating raw sugar prices in New York Sugar
Future Market (NYBOT Sugar #11). The average reduced by 32 percent, from
14.83 cents per pound to 10.16 cents per pound. And chart 3.3
demonstrates refined sugar prices in London Future Market (LIFFE Sugar
#5. The average reduced by 22 percent, from USD 412.87 per ton to USD
323.94 per ton. The world sugar production was larger than the
consumption. The world sugar inventory increased compared to that in the
previous year. In 2008, the Company expects sugar prices to fluctuate at
a level close to that in the previous year. Positive factors include the
rise of oil prices has increased prices of commodities, and the weak US
Dollar currency has increased costs for sugar manufacturers using the US
Dollar currency.

Chart 3.2:: World Raw Sugar Price in NYBOT Future Market, NY#11 Raw
Sugar (Cents/lbs)

[]

Chart 3.3: World Refined Sugar Price in LIFFE Future Market, LD#5
Refined Sugar (US$/ton)

[]

It is expected that in production year 2007/08 Thailands’ sugar industry
will be less affcted than some other foreign sugar manufacturers. In the
past, Thailand hardly experienced an excess of its sugar inventories.
Thai sugar is normally sold in the world’s market at the beginning of
each production year (December to May). The timing is different from the
sale of world major sugar exporters, Brazil and Australia. They
primarily export most of their sugar each year in second half. Thailand
also has an advantage of locating near sugar importers. Asia countries
are not able to produce sufficient sugar for their domestic consumption.
Sugar is, then, imported from other regions. Buying sugar from Thailand
allows less transportation cost and more convenience for those counties.
Moreover, Thai sugar manufacturers’ production technology allows them to
produce better quality sugar, especially premium white sugar, to compete
with other Asia sugar manufacturers whose product quality is lower.
Manufacturers in some countries even import raw sugar and refine it to
make white sugar for export. Such process increases transportation,
handling & inventory and energy costs.

Export channels of Thai sugar manufacturers are divided into:

(1) Thai sugar manufacturers sell their sugar through major traders such
    as Cargill, Tate & Lyle, Kerry, etc. The traders then sell the sugar
    to other overseas buyers. Risk of failure to collect payments and
    complications in export management are minimized. Thai sugar
    manufacturers’ only responsibility is to transport their sugar to
    ports of exports, such as FOB ports of Bangkok and Lamchabang.

(2) Thai sugar manufacturers export their products to neighboring
    countries, such as Laos and Cambodia, through borders. A small
    amount of sugar is sold to vendors at borders.

(3) Thai sugar manufacturers sell to manufacturers who use sugar in
    production of their exports. When domestic sugar prices are higher
    than those in international markets, the export manufacturers who
    use sugar as a production material lose their competitiveness in the
    world market. To promote investment in the food industry and
    competitiveness, the government allows those who manufacture exports
    to buy sugar at the world’ market prices conditionally.

Domestic Marketing and Industry Overview

Domestic sugarcane and sugar industries are governed by Thai Sugarcane
and Sugar Industry Act B.E. 2527. Office of the Cane and Sugar Board is
in charge of ensuring adequacy of sugar for the domestic demand. Every
year the board estimates the domestic sugar consumption amount and
determines quotas for sugar mills according to their capacity. Domestic
sugar prices are controlled by Goods and Services Act B.E. 2542. Current
domestic sugar price are mandated that:

(1) Prices of regular white sugar purchased at sugar mills do not exceed
Baht 1,400 per 100-kilogram sack.

(2) Prices of refined white sugar purchased at sugar mills do not exceed
Baht 1,500 per 100-kilogram sack.

(3) Wholesale prices of regular white sugar at all domestic wholesale
businesses do not exceed Baht 1,465 per 100-kilogram sack, and those of
refined white sugar do not exceed Baht 1,565 per 100-kilogram sack.

(4) Retail prices of regular white sugar at retail businesses in
Bangkok, Nonthaburi, Pahumthani, Samutprakarn, and Samutsakorn do not
exceed Baht 16.50 per kilogram; and those of refined white sugar do not
exceed Baht 17.50 per kilogram. (included VAT)

The price control does not apply to sugar cubes in boxes or packets that
do not weigh over 10 grams.

