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 mud. 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 mud is a residue from
vacuum filtration. It can be used as a raw material for general-purpose
fertilizer. The Company gives away filter mud to sugarcane farmers to
promote sugarcane cultivation in nearby areas. After the Company’s
subsidiary has continuously operated alcohol and chemical production,
wastewater from the factory can be mixed with filter mud and
biodecomposed to produce organic fertilizer that is suitable for
sugarcane cultivation. 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 2005/06 sugar was produced 151.160 million
tons (raw value) worldwide. The 10.248 million-ton increase represented
a 7.27 percent growth rate compared to that in 2004/05. The world total
consumption amounted to 145.400 million tons. The 1.256 million-ton
increase represented a 0.87 percent growth rate compared to that in
2004/05. As a result, the ending stock increased from 60.135 million
tons in 2004/05 to 64.186 million tons in 2005/06. The stock represented
44.14 percent of the total demand likely to last for 5.3 month
consumption.

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

[]

  Note: * 2006/07 estimated number

  Source : F.O.Licht, updated 31-10-2006.

The Asian sugar market: Asia is the most important market for Thailand’s
sugar exportation, as the total amount of sugar manufactured in the
region does not meet its yearly demand. As a result, Asia has to import
raw sugar and white sugar from exporting countries in other regions.
According to statistics, Thailand is the only Asian largest net exporter
of sugar, while Indonesia, Japan, South Korea, Malaysia are net importer
of sugar in this region. India and Pakistan are the most influential
variables that have caused fluctuation in the market because they are
both net exporters and net importers of sugar in some year.

In 2005/06 Asia had the total amount of sugar manufactured of 47.152
million tons (raw value), which was 6.072 million tons more than the
previous year. The increase represented a 14.78 percent increase which
mostly from the increase in production in India. In year 2003/04 and
2004/05, India had the drought, but in year 2005/06, the climate in
India recovered which cause 6 – 7 million tons increase in production
volume. In contrast, the region’s total demand increased a little from
61.508 million tons in the previous year to 61.926 million tons,
representing a 0.68 percent increase. As a result, the sugar deficit in
Asia decreased to 14.744 million tons, made up by sugar in the previous
year’s stock and imported sugar from other regions.

Chart 3.2: Production / Consumption in Each Region (Millions Tons,
centrifugal sugar, raw value, Oct/Sep)

[]

  Note: * 2006/07 estimated number

Source : F.O.Licht, updated 31-10-2006

Prices in the world’s suagar market highly fluctutaed in the previous
year as shown in Figure 3.3 NYBOT Sugar #11, and Figure 3.4 LIFFE Sugar
#5 in the past ten years. At the beginning of the year, the maximum
price of raw sugar reached approximately 19 cents per pound. The price
decreased to 11 – 12 cents per pound at the end of the same year. The
price of refined white sugar increased from USD 300 per ton to USD 500
per ton, and later on decreased to USD 340 – 360 per ton.

The fluctuation was caused by speculations in the funds at the beginning
of the year. Lots held by speculators were large. Also, it was expected
that oil prices would rise, which would result in the use of sugarcane
in producing ethanol as an alternative to gasoline and decreased
sugarcane in sugar manufacturing. In 2005/2006, it was estimated that
there was a 60-million ton in the world’s sugar stock. Once the oil
prices went down and India’s sugar production increased, speculators
shorted their sugar position. From 80,000 lots, there were only 20,000
lots remaining. The raw sugar price, then, reduced to 11 – 12 cents per
pound. The refined white sugar price decreased to USD 340 – 360 per ton.
However, comparing to sugar prices in the past 10 years (not including
the previous year), the decreased prices were still considered high.
This is due to changes in such primary factors as increased sugar
production cost in Brazil, the demand in ethanol for alternative use to
gasoline, decreased support from the EU, and the expectation of rise in
demands for sugar in China and India.

Thai manufacturers have sold their sugar at prices which are a
combination of the world sugar market prices and Thai premiums. Thai
sugar manufacturers have received premiums from sugar exportation. In
Asia sugar has been produced less than the total consumption. Sugar,
therefore, has been imported in the region. The importers are willing to
pay Thai manufacturers premiums instead of paying expenses of importing
sugar from other regions. Thai premiums vary in accordance with sugar
inadequacies in Asia, differences in transport expenses of importation,
other Asian countries’ importing sugar from Thailand, and other relevant
factors.

