Industry Overview

6. INDUSTRY OVERVIEW 6. INDUSTRY OVERVIEW
(Prepared for inclusion in this Prospectus) Frost & Sullivan Malaysia Sdn Bhd (522293W) Suite E”{)8-15, Block E, Plaza Mont’ Kiara, 2 Jalan Kiara, Mont’ Kiara, 50480 Kuala Lum pur, Malaysia. Tel: +603.6204.5800 Fax: +603.6201.7402
23 May 2011 www.frost.com The Board of Directors MSM Malaysia Holdings Berhad Level 3, Balai Felda Jalan Gurney 1 54000 Kuala Lumpur Malaysia Dear Sirs, Executive Summary of the Independent Market Research Report on the Sugar Refining Industry in Malaysia for MSM Malaysia Holdings Berhad (“MSM Holdings” or the “Company”) We, Frost &Sullivan Malaysia Sdn Bhd (“Frost &Sullivan”), have prepared the Executive Summary of the Independent Market Research report on the sU2ar refining industry in Malaysia (“Report”) for inclusion in MSM Holdings’ Prospectus dated 02 JUN lOll (“Prospectus”) in relation to the initial public offering and the listing of and quotation for the entire issued and paid-up share capital of MSM Holdings on the Main Market of Bursa Malaysia Securities Berhad. We are aware that this Report will be included in the Prospectus and we further confirm that we are aware of our responsibilities under section 214 of the Capital Market and Services Act, 2007. This research is undertaken with the purpose of providing an overview of the sugar refining industry in Malaysia. We acknowledge that if we are aware of any significant changes affecting the content of this Report between the date hereof and the issue date of the Prospectus, we have an on-going obligation to either cause this Report to be updated for the changes and, where applicable, cause MSM Holdings to issue a supplementary prospectus, or withdraw our consent to the inclusion of this Report in the Prospectus. Frost & Sullivan has prepared this report in an independent and objective manner and has taken adequate care to ensure the accuracy and completeness of the report. We believe that this report presents a true and fair view of the industry within the limitations of, among others, secondary statistics and primary research, and does not purport to be eXhaustive. Our research has been conducted with an “overall industry” perspective and may not necessarily reflect the performance of individual companies in the industry. Frost & Sullivan shall not be held responsible for the decisions and/or actions of the readers of this report. This report should also not be considered as a recommendation to buy or not to buy the shares of any company or companies as mentioned in this report or otherwise. For and on behalf of Frost & Sullivan Malaysia Sdn Bhd: Denni~’—­Director Banga/ore  Bangkok  Beijing  Bogota  Buenos Aires  CapeTown  Chennai  Delhi  Dubai  Frankfurt  Kolkata  Kuala Lumpur  London  Melbourne  Mexico City  Mumbai  NewYork  Oxford  Palo Alto  Paris  San Antonio  Sao Paulo  Seoul  Shanghai  Singapore  Sydney  Tokyo  Toronto  -56­
6. INDUSTRY OVERVIEW (Cont’d) © May 201 ‘I Frost & Sullivan The market research process for this study has been undertaken through secondary or desktop research, as well as detailed primary research, which involves discussing the status of the industry with leading industry participants and industry experts. The research methodology used is the Expert Opinion Consensus Methodology. Quantitative market information could be sourced from interviews by way of primary research and therefore, the information is subject to fluctuations due to possible changes in the business and industry climate. This market research was completed in May 2011. This report is prepared for inclusion in the Prospectus of MSM Malaysia Holdings Berhad (MSM Holdings) for submission to the Securities Commission Malaysia and other relevant parties. No part of this research service may be otherwise given, lent, resold, or disclosed to non-customers without our written permission. Furthermore, no part may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without our permission. For further information, please contact: Frost & Sullivan Malaysia Sdn Bhd Suite E-08-15, Block E, Plaza Mont’ Kiara 2, Jalan Kiara, Mont’ Kiara 50480 Kuala Lumpur. IMR on the Sugar Refining Industry in Malaysia © Frost & Sullivan 2011 -57­
6. INDUSTRY OVERVIEW (Cont’d) 1.1 INTRODUCTION The sugar refining industry in Malaysia began in the 1950s with the incorporation of Malayan Sugar Manufacturing Company Limited (MSM) in 1959. Prior to the establishment of MSM, Malaysia depended on imports of refined sugar from Britain and Hong Kong for local sugar consumption. MSM was incorporated as a joint venture between two companies from Japan -Mistui & Co. (a trading company) and Nissin Sugar Manufacturing Company (a sugar refining company) -and a local company, Kuok Brothers Sdn Bhd (a sugar trading company). The refinery in Seberang Prai, Penang was commissioned in 1964. In 1965 another sugar refinery commenced operations. United Malay State Sugar Industries, currently known as Central Sugars Refinery Sdn Bhd (CSR), comprised investors from Taiwan and Malaysia. CSR’s refinery is situated in Shah Alam, Selangor. With the establishment of two sugar refineries already in place, the Government of Malaysia looked into the possibility of cultivating sugar cane in order to establish a local sugar industry. In 1965 a team of Colombo Plan experts determined that Perlis possessed suitable soil and climate for sugar cane cultivation. A research team was deployed by MSM to conduct trial planting of sugar cane to corroborate the findings. The Perlis Sugar Project was henceforth established, whereby Perlis Plantation Berhad (PPB) and FELDA both engaged in sugar cane cultivation, and established a joint venture Kilang Gula Felda Perlis Sdn Bhd (KGFP) to operate an integrated sugar cane mill and refinery. Gula Padang Terap Sdn Bhd (GPT) was incorporated in 1973, and their present factory is located in Kuala Nerang, Kedah. Tradewinds (M) Berhad (Tradewinds) acquired CSR in 1983, and later on GPT in 2006. In 2010, Felda Global Ventures Holdings Sdn Bhd acquired 100% of MSM and a 50% equity interest in KGFP, as well as the 5,797 hectare plantation land in Chuping, Perlis and a 20% interest in Tradewinds. Presently there are only four sugar refining companies in Malaysia. 