Competition

There are currently 47 sugar mills in Thailand with sugarcane crushing
capacity of 60-75 million tons/year and sugar manufacturing capacity of
5.0-8.0 million tons/year (depending on yearly sugarcane amounts in the
crushing process). The crushing process lasts about 4-6 months each year
due to small amounts of sugarcanes entering the process. It begins in
November and ends in April or May. The number of sugar mills is under
government control. Licenses from Office of the Cane and Sugar Board and
Department of Industrial Works, Ministry of Industry, are required for
sugar mills in increasing capacity, moving mills, or operating new sugar
mills.

Major sugar manufacturers can be divided into five main groups, and a
group of small sugar manufacturers as follows:

Table 3.4: Groups of sugar manufacturers and market shares in Thailand

+----------+------+-----------+-------+-----------+------+-----------+
| Group    | Nu   | Amount of | M     | Amount of | Ma   | % of      |
|          | mber | sugarcane | arket | sugarcane | rket | change    |
|          | of   | crushed   | share | crushed   | s    |           |
|          |      |           |       |           | hare | increase/ |
|          | s    | 2006/200  | 20    | 2005/2006 |      | decrease  |
|          | ugar |           | 05/06 |           | 200  |           |
|          | m    | (million  |       | (million  | 5/06 |           |
|          | ills | tons)     |       | tons)     |      |           |
+----------+------+-----------+-------+-----------+------+-----------+
| Mitr     | 5    | 12.05     | 18.9  | 8.36      | 17.9 | 44.14 %   |
| Phol     | m    |           | %     |           | %    |           |
| Sugar    | ills |           |       |           |      |           |
| Group    |      |           |       |           |      |           |
+----------+------+-----------+-------+-----------+------+-----------+
| TRR      | 7    | 11.54     | 18.1  | 6.76      | 14.5 | 70.71 %   |
| Sugar    | m    |           | %     |           | %    |           |
| Group    | ills |           |       |           |      |           |
+----------+------+-----------+-------+-----------+------+-----------+
| Thai     | 3    | 8.95      | 14.0  | 6.46      | 13.8 | 38.54 %   |
| Identity | m    |           | %     |           | %    |           |
| Sugar    | ills |           |       |           |      |           |
| Group    |      |           |       |           |      |           |
+----------+------+-----------+-------+-----------+------+-----------+
| KSL      | 4    | 5.27      | 8.3 % | 4.01      | 8.6  | 31.42 %   |
| Group    | m    |           |       |           | %    |           |
|          | ills |           |       |           |      |           |
+----------+------+-----------+-------+-----------+------+-----------+
| W        | 4    | 2.75      | 4.3 % | 3.79      | 8.1  | - 27.44 % |
| angkanai | m    |           |       |           | %    |           |
| Group    | ills |           |       |           |      |           |
+----------+------+-----------+-------+-----------+------+-----------+
| Others   | 23   | 23.25     | 36.4  | 17.30     | 37.1 | 34.39 %   |
|          | m    |           | %     |           | %    |           |
|          | ills |           |       |           |      |           |
+----------+------+-----------+-------+-----------+------+-----------+
| Total    | 46   | 63.80     | 100.0 | 46.69     | 1    | 36.65 %   |
|          | m    |           | %     |           | 00.0 |           |
|          | ills |           |       |           | %    |           |
+----------+------+-----------+-------+-----------+------+-----------+

Source: Office of the Cane and Sugar Board, Thailand

The KSL Group is one of Thailand’s largest sugar manufacturers. It
operates four mills in three regions: the Northeast (1 mill), Central
Thailand (2 mills), and the East (1 mill): with the maximum total
sugarcane crushing capacity of 66,885 tons a day. In 2006/07 the Group’s
mill processed sugarcane crushing totaling 5,265,362 tons, and
manufactured 518,485 tons of sugar including refined and white sugar
amounting to 451,090 tons, and raw sugar totaling 67,396 tons; and
molasses amounting to 255,880 tons. Table 3.5 shows sales of different
types of sugar in 2005/06 and 2006/07 and the ratio of sales in export
markets to domestic markets.