Chart 3.3: World Raw Sugar Price in NYBOT Future Market, NY#11 Raw Sugar
(Cents/lbs)

[]

Chart 3.4: World Refined Sugar Price in LIFFE Future Market, LD#5
Refined Sugar (US$/ton)

[]

Chart 3.5: Speculative position of Sugar # 11 in NYBOT

[]

For demands and supplies in the world’s sugar market in Production Year
2006/2007, F.O.Licht projected in October 2006 that there would be
around 160.008 million tons of sugar produced, increasing by 5.85
percent from the previous year’s 151.160 million tons. Asia would
account for the increase, from 47.152 million tons in 2005/06 to 56.494
million tons in 2006/07. The world’s sugar inventory would reach 72.641
million tons from 64.186 million tons in 2005/06. Exporters with higher
production and transport costs would retain more sugar inventory.
However, there are some uncertainties that could result in a decrease in
the sugar production in 2006/07 such as:

(1) Climatic changes that could affect sugar production, especially in
    Brazil

(2) A potential increase in the world’s oil prices, resulting in
    increasing ethanol production and decreasing sugar production

(3) Speculations in the world’s sugar futures trading

In 2006/07 when the world’s sugar production is expected to increase,
Thailand’s sugar industry could be affected less than other countries’.
This is due to:

(1) Thai sugar is offered in the market at the beginning of each year
(from December to May), which is the same period as Russia’s sugar
import. Brazil and Australia offer most of their sugar in the market at
the end of each year.

(2) Thailand has an advantage of locating near sugar importers. Some
Asian countries are not able to produce sufficient sugar for their
domestic consumption. Sugar is still imported from other regions. Buying
sugar from Thailand allows less transport cost and more convenience.

(3) The EU’s decreased support for sugar exportation results in a
decrease in premium white sugar in the market. Thai sugar manufacturers
offer both white sugar and raw sugar. And their production technology
allows them to produce premium white sugar to compete with other Asian
sugar manufacturers whose product quality is not as good. Some
manufacturers even import raw sugar and dissolve it to make white sugar.
Such process increases transport, inventory and energy costs.

(4) The sugar production cost in Thailand is considered moderate. As
there is large volume of sugar in the world’s market, sugar from
exporters bearing higher production cost does not sell as well. Their
inventory cost, then, inevitably adds up.

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 exporters manufacturers who
    use sugar as as a production material lose their competitiveness in
    the world’s market. To promote investment in the food industry and
    competitiveness, the government allows those who manufacture exports
    to buy sugar at the world’s 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.

In early 2006, there were the deficit in domestic sugar consumption due
to that world market price was higher than domestic sugar price to the
extent that caused sugar smuggler to border. As a result, the government
decided to to raise THB 3 per kg for domestic sugar price to solve the
problems. 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.

The legislation results in low competition. Distribution channels are
choices of sugar mills. Some sugar manufacturers focus on retail sale.
Some sell their merchandise through middlemen or modern trades. Others
sell to other businesses in different industries. The KSL Group sells
most sugar products to manufacturers in different industries.

Competition

There are currently 46 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. There is no new licensed sugar manufacturer at the moment.

