4. Operation of Each Product Line

SUGAR

4.1.1 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 factories 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.

4.1.2 Sugar : Marketing and Competition

Marketing and Industry Overview in Overseas Markets

The world sugar market: In 2011/12 sugar was produced approximately
175.9 million tons (raw value) worldwide. The 11 million tons increase
was a 6.7% increase compared to that in 2010/11. The world's total
consumption amounted to 164.9 million tons. The 4.9 million tons
increase represented a 3.5 % growth rate compared to that in 2010/11. As
a result, the ending stock from 62.1 million tons in 2010/11 to 68.9
million tons in 2011/12. The stock represented 41.8 % of the total
demand likely to last for 5 months consumption.

Chart 4.1: World Sugar Balance (Millions Tons, centrifugal sugar, raw
value, OCT/SEP)

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  Note: 2012/13 estimated number

  Source : F.O.Licht, updated 23-11-2012

According to F.O. Licht‘s forecast on November 23, 2012, the 2012/13
output will increase by 0.8 %, from 175.9 million tons to 177.3 million
tons. Consumption will increase by 1.7 % from 164.9 million tons to
167.7 million tons. There will be an excess of the world’s sugar output.
The world’s sugar ending stocks in 2012/13 will increase from 68.9
million tons to 73.8 million tons. In Asia, it was projected that in
2012/13, there would not be enough sugar output for consumption,
resulting in approximately shortage of sugar 10.6 million tons in Asia.
The forecast, however, may vary according to changing demands and
supplies.

Climate uncertainties, such as flooding, drought, or severe cold in
countries where sugar is produced and consumed, limited numbers of sugar
producers capable of exportation, and any other events affecting the
world market sugar supplies also affect the world market sugar prices.

For a trend in sugar prices will depend upon Europe’s output including
the impact of climate on cane production in major producer countries,
such as Brazil, Australia and Thailand. Especially, in Brazil, since
they use bio-fuel from cane for cars which is ethanol. Therefore sugar –
ethanol parity becomes key because Brazil is the largest sugar producer,
if they gain benefit from selling ethanol, they will convert more canes
to ethanol and vice versa for sugar. However capability to switch
production between sugar and ethanol are limited about 40-60% because of
their factories are not designed to run 100% for each product. Other
factors that could affect sugar prices include allocation of investment
in funds to other assets, the US currency, oil prices, and the overall
world’s economy.

Chart 4.2: World sugar prices (NYBOT#11) in the past 10 years

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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 factories 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 factories do not
exceed Baht 1,900 per 100-kilogram sack.

(2) Prices of refined white sugar purchased at sugar factories do not
exceed Baht 2,000 per 100-kilogram sack.

(3) Wholesale prices of regular white sugar at all domestic wholesale
businesses do not exceed Baht 1,965 per 100-kilogram sack, and those of
refined white sugar do not exceed Baht 2,065 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 21.50 per kilogram; and those of refined white sugar do not
exceed Baht 22.50 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 50 operating sugar factories (exclude non-operating
and new license sugar factories which is not yet constructed) in
Thailand with sugarcane crushing capacity of 60 - 100 million tons/year
and sugar manufacturing capacity of 6 - 10 million tons/year (depending
on yearly sugarcane amounts in the crushing process and sugarcane
quality). 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 factories are under
government control. Licenses from Office of the Cane and Sugar Board and
Department of Industrial Works, Ministry of Industry, are required for
sugar factories in increasing capacity, moving factories, or operating
new sugar factories.

In 2012, all 46 operating sugar factories, there are five main groups of
major sugar manufacturers. The rest are small manufacturers. The KSL
Group is the 4^(th) producer, with 6 - 8 % market share. It has 5
factories (In 2012, KSL operates 4 factories since the new one just
finish construction) in three regions: the Northeast (2 factories),
Central Thailand (2 factories), and the East (1 factory). Table 4.3
shows sales of different types of sugar in the past 3 years as well as
ratios of sales in export markets to domestic markets.

Table 4.3: Sales of different types of sugar and ratios of domestic
sugar to total sugar sales in the past 3 years

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4.1.3 Sugar : Product and Service Provision

Raw material provision policy

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 factories need to ensure that
the maximum amount of cane is provided for their production in order to
reduce their fixed cost per unit. 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 factories and the sugarcane costs are deducted from the
loans.

The company’s strategy is giving long-term benefits as incentives to the
sugarcane farmers providing their crops to the corporate factories. This
promotes both the growth of the farmers’ incomes and the company. The
main policy “Prosperity of farmers is prosperity of the factory”,
especially 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”. This effort allows the
company to learn about problems experienced by the farmers and provide
them suitable assistance. Also, the company provides the farmers
equipment, knowledge and production support, such as providing loans for
purchasing trucks; giving them filter cakes for making fertilizers free
of charge; and providing experts in sugarcane cultivation, and
prevention and elimination of crop pests. The support enhances good
relationships between the farmers and the company, as well as systematic
growth.

Production policy

The company focuses on maximizing the volume of white sugar and refined
white sugar manufactured, as the two products have the highest selling
prices with the highest profit. It also focuses on the improvement of
production efficiency. Production efficiency that is higher than the
average of the industry will help reduce unit cost. As a result, the
company will be more competitive.