1.2 MARKET SEGMENTATION Sugar is a type of carbohydrate that can be found naturally in all green plants, fruits and vegetables. Sugar is formed as a result of photosynthesis, the process by which plants utilise energy from the sun to convert carbon dioxide and water into food. Sugar occurs in greatest quantities in sugar cane and sugar beets; hence these two plants are commonly used as commercial sources of sugar. Sugar cane only grows in tropical climates, while sugar beets thrive in parts of the world with a temperate climate. However, in 2007, researchers have developed the tropical sugar beet plant capable of tolerating higher temperatures and requiring less water than sugar cane, making tropical sugar beet suitable for cultivation in tropical climate. 6. INDUSTRY OVERVIEW (Cont’d) In addition to providing a sweet taste to many types of food, sugar also serves as a versatile ingredient and offers other functions in cooking and baking. For example, adding sugar into baked goods will add colour and texture to the dough. Sugar is also used in the fermentation process in the production of bread and other products containing alcohol. Sugar acts as a bulking agent in ice cream and baked goods, and serves as a preservative to deter the growth of micro-organisms in jams, preserves and milk. Furthermore, sugar imparts a pleasing “mouth-feel”, or body to beverages. In non-sweet foods such as salad dressings and condiments, the addition of sugar enhances flavour and balances the acid content in tomato and vinegar-based food products. Sugar is also used in the pharmaceutical industry as a coating to mask the bitter taste of medicine. Apart from its many uses in different types of food, sugar is also used for non-food purposes. Sugar is used in the fermentation process to produce industrial alcohol, which is then used to produce industrial chemicals. Sugar can also be used as a retarding mechanism for cement and glues, and as a raw material in the production of rigid polyurethane foams. In the textile industry, sucrose is used for sizing and finishing fabrics. Sucrose fatty acid esters are biodegradable surfactants that are used to reduce the surface tension of liquids in the manufacture of cosmetics and detergents. The value chain of the sugar manufacturing industry in Malaysia stretches from upstream sugar cane cultivation to downstream distribution and retail for industrial consumers as well as households. The industry value chain can be divided into the following steps: •  Cultivation of sugar cane and production of raw sugar  In Malaysia, there is only one sugar cane plantation and sugar cane mill, located in  Chuping, Perlis, and owned by KGFP. Cane seedlings are usually planted from  December to April, and are harvested during the dry season in the same period the  following year, peaking in January and February. The harvested sugar cane will  then be brought to the sugar cane mill, where it is grinded, crushed, boiled and  spun and dried in a centrifuge to produce raw sugar. In 2010, 1% of raw sugar  supply in Malaysia was produced locally, while the remaining 99% was sourced  from abroad, mainly from Brazil, Australia, Guatemala and Thailand.  •  Refining of raw sugar to produce refined sugar  Raw sugar will undergo a series of processes to produce refined sugar, along with  a byproduct known as molasses. Currently all four players own and operate sugar  refineries in Malaysia, along with packaging facilities: MSM in Penang, KGFP in  Perlis, CSR in Selangor and GPT in Kedah. Of the four refineries, KGFP alone  utilises locally produced raw sugar. Refined sugar, which contains approximately  99% sucrose, is packaged into a variety of sizes and grades.  •  Distribution and retail to industrial consumers and retail customers  Refined sugar is sold under different grain specifications and purity levels, both for  domestic and export consumption. Packaged refined sugar is delivered to industrial
6. INDUSTRY OVERVIEW (Cont’d) consumers to be used in food processing as well as pharmaceutical industries, along with retailers and distributors to be sold to households. Molasses has a low sucrose content of approximately 45-55%, and is sold to producers of ethanol, animal feed and yeast. Value Chain of the Sugar Refining Industry (Malaysia) SUGAR CANE PLANTATION
IMPORTS OF RAW SUGAR SUGAR CANE MILL
SUGAR REFINING INDUSTRY
DOMESTIC MARKET INDUSTRIAL RETAILERS AND EXPORTCONSUMERS DISTRIBUTORS

I III MARKETS … …. Pharmaceutical  Processed  Industry  Foods  .Manufacturers  (i.e. soft drinks,  •• _ • _  _  ~ ___ w  _  _  ••• _  _  •• _  _  baked goods,  sugar  confectioneries,  etc.)