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

Table 3.7: 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    | 2005/2006 | 20    | 2004/2005 |      | decrease  |
|          | ugar |           | 05/06 |           | 200  |           |
|          | m    | (million  |       | (million  | 4/05 |           |
|          | ills | tons)     |       | tons)     |      |           |
+----------+------+-----------+-------+-----------+------+-----------+
| Mitr     | 5    | 8.36      | 17.9  | 8.51      | 17.8 | -25.8 %   |
| Phol     | m    |           | %     |           | %    |           |
| Sugar    | ills |           |       |           |      |           |
| Group    |      |           |       |           |      |           |
+----------+------+-----------+-------+-----------+------+-----------+
| TRR      | 7    | 6.76      | 14.5  | 7.15      | 14.9 | -28.6 %   |
| Sugar    | m    |           | %     |           | %    |           |
| Group    | ills |           |       |           |      |           |
+----------+------+-----------+-------+-----------+------+-----------+
| Thai     | 3    | 6.46      | 13.8  | 6.11      | 12.8 | -22.0 %   |
| Identity | m    |           | %     |           | %    |           |
| Sugar    | ills |           |       |           |      |           |
| Group    |      |           |       |           |      |           |
+----------+------+-----------+-------+-----------+------+-----------+
| KSL      | 4    | 4.01      | 8.6 % | 4.07      | 8.5  | -19.4 %   |
| Group    | m    |           |       |           | %    |           |
|          | ills |           |       |           |      |           |
+----------+------+-----------+-------+-----------+------+-----------+
| W        | 4    | 3.79      | 8.1 % | 4.24      | 8.9  | - 38.4 %  |
| angkanai | m    |           |       |           | %    |           |
| Group    | ills |           |       |           |      |           |
+----------+------+-----------+-------+-----------+------+-----------+
| Others   | 23   | 17.30     | 37.1  | 17.75     | 37.1 | -23.6 %   |
|          | m    |           | %     |           | %    |           |
|          | ills |           |       |           |      |           |
+----------+------+-----------+-------+-----------+------+-----------+
| Total    | 46   | 47.82     | 100.0 | 47.82     | 1    | -25.8 %   |
|          | 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 2005/06 the Group’s
mill processed sugarcane crushing totaling 4,012,292 tons, and
manufactured 399,046 tons of sugar including refined and white sugar
amounting to 364,054 tons, and raw sugar totaling 34,992 tons; and
molasses amounting to 185,513 tons. Table 3.8 shows sales of different
types of sugar in 2005/06 and the ratio of sales in export markets to
domestic markets.

Table 3.8: Sales of different types of sugar in 2006 and 2005 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 cultivation 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 2005/06 the Company manufactured
white and refined sugar accounted for 91.23 percent of total production.

(2) Improvement and Development of Production Efficiency

The Company is one of the most efficient sugar producers. According to
the Office of the Cane and Sugar Board and Tris Rating Information,
based on 94 NT Sugar and 10 CCS, the company and his subsidiaries, as a
KSL Group, was the most efficient sugar manufacturer group among 5 big
sugar mill groups in Thailand. The data is shown on Table 3.9.

Table 3.9: Production Efficiency based on 94 NT Sugar and 10 CCS

+-------------+---------+--------------+--------------+--------------+
| Sugar       | No. of  | Production   | Production   | Production   |
| Factory     | Sugar   |              |              |              |
| Group       | Fa      | Efficiency   | Efficiency   | Efficiency   |
|             | ctories | 2005/2006    | 2004/2005    | 2003/2004    |
+-------------+---------+--------------+--------------+--------------+
| KSL Group   | 4 mills | 95.41        | 94.49        | 98.39        |
+-------------+---------+--------------+--------------+--------------+
| Mitr Phol   | 5 mills | 95.04        | 94.23        | 95.36        |
| Sugar Group |         |              |              |              |
+-------------+---------+--------------+--------------+--------------+
| TRR Sugar   | 7 mills | 93.85        | 93.26        | 95.60        |
| Group       |         |              |              |              |
+-------------+---------+--------------+--------------+--------------+
| Thai        | 3 mills | 92.38        | 93.13        | 92.69        |
| Identity    |         |              |              |              |
| Sugar Group |         |              |              |              |
+-------------+---------+--------------+--------------+--------------+
| Wangkanai   | 4 mills | 88.07        | 88.14        | 89.68        |
|             |         |              |              |              |
| Group       |         |              |              |              |
+-------------+---------+--------------+--------------+--------------+
| Total       | 46      | 92.92        | 92.85        | 93.84        |
|             | mills   |              |              |              |
+-------------+---------+--------------+--------------+--------------+

Source : Office of the cane and sugar board, Thailand & Tris Rating

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.
In 2006, the ethanol produced did not meet domestic demand. The company,
therefore, only sold its ethanol in the domestic market.