Table 3.5: Sales of different types of sugar in 2007 and 2006 and the
ratio of sales in export markets to domestic markets

[]

3.3 Sugar : Product and Service Provision

Raw material provision policy

There is limited increase in Thailand’s sugarcane cultivating areas due
to the control of deforestation, high prices of lands for sale, and lack
of promotion of sugarcane cultivation. Yearly growth and fluctuation of
sugarcane produce are mainly influenced by soil fertility and weather.
Providing raw materials for manufacturing is a vital process for sugar
producers. As the total capacity of the Thai sugar industry exceeds
domestic sugarcane produce, all the sugar mills need to ensure that the
maximum amount possible is provided for their production in order to
reduce the fixed cost. The main solution employed by most sugar
manufacturers is providing financial support to farmers, which is known
as the “Geaw” system. Agreements of the sugar producers’ advance
purchase of sugarcanes from the supported farmers are made, allowing the
farmers to apply for loans from the sugar manufacturers. The loans are
used for sugarcane cultivation. Harvested sugarcanes, then, are
delivered to the mills and the sugarcane costs are deducted from the
loans.

The KSL Group makes agreements before the plantation period on advance
purchase of sugarcanes. Financial support for farmers in need takes the
form of loans for sugarcane cultivation. The farmers grow and deliver
their sugarcane produce to the corporate mills. The whole process takes
about 10-12 months. The sugarcane costs are deducted from the loans the
farmers have received. If the total value of sugarcanes delivered by the
farmers is higher than the loans, they will earn the difference.
However, if the total value of sugarcanes delivered by the farmers is
lower than the loans, the difference is collected from their incomes
from sugarcane sale in the next year or collected in cash. The Company
file lawsuits against those fail to perform their payments. Raw material
provision is the corporate priority as they enable the mills to reach
their full capacity, allowing reduced fixed cost. The Company’s strategy
is giving long-term benefits as encouragement to the sugarcane farmers
providing their produce to the corporate mills. This promotes both the
growth of the farmers’ incomes and the Company. The main policy
“Prosperity of farmers, prosperity of the Mill”, employed in the
northeast, emphasizes creating and promoting a sustainable way to make a
living for sugarcane farmers, as well as eliminating middlemen known as
“Quota Heads”. The attempt allows the Company to know about problems
experienced by the farmers and provides them suitable helps. Also, the
Company provides the farmers equipment, knowledge, and production
support, such as proving loans for purchasing trucks; giving them
molasses for making fertilizers free of charge; and providing experts in
sugarcane cultivation, and prevention and elimination of crop pests. The
support enhances a good relationship between the farmers and the
Company, as well as systematic growth.

Production policy

(1) Focusing on the production of white sugar and refined white sugar

The Company focuses on maximizing the volume of white sugar and refined
white sugar manufactured, as the two products have the highest sale
prices with the highest profit. In 2006/07 the Company manufactured
white and refined sugar accounted for 87 percent of total production.

(2) Improvement and Development of Production Efficiency

The Company focuses on the improvement of production efficient which if
the company has better efficiency than the average of the industry, it
will help to reduce the cost of production per unit, increase the
competitiveness.

Marketing policy

Due to the fact that sugar prices in domestic consumer markets are
controlled by the Government, the Company emphasizes direct sale to
industries with product quality and on-time delivery promises. Most of
the customers are businesses in beverage and confectionary industries.
Business-to-business sale requires minimum cost because advertising does
not need in creating consumer awareness. Also, transport and packaging
costs are lower when being done in bulk. Thus business-to-business sale
requires lower cost than business-to-consumer sale.

The Company, moreover, emphasizes the sale of its sugar products to food
product re-exporters, as it allows the sale of C quota sugar which
yields better profit than regular exports while requires lower transport
cost.

Environmental effects

The sugar manufacturing process causes wastewater and dust from ash in
the steamer’s burning process. The Company is well aware of such effects
and has employed appropriate measures to prevent environmental problems,
in compliance with standards issued by Ministry of Industry.

3.4 Sugar : Works Not Submitted

- None -

ETHANOL

3.1 Ethanol : Product Characteristics

At the beginning of 2006, Khon Kaen Alcohol Co., Ltd., a subsidiary of
Khon Kaen Sugar Industry Public Company Limited, started its ethanol
production. The ethanol is sold to oil companies to be combined with
gasoline at the ratio of 10:100. The final product is called “gasohol”.
The standard of ethanol mixed in gasoline is determined by the
Department of Energy Business in the 4^(th) announcement in 2003
regarding characteristics and quality of gasohol.

3.2 Ethanol : Marketing and Competition

Khon Kaen Alcohol Co., Ltd. is licensed to produce ethanol to be
combined with gasoline for domestic sale. However, if the production
exceeds domestic demand, the company may license to export its ethanol.