HOUSEHOLDS Legend: III MSM Malaysia Holdings Berhad’s core activities Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan [The rest of this page is intentionally left blank] 6. INDUSTRY OVERVIEW (Cont’d) 1.3 INDUSTRY SIZE AND GROWTH TRENDS The sugar refining industry in Malaysia has seen steady growth over the past 20 years, with production volume of refined sugar registering a compound annual growth rate (CAGR) of 3.31 % over the years 1991 to 2010. In 1991, the annual production volume of refined sugar stood at 895,366 tonnes, and has since grown by 85.59% to 1.66 million tonnes in 2010. The growth trend of local production of refined sugar is highly influenced by several factors, including current world and domestic economic conditions, population growth, global prices of raw sugar, crude oil price, and weather conditions. The production of refined sugar is seen to exhibit steady, albeit moderate growth in the early years of the period between 1991 and 2010. However, the Asian financial crisis in 1998 instigated a decline in production volume that year, with production falling by 7.15% due to a drop in domestic and foreign demand. The industry quickly recovered in 1999 whereby production increased by 14.27%, attributed in part by falling market prices of raw sugar. The industry contracted slightly in 2001, before picking up again the following year. In 2005, a worldwide shortage of raw sugar caused global market prices to escalate, leading to a 2.50% decline in local production volume. Production declined again in 2008 and 2009 due to the global financial crisis along with soaring market prices of raw sugar. The sugar subsidy introduced by the Government in 2009 helped to keep domestic prices of coarse and fine refined white sugar relatively low, leading to an 11.62% growth in production volume in 2010 despite global market prices of raw sugar reaching a monthly average of USDO.3109 per pound in December 2010, its highest figure since end-1974. [The rest of this page is intentionally left blank] ICompany No.: 935722-K I 6. INDUSTRY OVERVIEW (Cont’d) Production Volume of Refined Sugar (Malaysia), 1991·2010 1,800,000 1,600,000 “iii” 1,400,000 Q) c:
c: g 1,200,000
Q) E :::J 1,000,000(5 > c: 0.. 800,000 (J :::J ‘C 0 600,000L­a. 400,000 200,000 0
IMR on the Sugar Refining Industry in Malaysia 6 © Frost & Sullivan 2011 -62­6. INDUSTRY OVERVIEW (Cont’d) 1.4 INDUSTRY RISKS AND CHALLENGES Volatility of Global Market Price of Raw Sugar The local sugar refining industry is highly dependent on imports of raw sugar, whereby approximately 99% of raw sugar supply is sourced from abroad. However, the global market price of raw sugar is highly volatile and is subject to external economic fluctuations, adverse weather conditions and changes in international trade policies. As such historically the market price of raw sugar, which is traded on the New York Board of Trade under the Intercontinental Exchange (ICE), has been seen to fluctuate from extreme ends of the price spectrum. In a period of 20 years from 1991 to 2010, the monthly average of the ICE Contract 1\10. 11 nearby futures price has dipped to USDO.0477 per pound in May 1999, and rose to USDO.3109 per pound in December 2010. The average market price of raw sugar for the calendar year of 2010 was USDO.2249 per pound, the highest monthly average price for the period between 1991 and 2010. In April 2011, the average market price for the month was recorded at USDO.2543 per pound. Refined sugar is traded on the London International Financial Futures and Options Exchange (L1FFE). The global market price of refined sL1gar can be seen to move in tandem with the market price of raw sugar. Over the years 1991 to 2010, the monthly average of the London Daily Price Contract No. 5 futures price was at its lowest in December 1999 at USDO.0761 per pound and peaked at USDO.3478 per pound in December 2010, displaying a similar trend to the market price of raw sugar throughout the period. The average market price of refined sugar for the calendar year of 2010 was recorded at USD0.2778 per pound. In April 2011, the average market price for the month was recorded at USDO.2911 per pound. A global surplus of raw sugar caused a dip in market prices in 2002, continuing on to 2003 due to increased output by key producing nations, particularly Brazil. In 2004, increased demand from developing countries buoyed by population and gross domestic product (GOP) growth caused prices to rise. Raw sugar prices started to soar in the later part of 2005, largely due to a significant rise in crude oil prices, in addition to a deficit in the world supply of sugar. Furthermore, European Union (EU) policy reforms reduced world exports, leading to a further increase in prices. Prices eventually declined throughout the year, aided by increasing world supply, decreasing crude oil prices and reduced speculative trading. The continuous increasing supply subsequently led to a surplus of raw sugar, causing prices to fall in 2007. However Brazil, the world’s largest exporter of sugar, started to venture more into the production of ethanol due to better returns, thereby moderating the global supply of sugar and reducing the downward pressure of prices. As sugar prices started to stabilise, prices of other commodities at the same time were on the rise, causing 6. INDUSTRY OVERVIEW (Cont’d) producers to switch to other types of more profitable crops. The decreasing acreage, weather-related reductions in yields, and increasing sugar consumption, contributed to the soaring prices of raw sugar in 2009 and 2010. Production and Market Price of Raw Sugar, and Consumption and Market Price of Refined Sugar (Global), 1991-2010

~Production ~Consumption ~Raw Sugar Price —Refined Sugar Price Note: Price points refer to average annual price for the calendar year Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan Operational and Financial Risks As with any other manufacturing business, the sugar refining industry is subject to operational and financial risks. Risks in day-ta-dayoperations include the risk of fire, flood, disruption in supply of utilities, breakdown of machinery, logistics failure and pilferage. These risks may have adverse effects to the business, possibly causing significant interruptions to the production line. Players in the industry also face significant financial risks. Since sugar is a price-controlled item in Malaysia, changes in retail price are determined by the Government, who has to take into account the welfare of the population at large. Hence, this poses a challenge to manufacturers who may not be able to react quickly to changes in the global market of raw sugar in order to maintain viability. In addition, manufacturers require a steady stream of income to gain back their respective returns on investment, which is estimated to be in the range of RM100 million. To start a