Domestic Marketing and Industry Overview

The demand for denatured ethanol varies according to the demand for
gasohol which has 10% of ethanol content. The first gasohol project was
initiated in 1985 by His Majesty the King who had realized potential
gasoline shortage and a drop in crop prices in Thailand. He requested
that the Royal Chitralada Projects study the feasibility of processing
sugarcane into ethanol used in combining with benzene to make gasohol.
Gasohol had been experimented on cars with small and large engines used
in the Royal Projects since 1994. The results were promising both in the
laboratories and practice. Now gasohol is used widely in the government
and private sectors. Gasohol is promoted for public use. The Ministry of
Energy has determined gasohol prices to be Baht 1.50 per liter lower
than benzene prices. Reduction of the amount from gasohol sales
contributing to the Oil Fund has been granted. There are two types of
gasohol available: gasohol 95 as a substitute of benzene 95, and gasohol
91 as a substitute of benzene 91 as shown in Table 3.10: The structure
of gasohol prices compared to other types of gasoline.

Table 3.10: Structure of Gasohol price compared to other types of
gasoline

[]

Apart from the lower price, Baht 1.50 lower 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.

Ethanol production has been promoted by the government; tax incentives
are granted by BOI. To strengthen consistency of the domestic demand, in
early 2006 the government announced the plan to phase benzene 95 out in
2007. The practice should drive the demand for ethanol to 1 million
liters a day. In 2009, benzene 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
benzene 95 out.

Table 3.11: 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. Refer to Table 3.12.

Table 3.12: Other Governments’ Policy for mixing Ethanol with Gasoline

[][]

Table 3.13: Fuel Ethanol Production Projections.

[]

Table 3.14 Cost of Ethanol Production by using different kinds of raw
materials, compared to world oil price

[]

Competition

In 2006, there were 5 ethanol plants producing ethanol combined in
gasoline in Thailand. The total production capacity of 655,000 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 will be 9 new ethanol plants. The production
capacity will increase by 1,180,000 liters a day, and the total
production capacity will reach 1,835,000 liters a day. Currently, the
government has licensed ethanol production at the total of 12,000,000
liters a day. The amount significantly exceeds the domestic demand.
Production capacity is not a limit. Actual limits in ethanol production
are 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 production 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
alcohol fermentation businesses, MSG manufacturers, animal food
manufacturers, and molasses exporters. For cassava, ethanol producers
have to deal with purchasing from farmers and quality, 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.

Table 3.15: Ethanol Producer for mixing with gasoline in year 2006

[]

Table 3.16: List of Ethanol Producers for mixing with gasoline, expected
to start production and distribute in year 2007

[]

In terms of ethanol pricing, at the beginning the government allowed
free pricing. Therefore, prices were determined by sellers and buyers.
There are guidelines for pricing and the suggested price which is
cost-plus pricing. The production cost corresponds to molasses and
cassava prices. However, in the previous year molasses price fluctuated,
resulting in fluctuations in ethanol price. At the beginning of the
year, the ethanol price was around Baht 19.00 a liter, and then rose to
25.30 per liter. In 2007, the government determines the proxy ethanol
price to correspond to ethanol pricing at the Brazilian Mercantile and
Futures Exchange in Sao Paulo with costs of ethhanol transport,
insurance against loss, survey, and shipping to be added in.

Khon Kaen Alcohol Co., Ltd., a subsidiary of Khon Kaen Sugar Industry
Group, is one of the country’s ethanol producers. It has the production
capacity of 150,000 liters a day. The factory is located near the KSL’s
sugar mills in Khon Kaen Province. In 2006, the ethanol factory produced
approximately 25 millions liters, which was sold to oil companies. For
more flexible production material management, the Company invested Baht
50 million for facilities that enable the use of cassava flour and
cassava-related products in ethanol production. The operation is to
commence in the second quarter of 2007. It is expected that in 2007,
there will be an increase in ethanol production by 80 percent, equaling
45 million liters, compared to that in the previous year. The Company
has invested in constructing 2 ethanol plants in Chonburi Province
(Eastern Thailand) and Kanchanaburi (Central Thailand) near its sugar
mills. The ethanol factory in Chonburi will begin the production in
2007, whereas the Kanchanaburi factory is to commence the production in
2008. The KSL Group’s ethanol production will reach the total capacity
of 400,000 liters a day.

Table 3.16: Ethanol Sales in 2006 and 2005 and the portion of Export per
Domestics

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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 casava flour and other casava-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 machienery 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.

3.4 Ethanol : Works Not Submitted

The additional project to facilitate the use of casava flour and
casava-related products in ethanol production is to be completed in the
second quarter of 2007. The investment is worth approximately Baht 50
million.