Kenyan sugar millers opt for new product lines

As the Kenyan sugar millers opted for new product lines as they race to cushion earnings from competition that will come with the opening of the local market to regional low cost producers in 2012, Mumias Sugar Company has secured Kshs 1.6 billion for ethanol plant. The company will in the next one and a half years start producing 22 million litres of ethanol annually, which could meet nearly 50 percent of the country's total demand, following the signing of a financing deal between the sugar company and a consortium of banks including Ecobank Kenya and the Commercial Bank of Africa. The Common Market for Eastern and Southern Africa (Comesa) safeguard, which limits the amount of sugar that can be imported from these countries, will expire in 2012 opening up the local sugar industry to competition from imports from the regional trading bloc, Mumias sugar is in line with its growth and expansion strategies as it seeks to add their new product lines to its electricity generation business. Kenyan sugar millers are scrambling to set up alcohol, power generation and water bottling plants from their waste products with latest firm to unveil such plans being Sony Sugar. Mumias Sugar Ethanol plant is expected to cost Kshs 3.64 billion of which Kshs 2.01 billion will be raised by the company.
Sugar production capacity in Kenya
Since 2003, the sugar production capacity has grown by 22% to 547,999 metric tonnes in 2009 from 448,520 metric tonnes in 2003. In 2008, the sugar production capacity marginally declined by 2% to 511, 891 metric tonnes mainly as a result of Mumias sugar company renovations in September 2008 that led to production slowdown. However, domestic demand for sugar in 2009 was 750,000 metric tonnes compared to 547,999 metric tonnes produced, leaving the dependent of imports to plug the supply deficit. From January to July this year, the country produced 286,226 metric tonnes.
Power generation as an alternative source of income
Kenya Power and Lighting Company buys more than two thirds of the Mumias 38MW power output at a cost of Kshs 6.40 (USD 0.08) per Megawatt Hour. This earned the company Kshs 359 million in the financial year ended June 2010. Sony Sugar generates 4MW of electricity for its internal use and is targeting to grow its generation capacity to 15 MW, and sell the excess capacity to Kenya Power and Lighting Company (KPLC). Nzoia Sugar and Chemelil Sugar generate power for their own use, but want to boost their generation capacity and sell idle capacity to KPLC. The two firms are also expected to follow suit and focus on ethanol production and water bottling plants.
Entry to the alcohol market
Already, the government has set the table for the sugar millers’ entry to the alcohol market after it issued regulations requiring all petrol sold in the Kenyan market to be mixed with alcohol to make gasohol. However, the commissioning of the Ethanol project by Mumias Sugar Company is in compliance with a government policy that requires petrol sold in Kenya to be blended with 10 percent ethanol. This will offer ready demand for the sugar millers’ ethanol. The country is currently producing an average of 15 million litres of ethanol per year against a total demand of between 40 and 50 million litres, a situation that presents a huge potential for Mumias. The 100,000 tonnes of molasses generated from the factories will be used in the project where other types of alcohol such as rectified spirit will be generated and sold to industries, a move that will in turn contribute immensely to the firm's bottom line.
Implication to the Kenyan sugar millers
With the expected reduction on import duty for the imported sugar to 10% from 40%, the local millers will feel the pinch since the cost of production in the country is higher compared to other countries. This makes the cost of sugar produced more expensive compared to the imports. However, we envisage unhealthy competition in the market that may lead to draining of Kenyan sugar millers income earned from sugar production.

Dyer and Blair Bank