Domestic Marketing and Industry Overview

Domestic demand for ethanol to be mixed with gasoline depends on amounts
of gasohol used.

Gasohol was first introduced for the public use in 2006. The blend
contains 10 percent of ethanol (E 10). In 2006, the total amount of
ethanol produced did not meet domestic demand because there were only
few ethanol producers. The domestic price of molaaases increased as
there was less sugarcane crop. Hence, ethanol was priced higher.
However, in 2007 there were more ethanol manufacturers reulting in the
total exceeding consumers’ demand. The price of molasses, a primary raw
material used in ethanol manufacturing, decreased. Therefore, ethanol
prices in 2007 decreased. There are currently two types of gasohol
available in Thailand: gasohol 95 as a substitute of gasoline 95, and
gasohol 91 as a substitute of gasoline 91. The blends contain ethanol at
a rate of 10 percent as called “E10”. In 2008, the government encourages
the sale of E20 gasohol, which contains ethanol mixing at a rate of 20
percent. It is expected that a demand for ethanol will rise. Shown in
Table 3.6, the structure of gasohol prices compared to other types of
fuel in Thailand.

Table 3.6: Structure of Gasohol price compared to other types of
gasoline

[]

Apart from the lower price at THB 3.50 – 3.70 per liter, the use of
gasohol yields the following positive effects:

1.  The amount of gasoline imported and trade deficit are reduced.

2.  Thai farmers generate more income from growing crops used in ethanol
    production, resulting in improved quality of life.

3.  Better burning of the engine decreases air pollution and other
    environment problems. Gasohol allows 20-25% reduction of hydrocarbon
    and carbon monoxide. Expenses for related health problems of Thais
    may decrease.

4.  Using gasohol helps reduce the use of gasoline which is from a
    limited resource. Combining ethanol with benzene helps decrease the
    use of gasoline in Thailand by 10 percent 25 million liters a month.

5.  Ethanol production diversifies agricultural and industrial
    investments.

The government has promoted ethanol production. Tax incentives are
granted by BOI. To ensure the rise in demand for gasohol, in early 2006
the government announced a plan to phase gasoline 95 out in 2007. The
practice should drive the demand for ethanol to reach 1 million liters a
day. In 2009, gasoline 91 will be phased out. There will be an increase
in ethanol content in gasohol 95, from 10 to 20 percent. The demand for
ethanol, then, will reach 4 million liters a day. However, later in 2006
the amount of ethanol produced was not sufficient for domestic use. The
government, therefore, postponed the plan to phase out gasoline 95. In
2007, ethanol supply was higher than the demand. There was up to 1
million liters of ethanol produced per day, whereas the average domestic
demand was only 400,000 – 500,000 liters per day. Ethanol prices, then,
dropped. Ethanol producers have attempted to export excess ethanol.
However, there is some complication in the procedure to apply for
exportation permits. According to the Thai legislation, ethanol is
perceived as liquor, which receives complicated restrictions. Also,
there are problems in transporting and storing ethanol. All the
difficulties take a period of time to resolve. Later in the year, the
rise of gasoline prices and promotion of ethanol use will drive a daily
ethanol use rate to 630,000 liters per day which will still appear lower
than the current total ethanol production. In addition, in 2008 there
will be even more ethanol manufacturers. The Company has projected that
ethanol production in Thailand will reach 1.5 – 2.0 million liters per
day.

Table 3.7: Sale Volume of Gasohol

[]

Marketing and Industry Overview in Overseas Markets

Brazil is the world’s major ethanol producer. Primarily, ethanol is
produced from sugarcane. It is combined with gasoline at the raito of
20-25: 100, and used as fuel by itself with cars with specific designs.

The government has a policy to promote the use and manufacture of cars
that run by 100% ethanol. There is control over the amount that ethanol
is produced and the demand through changing the amount of ethanol
content in gasoline. In the United States, some states are considering
phasing out the use of MTBE which is toxic and pollutes. The plan is to
substitute MTBE with ethanol which is mostly produced from maize with
higher cost compared to that produced from sugarcane. The EU also has a
plan to combine gasoline with ethanol in line with the biofuels
directive. It is expected that the EU will not have enough ethanol and
will need to import it. Other countries have similar plans where ethanol
contents and implementation timeframe may vary. As a result, the world
ethanol price has been risen, as shown in table 3.8, Ethanol price 95%
and 99.5% Ex mill Brazil.