6. INDUSTRY OVERVIEW (Cont’d) refinery, the minimum production level required to ensure viability is estimated to be 400 . tonnes per day. Distance from Key Export Markets Malaysia’s geographical position presents a disadvantage when it comes to exporting to key markets such as China and Korea. Thailand has an advantage over Malaysia in this case as it is more strategically located, enabling producers from Thailand to incur lower logistics and transport costs. This poses a challenge to local sugar manufacturers planning on exporting sugar abroad, causing them to rely on other factors such as quality and branding to compete in the global market. 1.5 BARRIERS TO ENTRY Licensing Requirement for the Refining and Retailing of Sugar As sugar is a controlled item, the production and sale of sugar requires a license. Under the Control of Supplies Act 1961, sugar is listed as both a scheduled and controlled article. Hence, under the Act, in order to manufacture or refine sugar, a license is first required. For details regarding the Act, refer to Section 1.8 -Relevant Laws and Regulations. Due to the structure of the sugar industry which is highly regulated by the Government, this licensing requirement will prove to be a barrier for potential entrants. High Capital and Operational Expenditures The high costs associated with capital and operational expenditures deter entry into the local sugar refining industry. High capital investments required for sugar refiners include the initial purchase of machinery, equipment and various infrastructures such as land, refinery, storage facilities, packaging’ plant, laboratory facilities and administrative offices. Operational expenditures required for day-to-day operations include costs incurred for procuring raw sugar, logistics, transportation, personnel, maintenance and overhead costs. The required initial investment is estimated at RM100 million, while working capital required to run operations is estimated at RM200 million. These high costs subsequently require a steady flow of sales income to ensure viability in the market, serving as a barrier to potential entrants without much industry experience. Established Distribution Network Sugar is a staple food that is consumed by both households as well as industrial consumers across Malaysia. Hence a well-established distribution network is essential in ensuring that the sugar produced reaches all ends of the consumer market, from the urban cities to the rural villages in the outskirts of town. An effective transportation and delivery

6. INDUSTRY OVERVIEW (Cont’d) network takes time to build, in addition to the high development and maintenance costs involved. Hence with the well-established wide range of distribution channels already in place by the current players in the industry, other parties looking to enter the industry will be deterred. Reputation and Industry Expertise As a producer of a fast moving consumer good (FMCG), an established reputation is essential in order to thrive in the sugar business, where expertise is required in the production process, along with solid industry knowledge in marketing and distribution. Reputation and good track record are vital in building and maintaining customer relationships. Good relations with wholesalers and distributors take time to develop, and once established poses a barrier for new entrants to compete with the current players in the industry, who would already have the upper hand. Similarly good product quality and track record can develop into long-term contracts with industrial consumers, who are likely to request for specific types of sugar, be it in terms of grain size, colour or purity level. Hence potential entrants will face difficulties in entering into new contracts with industrial consumers, who would already have their own suppliers. 1.6 PRODUCT SUBSTITUTION Refined sugar is a staple food product consumed by all segments of the market. However sugar substitutes are widely available for consumption, for both household and industrial consumers. Artificial sweeteners such as aspartame and saccharin are commonly used in hot beverages and in baking, and are readily available in supermarkets. Natural sugar substitutes, such as stevia, are also gaining popularity in Malaysia. However, stevia is typically priced at a premium for smaller quantities when compared to refined sugar. The retail price of natural sugar substitute products is not controlled by the Government of Malaysia. Consumers may turn to sugar substitutes for a number of reasons, most of which are related to health concerns. Diabetics are required to limit their sugar intake to regulate their blood sugar levels; hence by turning to artificial sweeteners they are able to consume sugar-free sweet-tasting food. Sugar substitutes also have little or no calorie content, and can assist in weight loss. Sweeteners such as xylitol can prevent tooth decay as they are not fermented by bacteria present in teeth. In the production of raw sugar, sugar beets can also be used as an alternative to sugar cane. However, as sugar beets are not grown in Malaysia, they do not serve as a substitute in a local context.
6. INDUSTRY OVERVIEW (Cont’d) 1.7 RELIANCE AND VULNERABILITY TO IMPORTS The sugar refining industry in Malaysia is heavily dependent on the imports of raw sugar, whereby imports constituted 99% of total raw sugar input used in refineries in 2010. Imports of raw sugar mainly come from Brazil, Australia, Guatemala and Thailand. In Malaysia, approximately 70% of total purchases of raw sugar from foreign suppliers are made through long-term contracts (LTCs). LTCs for raw sugar have been negotiated since the 1970s, and typically cover a three-year period with the current LTC being valid from 2009 to 2011. The Government of Malaysia, through the Ministry of International Trade and Industry (MITI), along with all the local producers of refined sugar, collectively enter into LTCs with foreign suppliers of raw sugar to secure a consistent flow of supply. The LTC stipulates the quantum of raw sugar to be purchased over the length of the contract, at a predetermined price, which is influenced by the market price of raw sugar at the time of negotiation. Other purchases outside the amount agreed upon in the LTC will be made at global market prices. In addition to the importation of raw sugar, machinery and equipment utilised in the sugar refining process are imported from Japan and Germany.