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.

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.

4.1.4 Sugar : Works Not Submitted

- None –

ETHANOL

4.2.1 Ethanol : Product Characteristics

Khon Kaen Alcohol Co., Ltd., a subsidiary of Khon Kaen Sugar Industry
Public Company Limited, produces and sells ethanol to oil companies. The
ethanol is combined with gasoline at 10, 20 and 85 % to produce the
final product commonly called gasohol.

4.2.2 Ethanol : Marketing and Competition

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 public use in 2006. The blend contains
10 % of ethanol (E 10). In 2008, oil prices exceeded 100 USD per barrel.
The government sector provided tax and contributing fund. These factors
made the gasohol prices lower than gasoline, as shown in Table 4.4, the
price structures of gasohol. The promotion of the use of gasohol as an
alternative energy source allowed continuous growth for the ethanol
market. Currently, average 1.6 million liters of ethanol per day is
mixed in gasoline. As shown in Table 4.5 amounts of ethanol used to mix
with gasoline for gasohol production.

Table 4.4: Selling price structures of gasohol

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Chart 4.5: Amounts of ethanol mixed with petroleum as gasohol

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In the last quarter of 2011, ethanol consumption rate dropped to 1
million liters per day due to a severe flooding in Thailand which
affected consumption rate of all fuel types including gasohol. In
contrast to the last quarter of 2012, ethanol consumption has increased
due to government plan to ban normal gasoline and use gasohol instead,
therefore gas stations start to adapt their station as well.

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 ratio of 20
– 25 % or ethanol 100 %, and used as fuel by itself with specially
designed cars. The Brazilian government has a policy to promote the use
and manufacture of cars that run with ethanol 100 %. There is control
over the amount of ethanol produced and the demand through changing the
amount of ethanol content in gasoline. Brazil is also one of the larger
ethanol exporters in the world.

Competition

In 2012, ethanol consumption gradually increased since government plan
to ban normal gasoline and use gasohol instead, moreover gas stations
start to adapt their station to sell gasohol. There were new ethanol
producers so the total ethanol production capacity will be increased.
Despite increased production capacities, some ethanol plants were not
able to operate at their full capaciities. This was due to a raw
material shortage in ethanol production and selling prices that could
not motivate ethanol producers to increase their production, therefore,
in 2012 the producers did not operate at their maximum capacities.
However the company has already invested in a new ethanol plant and
global market still have ethanol demand for cars and other downstream
industries, hence the company plan to diversify customers base to global
market next year. Table 4.6 shows sales and average selling prices. In
2012, sales volume increased but price decreased compare to last year.

Table 4.6: Sales and average selling price of ethanol in the past 3
years

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4.2.3 Ethanol : Product and Service Provision

Raw material provision policy

The company’s ethanol plants purchase the raw 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 raw material is purchased from nearby sugar
factories. For more flexible raw 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 raw material and that production cost is manageable. If
the world’s sugar prices drop, sugarcane juice from the Group’s sugar
factories are used as a raw material in ethanol production.

Production policy

The company minimizes its costs by ensuring economies of scale,
flexibility in using cheap raw materials and cost reduction. Expenses
are minimized, such as using wastewater in producing organic fertilizer.
Corporate resources are shared, such as personnel of sugar factory, or
the Group purchasing energy from its own power plant. Leasing molasses
storage tanks reduces the cost of investing them. Purchasing molasses at
the factories helps save transport costs.

Being able to produce the raw material, molasses, within the group
allows the consistency of the quality of the material and more
production effectiveness. Contaminants are reduced. Molasses storage
tanks are appropriately temperature controlled, allowing highly
effective production.

Marketing policy

Ethanol is an industrial product. It is used as a material 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 maintenance.

Environmental effects

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

4.  Ethanol : Works Not Submitted

- None -

STEAM & ELECTRICITY

4.3.1 Steam & Electricity : Product Characteristics

The project has been undertaken by Khon Kaen Sugar Power Plant Co., Ltd.
and has 2 locations, the first power plant in Nampong district, Khon
Kaen province has capacity of 30 MW, of which 20 MW of electricity
produced is sold to Electricity Generating Authority of Thailand. The
second power plant in Boploy district, Karnchanaburi province has
capacity of 90 MW, of which 20 MW of electricity produced is sold to
Electricity Generating Authority of Thailand. The rest of the
electricity generated is sold to the KSL Group’s plants and used within
the power plant itself. In generating electricity, bagasse from sugar
production is used as the main fuel source. Currently, the company
invested further in the third power plant in Loei province with capacity
of 40 MW and also capacity expansion in the first location in Nampong
district, Khon Kaen province. (read more detail in section 3. Nature of
Business)

4.3.2 Steam & Electricity : Marketing and Competition

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

Table 4.7: Sales and average selling prices of electricity in the past 3
years

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4.3.3 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 bagasse 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 facilities in Khon Kaen has been registered with the UN as a CDM
project (under the Kyoto Protocol), the company has the right to sell
carbon credits if the project’s credits can be certified by UNFCCC.

4.3.4 Steam & Electricity : Works Not Submitted

- None -