Table 3.8: Ethanol Price 95 and 99.5 Exmill Brazi

l

[]

Note : Brazil price at Santos will add 25 – 30 USD / KL

Competition

In 2006, there were 5 ethanol plants producing ethanol combined in
gasoline in Thailand. The total production capacity of 575,000 liters a
day is not adequate to meet domestic needs if benzene 95 is phased out.
Some plants are not operated to the best of their capacity, while some
have ceased their production due to machinery repair and material
shortage. In 2007, there are additional 3 new ethanol plants. The
production capacity will increase to 1,035,000 liters a day, and in
2008, the company forecasts there should be at least 5 additional
ethanol production. The total production capacity will reach 1.5 – 2.0
million liters a day. Currently, the government has licensed ethanol
production at the total of 12 million liiters a day. The amount
significantly exceeds the domestic demand. Production capacity is not a
limit. Actual limits in ethanol production are raw materials and
wastewater treatment capacity. The main material for Thailand’s ethanol
production is molasses from sugar manufacturing and cassava. An example
of a common problem concerning raw material is some ethanol manufactures
do not own sugar mills. They purchase molasses from sugar mills in which
difficulties usually arise in terms of volume, pricing and quality, as
they often have to compete with Liquor businesses, MSG manufacturers,
animal feed manufacturers, and molasses exporters. For cassava, ethanol
producers have to deal with purchasing from farmers and quality of
cassava, as well as compete in raw material purchasing with cassava
flour manufacturers. Hence, it seems complicated for licensed ethanol
producers who depend on molasses, but do not have support from sugar
mills. And it is also difficult for licensed ethanol producers who
depend on cassava to invest in factory construction and reach the
maximum production capacity. According to the corporate in-house
research, it is not likely that the actual total amount of ethanol
produced exceeds 4,000,000 liters per day. Such amount is close to the
projected domestic demand once benzene 95 and benzene 91 are phased out.

Khon Kaen Alcohol Co., Ltd., a subsidiary of the KSL Group, is one of
Thailand’s ethanol producers. The plant, located in Khon Kaen Province
in the vicinity of Khon Kaen Sugar Industry’s plant, has a production
capacity of 150,000 liters per day. In 2006, it produced 25 million
liters of ethanol sold to oil companies. For more flexible production
material management, the company invested THB 50 million for facilities
that enable the use of cassava flour and cassava-related products in
ethanol production. In 2007, the total of ethanol produced,
approximately 27 million liters, was close to that in the previous year.
Khon Kaen Alcohol has not been able to achieve its full capacity of 45
liters per day due to marketing problems caused by the government’s
postponing the plan to phase out gasoline 95. Total domestic ethanol
demand only accounted for about 40 – 50% of the company’s production
capacity. Regarding ethanol exportation, there are some complications in
the procedure to apply for an export permit, and in transporting and
storing ethanol. In 2006, the Group planned to invest in the
construction of 2 ethanol plants in Chonburi Province (Eastern Thailand)
and Kanchanaburi Province (Central Thailand) near its sugar mills. It is
projected that the KSL Group’s ethanol production will increase from
150,000 liters per day to reach the total capacity of 400,000 liters a
day. Due to lack of government’s concrete policy on ethanol at the
moment, the Group, however, decided to postpone the projects.

Table 3.9: Production, Sale Volume and Average price of Ethanol in 2007
and 2006.

[]

3.3 Ethanol : Product and Service Provision

Raw material provision policy

The Company’s ethanol plants purchase the production material, molasses,
from sugar factories of KSL (the holding company) at the market price. A
one-year agreement is made in advance. If the KSL factories do not have
enough molasses, the substance is purchased from KSL subsidiaries’ sugar
mills or other sugar mills nearby. In 2007, for more flexible production
material management the Company invested in facilities that allow the
production of ethanol from cassava flour and other cassava-related
products. This is to ensure that there is sufficient production material
and efficeint production cost. If the world’s sugar process drops,
sugarcane juice from the Group’s sugar mills is used as a material in
ethanol production.