1.8 RELEVANT LAWS AND REGULATIONS In Malaysia, the sugar industry is regulated by the Government. Refined sugar is a controlled-price item, with the Government providing subsidies since 2009 to keep domestic retail prices below global market levels in order to protect the consumers. Domestic prices of coarse and fine refined white sugar are set by the Government, while other sugar products such as brown sugar, caster sugar and molasses are determined at prevailing market prices. In addition, imports of refined sugar are controlled in Malaysia. Regulations Governing Sugar Trade and Distribution Price Control Act 1946 The Price Control Act 1946 is an Act providing for the control of price of selected goods. Under this Act, price controlled goods shall be not be sold above the determined price, whereby additionally the sale of such goods requires a license. The sale of refined sugar is currently under price control, and its production is subsidised by the Government. The Ministry of Domestic Trade, Co-operatives and Consumerism (MDTCC) is responsible in ensuring the compliance of this Act by the manufacturers and traders with the aim towards encouraging ethical trade practices, as well as protecting consumer interest. The Price Control Act 1946 will be replaced by the Price Control and Anti-Profiteering Act 2011 when the latter comes into force. The Price Control and Anti-Profiteering Act aims to provide for the determination of the maximum, minimum or fixed price for the 6. INDUSTRY OVERVIEW (Cont’d) manufacturing, producing, wholesaling or retailing of any goods. MDTCC is authorised to prescribe the mechanisms to determine whether profit is unreasonably high, as the Minister deems fit. All regulations, rules and orders made under the Price Control Act 1946 shall continue to be in operation until replaced or revoked. Control of Supplies Act 1961 The Control of Supplies Act 1961 controls and rations the supplies of certain goods in Malaysia. Under this Act, sugar is both a scheduled article as well as a controlled article. By being a scheduled article, a license is required to trade (at both wholesale and retail levels) or manufacturelrefine sugar. As a controlled article, the sale of sugar, by either a wholesaler or retailer, also requires a license. In addition, the premises in which sugar is sold require a separate license. The Control of Supplies Act is enforced by the MDTCC. Industrial Co-ordination Act 1975 The Industrial Co-ordination Act 1975 is an Act introduced with the objective of maintaining the coordination, orderly development and growth in Malaysia’s manufacturing sector. As sugar refining is part of the manufacturing sector, thus a license is required for the manufacturing of sugar products. The Act requires manufacturing companies with shareholders’ funds of RM2.50 million and above or engaging 75 or more full-time employees in Malaysia to apply fora manufacturing license for approval by MITI. Applications for the Manufacturing License are to be submitted to the Malaysian Industrial Development Authority (MIDA), in which it will subsequently be approved and issued by MITI. The licenses are non-transferable unless with prior approval obtained from MITI. Regulations Governing Sugar Plantation and Refinery Occupational Safety and Health Act 1994 The manufacturing industry, which includes the sugar refining industry, is also regulated by the Occupational Safety and Health Act 1994. As part of the manufacturing industry, all sugar manufacturers possess a general duty of care to the employees to provide and maintain the production facilities and systems that are practicable, safe and without risks or hazard to employees’ health and safety. It is also the obligation of the employer to provide employees with the training, knowledge, information and supervision, in providing a safe working environment without risks to their health, safety and welfare. The Department of Occupational Safety and Health (DOSH) is authorised to ensure that companies have taken proper steps to ensure a safe working environment for their employees. DOSH also stipulated that for most manufacturing industries, including the sugar refining industry, companies that employ more than 500 employees are required to appoint a safety and health officer, who will be responsible in ensuring the due observance of the statutory obligations with regards to workplace health and safety as well as the promotion of a safe 6. INDUSTRY OVERVIEW (Cont’d) and healthy working environment. A health and safety committee should also be formed to monitor the implementation of the safety measures during work, to promote and also plan measures to ensure employees’ safety and health. Factories and Machinery Act 1967 DOSH also requires compliance with the Factories and Machinery Act by all manufacturers in Malaysia. The Factory and Machinery Act 1967 provides for the regulation of factories with respect to matters relating to the safety, health and welfare of employees, and also the registration and inspection of the machineries, and manufacturing facilities identified for the purpose of sugar manufacturing. Under the Act, it is required that all machineries manufactured locally or imported for manufacturing purposes require a valid certificate of fitness before they can be operational. This approval needs to be obtained from DOSH. Employment Act 1955 Sugar plantation cultivation is a labour intensive activity. The Employment Act 1955 stipulates the rights and welfare benefits that employees are entitled to, and which all employers are required to comply. The Act also states that an employer is required to obtain a license to import legal foreign workers under the contract of services, and ensure their welfare and rights are fulfilled in terms of their wages, hours of work, rest days, and sick and annual leave. The Ministry of Human Resource is responsible in monitoring and ensuring that companies are in compliance with the Act and protects the welfare of employees. Environmental Quality Act 1974 The Department of Environment (DOE) Malaysia is responsible for the implementation and monitoring of Malaysia’s environmental regulations and policies. The Environmental Quality Act 1974 prohibits industrial activities which cause air, sound, soil, and water pollution without obtaining a valid license. Therefore, the burning of waste or rubbish or any open burning is prohibited without obtaining the necessary licenses or permits. However, according to the DOE, the burning of sugar cane leaves by sugar plantations is allowed under this Act, subject to approval by the Director General of DOE in writing. The burning of sugar cane leaves is allowed in an area that does not exceed 20 hectares during the harvesting period. This activity must be done only during dry weather, between the time of 11 am to 5pm. Smoke and particles resulting from the burning should not cause interference to road traffics and major routes, in which warning signs and potential hazard warnings should be given to road users around the area. Such burning must be closely monitored by a competent person and the nearest police station should be notified prior to such burning. Such burning is not allowed to be conducted on peaty soils at any time. All open burning will need to be halted with 6. INDUSTRY OVERVIEW (Cont’d) immediate effect if there is any evidence that the air quality in the surrounding areas of the sugar plantation has reached an unsatisfactory level.
