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 2007/08 sugar was produced approximately
167.85 million tons (raw value) worldwide. The 0.423 million-ton
increase represented a 0.25 percent growth rate compared to that in
2006/07. The world's total consumption amounted to 158.783 million tons.
The 5.821 million-ton increase represented a 3.81 percent growth rate
compared to that in 2006/07. As a result, the ending stock increased
from 73.762 million tons in 2006/07 to 78.047 million tons in 2007/08.
The stock represented 50.48 percent of the total demand likely to last
for 6.06-month consumption.

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

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  Note: * 2008/09 estimated number

  Source : F.O.Licht, updated 29-10-2008.

According to Chart 3.1, in 2006/07-2007/08, the production is 14 million
tons and 9 million tons larger than the consumption respectively.
Increased sugar production primarily took place in Asian countries ,
especially India, Pakistan, China and Thailand. As a result, there was
no more shortage of sugar for consumption in Asia. The sugar supply was
close to the consumption. In the past two years, other types of crops,
for instance, wheat had increased. India's sugar industry experienced
lack of liquidity. Indian farmers, consequently, changed to crops with
better returns. In 2006/07, the total amount of sugar produced in India
continually decreased from 30.766 million tons in 2006/07 to 28.587
million tons in 2007/08. It was estimated that sugar produced in 2008/09
would be 22.826 million tons. In 2008/09, Asia's sugar supply might be
14 million tons less than consumption.

According to WTO’s free trade agreement, the EU decreased financial
support for sugar exportation. The EU produced less sugar. In 2005/06,
over 20 million tons of sugar was produced in the EU. In 2008/09,
however, it was estimated that less than 15 million tons of sugar would
be produced. The situations in India and EU resulted in a 6.6
million-ton projected decline in sugar production in 2008/09, in which
the total production would be brought down to 161.248 million tons. It
is likely that the worldwide recession in 2008/09 would cause a decrease
in consumption, from 4 percent in the previous two years to 1.8 percent.
In 2008/09, it was expected that the amount of sugar produced, 161.248
million tons, would be close to the number of sugar consumption, 161.720
million tons.

In the previous year, average prices in the world’s sugar market
fluctuated between 9 to 5 percent per pound. The fluctuation was caused
by internal factors of the world’s sugar industry. In 2008/09, it was
projected that the EU and India would produce less sugar. Other factors
included the total amount of sugar produced in Brazil, and the ratio of
ethanol production and sugar production in Brazil, which related to the
oil prices in the world's market and different government’s alternative
energy policies. External factors included the worldwide recession
affecting liquidity of commodity hedge funds and exchange rates against
dollars. It was estimated that the world’s sugar market would still be
fluctuating due to the internal and external factors.

It is likely that the Thai sugar industry will be less affected by the
recession worldwide in 2008/09, compared to other industries. Sugar is
necessary for living. In 2008/09, it was predicted that sugar
manufactured in Asia would be 14 million tons less than estimated
consumption. All over the world, the sugar production will be close to
the consumption; therefore, it is not very likely that Thai sugar will
not sell well.

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 1,900 per 100-kilogram sack.

(2) Prices of refined white sugar purchased at sugar mills 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 47 sugar mills in Thailand with sugarcane crushing
capacity of 60-80 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.

Of all 47 sugar mills, there are five main groups of major sugar
manufacturers. The rest are small manufacturers. The KSL Group is the
number four producer, with larger amounts of cane crushed and 7-8
percent market share. 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 2008/09 the Group’s mill processed sugarcane crushing totaling
5,737,019 tons, and manufactured 598,401 tons of sugar including refined
and white sugar amounting to 413,677 tons, and raw sugar totaling
184,724 tons. Table 3.2 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 3.2: sales of different types of sugar and the ratio of sales in
the past 3 years

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3.3 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 mills 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 mills 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 mills. This
promotes both the growth of the farmers’ incomes and the Company. The
main policy “Prosperity of farmers is prosperity of the Mill”,
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.

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 10, 20 and 85 percent. The final product is called
“gasohol”.

3.2 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 percent 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
3.3, 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, over 1 million liters of ethanol per day
is mixed in gasoline. The figure is an increase from 700,000 liters per
day at the beginning of the previous year. Figure 3.4 shows amounts of
ethanol used to mix with gasoline for gasohol production.

Table 3.3: Selling price structures of gasohol

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Figure 3.4: Amounts of ethanol used to mix with gasoline for gasohol
production

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In 2008, among businesses investing in ethanol production, there were
only 13 ethanol producers with a projected production capacity of 1.7
million liters per day. Domestic supply of ethanol totaling 1 million
liters per day exceeded demand. The excess supply was exported by the
producers

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: 100, and used as fuel by itself with specially designed cars.

The Brazillian government has a policy to promote the use and
manufacture of cars that run with 100% ethanol. 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. The market prices of ethanol in Brazil
are used as a basis for determining ethanol selling prices. In the
previous year, ethanol prices fluctuated between 400 USD/m3 to 600
USD/m3 in line with oil prices in the world market oil. Chart 3.5 shows
ethanol prices in Brazil.

Table 3.5: Ethanol Price in Brazil

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Note : Brazil price at Santos

Competition

In 2008, ethanol consumption reached 1 million liters per day in line
with gasohol consumption. There were new ethanol producers so the total
ethanol production capacity increased from about 1 million liters per
day to 1.7 million liters per day. Some excess ethanol was exported.
Competition in the past year was quite intense in the domestic market.
However, the oil prices increased drastically, ethanol prices, as a
result, went up. Export Selling price was not much different compared
with domestic selling price. Table 3.6 shows sales and average selling
prices. In 2008, ethanol sales increased from 18.9 million liters to
50.4 million liters. 20.5 million liters of ethanol were exported.
Compared to 2007, the Company exported a very small amount due to
complicated export licensing of the Government, and problems with
transportation system and export storage tanks.

Table 3.6: Sales and average selling price of ethanol in the past three
years

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3.3 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 KSL subsidiaries’
sugar mills or other sugar mills nearby. 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 mills is 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 Khon Kaen Sugar
Industry mills, 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 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. 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
rest of the electricity generated is sold to the KSL Group’s plants and
used in the power plant itself. In generating electricity, bagasse from
sugar production at Khon Kaen Sugar Industry’s mill nearby is used as
the main fuel source.

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. Table 3.7 indicates sales and average selling
prices of electricity.

Table 3.7: Sales and average selling prices of electricity in the past
two years

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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

- None -