Production policy

(1) Cost Management

The Company minimizes its costs by ensuring economies of scale,
flexibility in using cheap production materials, and cost reduction.
Expenses are minimized, such as using wastewater in producing organic
fertilizer. Corporate resources are shared, such as personnel of Khon
Kaen Sugar Industry mills, or the Group purchasing energy from its own
power plant. Leasing molasses tanks reduces the cost of purchasing ones.
Purchasing molasses at the factories help saving transport cost. It is
expected that the Group’s ethanol production costs Baht 3 lower per
liter, compared to other ethanol factories operating as single
operations.

(2) Improving and Developing Production Effectiveness

Being able to produce the production material, molasses, within the
group allows the consistency of the quality of the material and more
production effectiveness. Contaminants are reduced. Molasses tanks
temperature is controlled appropriately. Better technology and
experienced personnel have enabled the ethanol plant to achieved its
target capacity for one year. The operation has been very smooth and
almost no interuptions from technical and machinery problems.

Marketing policy

Ethanol is an industrial product. It is used as a matereial in producing
gasohol. Consistency in qualtiy, standard, and availability are very
important. The Company ensures that its production meets those
requirements by exercising quality assurance. Part of the ethanol
produced is stored in tanks for sale during the period when the
operation is ceased for annual machinery repair and maintenace.

Environmental effects

The wastewater from ethanol production process is used to combine with
filter cake from the corporate sugar mills to make organic fertilizer.
The fertilizer is then sold to farmers.

4.  Ethanol : Works Not Submitted

- None -

STEAM & ELECTRICITY

4.1 Steam & Electricity : Product Characteristics

The project is undertaken by Khon Kaen Sugar Power Plant Co., Ltd.,
(registered capital and paid-up capital totaling Baht 400.0 million) a
subsidiary where Khon Kaen Sugar Industry Public Company limited holds
99.99 percent share of the total. The power plant has a production
capacity of 30 MW. 20 MW of electricity produced is sold to Electricity
Generating Authority of Thailand. (According to the 21-year agreement
between the company and EGAT, the biomass electricity is priced in line
with SPP’s pricing formula based on the raw material cost and amount of
energy used in generating electricity.) The rest of the electricity
produced is sold to the KSL Group’s plants and used in the power plant
itself. In generating electricity, bagasse (cane fiber) from sugar
production at Khon Kaen Sugar Industry’s mill nearby is used as the main
fuel source. The capital amounts to approximately Baht 880 million. The
investment is supported by the Board of Investment of Thailand (BOI)
with an 8-year corporate income tax exemption. The power plant commenced
its electricity generation in late December 2006.

4.2 Steam & Electricity : Marketing and Competition

As the distribution of electricity to Electricity Generating Authority
of Thailand is governed by the contract, the purchaser is specified and
there is no competition. The rest of the electricity and steam energy is
sold to companies in the KSL Group for ethanol and sugar production. The
sale is 100% domestic.

4.3 Steam & Electricity : Product and Service Provision

Raw material provision policy

Raw material procurement is crucial in operating the electricity
generating business. The corporate power plant is mainly fueled by
bagasse. Each year, the Group crushed sugarcane fluctuates. A limited
amount of crushed sugarcane may affect the fuel amount available for the
power plant’s electricity generating. Thus, Khon Kaen Sugar Power Plant
has prepared purchasing biomass fuel sources, such as bagasse,
eucalyptus bark and scrap wood, from nearby plants.

Production policy

(1) Cost Management

The Khon Kaen Sugar Power Plant committed to minimize its production
cost. Costs of electricity generating and steam energy production
include fuel and depreciation. Fuel efficiency is, hence, crucial. The
company also ensures economies of scale to reduce its unit cost.

(2) Improving and Developing Production Effectiveness

The quality of fuel is effectively controlled, as the company uses its
own bagasse. Fuel efficiency is ensured by controlling moisture in
bagasse using such methods as baggasse dryer system and setting up roofs
to protect the material from the rain.

Marketing policy

The long-term agreement between the company and EGAT allows the
electricity produced to be priced based on natural gas prices and
exchange rates. The sale unit price increases at the time when EGAT’s
demand for electricity is high. Electricity sold to the companies in the
KSL Group is priced at the same rate as that sold to EGAT.

Environmental effects

Extensive Environmental Impact Assessment (EIA) has been carried out.
The registration with the UN as a CDM project (under the Kyoto Protocol)
has been approved, the company has the right to sell carbon credits.

5.  Steam & Electricity : Works Not Submitted

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