1.9 INDUSTRY PLAYERS The players in the sugar refining industry in Malaysia are • MSM Malaysia Holdings Berhad ~ Kilang Gula Felda Perlis Sdn Bhd (KGFP) ~ Malayan Sugar Manufacturing Company Berhad (MSM)

• Tradewinds (M) Berhad ~ Central Sugars Refinery Sdn Bhd (CSR) ~ Gula Padang Terap Sdn Bhd (GPT)

 

Key Players in the Sugar Industry (Malaysia), 2011 Kilang GulaFelda Perlis Gula Padang Terap … Sdn Bhd (GPT) Legend –.. Tradewinds 1M) Berhad
Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan
6. INDUSTRY OVERVIEW (Cont’d)
1.10 MARKET SHARE AND RANKING The production of refined sugar in Malaysia is closely monitored by the Department of Statistics (DOS). Market share is calculated based upon total production volume of refined sugar released by DOS. In 2010, the total production of refined sugar in Malaysia was recorded at 1.66 million tonnes. In 2010, MSM produced 806,658 tonnes of refined sugar and KGFP produced 137,104 tonnes of refined sugar. Hence based on these figures, MSM and KGFP collectively held a market share of 56.79% (whereby MSM held 48.54% and KGFP 8.25%) of the total production volume of refined sugar in Malaysia in 2010, making them the industry leader in 2010. Market Share by Production Volume (Malaysia), 2010 MSM, 48.54% Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan
1.11 DEMAND CONDITIONS AND DEPENDENCIES 1.11.1 Sugar Consumption and Growth Trends 1.11.1.1 Global Global consumption of refined sugar has been seen to exhibit steady growth over the years 1991 to 2010, registering a CAGR of 1.80% over the 20-year period. According to data released by the United States Department of Agriculture (USDA) Foreign Agriculture Service, in 1991 global consumption was recorded at 109.94 million tonnes, and since then has grown by 40.28% to 154.23 million tonnes in 2010. 6. INDUSTRY OVERVIEW (Cont’d) Consumption is driven mainly by countries in Central and South America, Africa, the Middle East and Asia, with growth trends influenced by several factors such as increased consumer income, population growth, and rising demand for processed foods and drinks containing sugar. As sugar is largely regarded as a staple food item, consumption has not . been seen to be adversely impacted during periods of economic crisis. Consumption figures have continued to grow during the Asian financial crisis in 1998, along with the
global financial crisis in 2008/2009. Global consumption grew at a CAGR of 1.64% over the years 1991 to 2000, and increased to 1.92% over the years 2001 to 2010. The increased growth rate at the latter decade can be attributed to increased consumer income in developing countries, which constitute the largest consumers of sugar. Global consumption grew at the highest rate in 2007 by 6.04% from 141.82 million tonnes in 2006 to 150.39 million tonnes, attributed to a decline in the market price of raw sugar brought about by a surplus in global production. [The rest of this page is intentionally left blank]
I Company No.: 935722-K I 6. INDUSTRY OVERVIEW (Cont’d) Consumption of Refined Sugar (Global), 1991-2010 180,000 Ij CAGR 1,80% 160,000 1L——-~~~-___=====:::;::::::::::;=—-===:::~~~;_I–­m­ee  140,000  I  __  _  _  o…  o  o .E. 120,000  -1-1————­ e  o  ~E’ 100,000  ::;,  11l  e  <3  80,000
60,000 40,000 20,000 o 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan IMR on the Sugar Refining Industry in Malaysia 17 ©Frost & Sullivan 2011 -73­6. INDUSTRY OVERVIEW (Goni’d) On a global scale, the top five sugar consuming countries per capita in 2009 were Swaziland (262 kilograms (kg) per person), New Caledonia (164 kg per person), St. Kitts and Nevis (81 kg per person), lVIacedonia (8’1 kg per person) and Israel (75 kg per person). In 2009, the global average for sugar consumption per capita was 31 kg per person per year. Malaysia’s sugar consumption per capita that year was 48 kg per person, well above the global average, and ranking Malaysia 22nd out of the 147 countries recorded by USDA. 1.11.1.2 Asia Pacific and Gulf Cooperation Council The Asia Pacific (APAC) and Gulf Cooperation Council (GCC) region represents a significant market for sugar consumption, constituting 41.47% of global consumption of sugar in 2010. In the context of this report, APAC and GCC can be further broken down into the following sub-regions: • Association of South East Asian Nations (ASEAN) (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam)
• Australasia (Australia and New Zealand)
• North Asia (China, Hong Kong, Japan, Macau, North Korea, South Korea and Taiwan)
• South Asia (Bangladesh, India, Pakistan and Sri Lanka) and
• GCC (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and UAE)

Consumption in APAC and GCC has exhibited high growth rates over the years 1991 to 2010. APAC and GCC consumption has grown at a CAGR of 3.14% from 35.54 million tonnes in 1991 to 63.96 million in 2010, relatively at a higher rate compared to the CAGR of world consumption over the same period (1.80%). The high consumption growth in APAC and GCC is driven by developing economies. The highest CAGRs recorded over the years 1991 to 2010 were by Cambodia (18.94%), Bangladesh (11.05%), Myanmar (8.57%), Laos (6.44%) and Vietnam (6.07%). In addition, China and India, the two countries with the largest consumption by volume also recorded healthy growth rates, with CAGR registered at 3.64% and 3.47% respectively over the period. High consumption rates in the region can be attributed to the high population, notably in India and China, as well as rapid economic growth leading to increased income levels and development in the food processing industries. As a whole, the population level of APAC and GCC has exhibited steady and positive, though declining growth rates over the years 1991 to 2009, groWing at a CAGR of 1.25%. As such, since consumption has grown at a higher rate than population, consumption level per capita is seen to be growing as well. This means that on average, each individual in APAC and GCC has been consuming an increasing amount of sugar per year over the
6. INDUSTRY OVERVIEW (Cont’d) period. APAC and GCC consumption per capita has grown at a CAGR of 2.06% from 12 kg per person in 1991 to 17 kg per person in 2009. Sugar Consumption and Sugar Consumption per Capita in Selected Countries (APAC and GCC), 1991-2010 -_..__._———-_.__…_._–_.__.._–_._—-_.__._.—_._._-_._-_._-_.__….__._-_.._._–_._–_.­70,000 _-‘7 (“‘)60,000 consuro __—–o U) Cft-GF. —-.A-……….-…… 20 i;l c:~ 50,000 … c:o….. • I ‘ ~ 3 g 40,000 ——-=:::–:::I…..~~!!!!!~~~———.ff_15 g” E I-g o +—–,-.—-.——,-..,..——,-,—–,—–,-..,..—-,-.,.—-,—-,,—-.—-.-.–.-,–+0 2.
