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 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.

4.1.2 Sugar : Marketing and Competition

Marketing and Industry Overview in Overseas Markets

  The world sugar market: In 2008/09 sugar was produced approximately
  158.44 million tons (raw value) worldwide. The 6.61 million-ton
  increase was a 4.35 percent increase compared to that in 2008/09. The
  world's total consumption amounted to 162.10 million tons. The 2.15
  million-ton increase represented a 1.34 percent growth rate compared
  to that in 2008/09. As a result, the ending stock from 73.90 million
  tons in 2008/09 to 61.44 million tons in 2009/10. The stock
  represented 33.33 percent of the total demand likely to last for
  4.55-month consumption.

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

  []

  Note: 2011/12 estimated number

  Source : F.O. Licht, updated 01-11-2011.

According to F.O. Licht ‘s forecast on November 1, 2011, the 2011/12
output will increase by 5.2%, from 165.5 million tons to 174.1 million
tons. Consumption will increase by 2.4%, from 160.1 million tons to
164.0 million tons. There will be an excess of the world’s sugar output.
The world’s sugar ending stocks in 2011/12 will increase from 61.4 tons
to 67.2 tons. In Asia, it was projected that in 2011/12, there would not
be enough sugar output for consumption, resulting in approximately
shortage of sugar 9.7 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.
Furthermore, in the past 2 – 3 years, significant increases in
investment by foreign funds have heightened fluctuation of sugar prices
as it can be seen from the difference between low price at 11 cents/lb
and high price at 35 cents/lb.

In the future, 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

[]

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 46 operating sugar mills (exclude non-operating and
new license sugar mills which is not yet constructed) in Thailand with
sugarcane crushing capacity of 60-100 million tons/year and sugar
manufacturing capacity of 6.0-10.0 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 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 46 operating sugar mills, there are five main groups of major
sugar manufacturers. The rest are small manufacturers. The KSL Group is
the 4^(th)- 5^(th) producer, with larger amounts of cane crushed and 6-8
percent market share. It operates four mills in three regions: the
Northeast (1 mill), Central Thailand (2 mills), and the East (1 mill).
Table 3.3 shows sales of different types of sugar in 2008/09, 2009/10,
and 2010/11 as well as ratios of sales in export markets to domestic
markets.

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

[]

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 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.

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 percent 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 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
3.4, 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 1.2 million liters of ethanol per
day is mixed in gasoline. As shown in Table 3.5 amounts of ethanol used
to mix with gasoline for gasohol production.

Table 4.4: Selling price structures of gasohol

[]

Chart 4.5: Amounts of ethanol mixed with petroleum as gasohol

[]

In September 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. As of this report is issued,
consumption rate is expected to recover.

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
18-25: 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 2009,
sugar prices in the global markets increased. The sugar yiled from
Brazil was not as expected due to climate change. Ethanol prices in the
world markets increased in realtion to the higher sugar prices. It is
estimated that the ethanol yield will decrease, as more of the cane
supply will be used in sugar production which will generate more income.

Competition

In 2011, ethanol consumption maintained at 1 - 1.2 million liters per
day in line with gasohol consumption. 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
2011 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
2011, sales volume and price was stable compare to last year.

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

[]

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 mills.
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 maintenance.

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

4.3.1 Steam & Electricity : Product Characteristics

The project has been undertaken by Khon Kaen Sugar Power Plant Co., Ltd.
The plant has a production capacity of 30 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. The company invested further in the Bo Ploy renewable energy
project, allowing the current total production capacity to reach 120 MW.
It is estimated that 40 MW of the electricity produced will be sold to
the EGAT.

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
three years

[]

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 -