Government gives $5.6m loan to Mumias

 

Sugarcane being transported to the factory in Mumias. FILE 

By RAMENYA GIBENDI, Special Correspondent

Kenyan sugar miller Mumias Sugar Company has received a Ksh500 million ($5.6 million) soft loan from the government to repair its eroded cash position.

The two-year loan from the Kenya Sugar Board comes after the company recorded its lowest sugar production ever in five years due to cane poaching by rival mills, falling cane quality and decreasing acreage in its key catchment area of western Kenya.

The poor cane delivery and dwindling sugar production have seen the company’s revenue drop and affected its ability to pay creditors.

In the financial year ended June 2013, the company struggled to service an $18.5 million loan from Proparco, a development financial institution partly owned by Agence Française de Développement.

The cash flow challenge has pushed the company into sourcing for short-term borrowing to bolster its liquidity. In the year ended June, the company had an outstanding overdraft of Ksh1 billion ($11 million) and took a new loan of Ksh1.15 billion ($13 million) from KCB.

The poor cash flow saw the company suspend dividend payment for the first time in five years since 2009. Earnings per share for 2012 were Ksh1.31 (1 US cent) and Ksh1.26 (1 US cent) in 2011.

The increasing subdivision of cane farms has reduced productivity in main cane growing region of western Kenya, a factor that, coupled with the entry of new sugar millers, has triggered off cane poaching.

“An estimated 150,000 tonnes of cane was poached by neighbouring mills especially in western Kenya… this has become a challenge to our operations affecting cane supply and distorting projections,” said managing director Peter Kebati.

The country’s largest miller produced 147, 308 tonnes of sugar in the 2012/2013 financial year, which was 41 per cent below the targeted 250,000 tonnes, a 15 per cent decrease from the previous year’s production of 173,600 tonnes.

Analysts say with the country largely dependant on small scale farmers who depend on rainfall, there is no likelihood of an increase in cane production in western Kenya.

According to the World Bank, with the exception of Mumias Sugar — with a capacity utilisation rate of 70 per cent — the other sugar companies in western Kenya have an average utilisation rate of 55 per cent, making their output expensive since they have to spread the fixed costs to the low production levels.

The global lender estimates that it costs $550 to produce a tonne of sugar in Kenya compared with $230-$550 tonnes in other Comesa member states.

The World Bank said things will get tougher for local millers once Comesa safe guards that limit the entry of duty free sugar into the country expire in February next year.

“Without protection, most of the producers in western Kenya will find it difficult to dispose of their sugar in the local market, unless measures are taken to improve production and processing efficiency.”

The Kenyan sugar industry has struggled to become competitive, weighed down by a myriad challenges including high cost of production.

 

The sector has survived courtesy of protection from imports from the Comesa markets — considered low-cost producers. The safeguards that have existed since 2003 will expire in February 2014.

According to a World Bank report on “Achieving Shared Prosperity in Kenya,” the local sugar industry remains under global threat since the protectionist measures have not been complemented by efforts to streamline it.

The measures, said the report, have turned Kenya into a high cost sugar producer, making the country the most attractive open market for sugar after the EU.

Apart from Mumias, which controls about 60 per cent of the market, all the other seven major millers operate below 55 per cent of crushing capacity. Mumias achieves 70 per cent.

But poor cane supply and quality has seen the firm’s sugar recovery rate steadily tumble from 10.7 per cent in 2009 to 8.4 per cent in 2013, directly affecting sugar output.

Despite the increase in the number of millers and consumption growing at an annual average of 4 per cent according to the World Bank, output has stagnated.