~Consumption _Consumption per Capita Note: Population figures for 2010 are publicly unavailable as at the time ofpublication of this report Source: Extracted from the Independent Market Research report prepared by Frost &Sullivan In the context of APAC and GCC, Malaysia ranked 4th among the 29 selected countries, whereby the regional average sugar consumption per capita was 26 kg per person in 2009. Singapore topped the regional ranking in 2009 with 60 kg per person, followed by Australia (57 kg per person), New Zealand (54 kg per person), Malaysia (48 kg per person) and South Korea (45 kg per person). Of the five countries, Singapore and South Korea exhibited slight overall decline, with CAGRs recorded at 0.04% and 0.31 % respectively over the years 1991 to 2009. Australia, New Zealand and Malaysia meanwhile registered slight increases in sugar consumption per capita, with a CAGR of 0.72%, 0.83% and 1.60% respectively. Of the five regions, GCC recorded the highest CAGR for consumption over the period, growing from 635,000 tonnes in 1991 to 1.28 million tonnes in 2010 at a CAGR of 3.77%. South Asia, the largest consumers in the region by volume, also recorded high growth with a CAGR of 3.57% from 15.28 million tonnes in 1991 to 29.74 million tonnes in 2010. Consumption in ASEAN registered a CAGR of 3.40% over the period, growing from 6.51 million tonnes in 1991 to 12.23 million tonnes in 2010. In North Asia, consumption IMR on the Sugar Refining Industry in Malaysia 6. INDUSTRY OVERVIEW (Cont’d) increased from 12.08 million tonnes in 1991 to 19.15 million tonnes in 2010 at a CAGR of 2.46%. Australasia registered the lowest CAGR in the region with 1.93%, where consumption rose from 1.03 million tonnes in 1991 to 1.49 million tonnes in 2010. Import volume of refined sugar in APAC and GCC has generally been on an uptrend over the years 2000 to 2009, with the exception of ASEAN. Imports of refined sugar into ASEAN has declined from 914,000 tonnes in 2000 to 535,000 tonnes in 2009 at a CAGR of 5.77%, largely owing to the respective Governments of the majority of ASEAN nations’ intentions of protecting the local sugar industry in order to achieve self-sufficiency. For instance, the importation of refined sugar into Indonesia has declined at a CAGR of 17.46% from 562,595 tonnes in 2000 to 100,038 tonnes in 2009. Similarly, imports into Philippines have declined at a CAGR of 21.61 % from 180,682 tonnes in 2000 to 20,195 tonnes in 2009. Of the remaining regions, imports into South Asia have registered the highest CAGR of 27.37%, growing from 133,000 tonnes in 2000 to 1.17 million tonnes in 2009. Imports into South Asia were strongly driven by Bangladesh, while India and Pakistan import high amounts of refined sugar during instances of supply shortage. North Asia has also seen high growth, with imports rising from 85,000 tonnes in 2000 to 184,000 tonnes in 2009 and registering a CAGR of 8.95%. Imports of refined sugar into Australasia have seen an increase from 24,000 tonnes in 2000 to 46,000 tonnes in 2009 at a CAGR of 7.64%. Meanwhile GCC’s imports have risen at a CAGR of 4.81%, growing from 257,000 tonnes in 2000 to 393,000 tonnes in 2009. 1.11.1.3 Malaysia In Malaysia, the consumption of refined sugar has been on an uptrend over the years 1991 to 2010, growing at a CAGR of 4.08% over the period. Domestic consumption has grown by 113.58% from 663,000 tonnes in 1990 to 1.42 million tonnes in 2010. The increase in sugar consumption is attributed to rising GOP, along with growth in the food manufacturing and food processing industries. Domestic consumption is closely tied with the domestic production level of refined sugar, as the Government of Malaysia restricts the importation of refined sugar. The domestic consumption of refined sugar grew strongly from 1991 to 1997, growing by 57.85% from 663,000 tonnes in 1991 to 1.05 million tonnes in 1997. However, consumption declined by 9.61% to 947,000 tonnes in 1998 due to decreased production caused by the 1998 Asian financial crisis. The consumption of sugar in Malaysia recovered in 1999 but declined again in 2000 and 2001 caused by increased global market prices of raw sugar, which led to decreased production. Subsequently, domestic consumption displayed continued growth until 2008, before falling by 3.10% in 2009. The drop in consumption in 2009 was attributed to the fall in production of refined sugar that year, caused by the slowdown in the domestic economy brought about 6. INDUSTRY OVERVIEW (Coni’d) by the global financial crisis, along with the soaring global market prices of raw sugar. In 2009, Malaysia’s GDP contracted by 1.70%, and the overall manufacturing industry recorded a contraction of 9.40%. Consumption then recovered in 2010, increasing by 6.86% from 1.33 million tonnes in 2009 to 1.42 million tonnes, despite three instances of price increase by the Government that year. [The rest of this page is intentionally left blank] ICompany No.: 935722-K I 6. INDUSTRY OVERVIEW (Cont’d) Refined Sugar Consumption (Malaysia), 1991·2010 1,600 1,400 “iii’ 1,200 CIl l:
l:

00­0 ?-l: 0 ;; 800c. E ::J III l: 0 600(.) 400 200 o II
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan IMR on the Sugar Refining Industry in Malaysia 22 © Frost & Sullivan 2011 -78­6. INDUSTRY OVERVIEW (Cont’d) 1.11.2 Price Trend The price of sugar in Malaysia from 1991 to 2009 remained relatively stable despite the volatility of the global market price of raw sugar. The steady retail price of sugar has led to an increase in domestic consumption, most notably from 1998 to 2009 where consumption grew by 40.23% while retail prices remained steady between RM1AO to RM1A5 per kg. In line with the Tenth Malaysia Plan (10MP) where the Government has announced its intention to bring the retail price of refined sugar closer to market rates, the Government raised the ceiling price for refined sugar in 2010. The retail price of coarse refined white sugar was controlled at RM1A5 per kg from 13 September 2006 until 31 December 2009, and on 1 January 2010 the price was increased to RM1.65 per kg. This was subsequently followed by two more price increases in 2010, whereby the retail price of coarse sugar rose to RM1.90 in July and RM2.10 in December. On 10 May 2011, the Government increased the retail price of coarse sugar by RMO.20 to reach RM2.30 per kg. Sugar Consumption and Retail Price (Malaysia), 1991-2010 1,600
2.00 1.801,400 Ul 1.60Q)c: 1,200 AIc: 1AO III..0-!!!.0 1,000 1.200 “’00.,::..­-c;”c: 800 1.00 III0 :0:: AI0.80a. 600 3:E :::J -0.60 ;Benc: 400 -0 OAOu 200 0.20 O-t—-.—.–.——.—–.–..–.–.–r—,—,—-,–.—-.—,.-.,—,—.,-.-+ 0.00 ~#########~########~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~ “””-Domestic Consumption __Retail Price * The average price of sugar was used as a data point in 2010 Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan 1.11.3 Exports of Refined Sugar Malaysia’s major export markets for refined sugar are Indonesia, Singapore, Philippines, Australia and New Zealand. Malaysia also exports to other countries such as Pakistan, IMR on the Sugar Refining Industry in Malaysia 6. INDUSTRY OVERVIEW (Cont’d) Thailand, Hong Kong, Sri Lanka, Cambodia and Russia. Malaysia’s exports of refined sugar have increased at a CAGR of 0.12% over the years 2000 to 2010. Over the years 2000 to 2010, Indonesia was Malaysia’s largest export market, with the exception of 2009 when Indonesia was narrowly overtaken by Singapore. Between the years 2000 to 2006, exports to Indonesia constituted an average of 64.96% of Malaysia’s total exports of refined sugar. Exports to Indonesia started to decline in 2007, largely due to the rise of the local sugar industry in Indonesia, thereby decreasing the country’s dependency on imported refined sugar. Malaysia’s exports of refined sugar to Indonesia have declined at a CAGR of 11.12% over the years 2000 to 2010. Of the remaining four major export markets, Malaysia’s exports to Singapore and New Zealand have displayed the most steady patterns over the same period, declining at a CAGR of 0.22% and 0.48% respectively over the years 2000 to 2010. Exports to Australia have exhibited the highest growth, with CAGR recorded at 55.39% over the same period. Exports to Philippines meanwhile have also increased at a CAGR of 11.09% over the years 2000 to 2010. Malaysia’s exports to other countries have increased at a CAGR of 38.53%, whereby notably exports to Pakistan have increased at a CAGR of 39.40% from 357 tonnes in 2000 to 9,890 tonnes in 2010. Major Exports of Refined Sugar (Malaysia), 2000-2010
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 ~Total Exports …….Indonesia _Singapore ……Philippines “‘*-Australia ~New Zealand Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan (The rest of this page is intentionally left blank] IMR on the Sugar Refining Industry in Malaysia 6. INDUSTRY OVERVIEW (Cont’d) 1.11.4 Market Drivers Growth of Food and Beverage Manufacturing Industry Sugar is a versatile food ingredient, and has a wide array of uses in food and drinks. Sugar is mainly used as a sweetener to increase palatability, but is also used as a bulking qgent and as a preservative in food. As such, sugar is used as an ingredient in the manufacturing and processing of a variety of food and drinks, driving the sugar refining industry forward. The sales values of various food manufacturing industries have exhibited high growth from 2007 to 2010. The total sales value of the manufacturing of soft drinks in Malaysia has grown from RM855.45 million in 2007 to RM1.59 billion in 2010, registering a strong 85.52% increase over a span of four years. Over the same period, the manufacturing of biscuits and cookies has grown by 31.58%, the manufacturing of bread and other bakery products has grown by 16.76% and the manufacturing of chocolate products and sugar confectionery grew by 13.33%. Molasses which is used in the manufacturing of animal feed, has grown by 18.69% from 2007 to 2010. The sales value of the manufacturing of sugar has grown by 38.66% over the same period, from RM2.23 billion in 2007 to RM3.09 billion in 2010. Sales Value of Selected Manufactured Food and Beverage Products (Ex-factory) (Malaysia), 2007-2010
680,954 569,701 526,953 771,745 13.33% i confection~ !……_.__• 0. _.__._._.~._._.__J.___• • •••..••••_………. ._ __•
Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan The production volume of carbonated and non-carbonated sweet beverages has also grown strongly over the years 2007 to 2010. Total production volume of non-carbonated sweet beverages has grown from 1.77 billion Iitres in 2007 to 2.53 billion Iitres in 2010, registering growth of 42.96%. The production of carbonated sweet beverages grew by 22.08% from 366.35 million litres in 2007 to 447.23 million litres in 2010. The production of sweetened condensed milk has also exhibited strong growth, with production volume recording 37.36% growth from 170,136 tonnes in 2007 to 233,700 tonnes in 2010. IMR on the Sugar Refining Industry in Malaysia 6. INDUSTRY OVERVIEW (Cont’d) Production of Selected Beverage Products (Malaysia), 2007-2010
Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan Limited Product Substitution Sugar is a staple food item and is considered a necessity in Malaysia, both in the food and beverage industry as well as for household consumption. Sugar is a natural source of energy for our body and possesses many qualities that are not easily found in other food products. Sugar substitutes generally only mimic the sweet taste of sugar. Sugar substitutes have been available in the domestic market for many years. Aspartame, an artificial sweetener and stevia, a natural sweetener are examples of sugar substitutes used by households in Malaysia, while high fructose corn syrup is used for industrial consumption. However these sugar substitutes are not as widely available as sugar itself, and their prices are not controlled by the Government. Hence, the limited amount of product substitution available in Malaysia serves as a driver for the industry. Population Growth Malaysia’s population has grown at a CAGR of 2.25% over the years 1990 to 2010. The growth in population supports the demand for sugar in Malaysia, which is consumed by all age groups. In addition, the population growth in APAC was registered at a CAGR of 1.27% over the years 1990 to 2009, serving as a driver for sugar consumption in the region. 1.11.5 Market Restraints Increase in Health Awareness Excessive consumption of sugar has been known to cause adverse health effects, such as obesity, diabetes, high blood pressure and tooth decay. According to Malaysia Diet Guidelines, sugar intake should not exceed more than 50 grams a day. In 2010, Malaysia’s sugar consumption per capita was recorded at 50 kg per person, translating to an average of 137 grams a day, 2.74 times the recommended maximum daily intake. Hence, the IMR on the Sugar Refining Industry in Malaysia 6. INDUSTRY OVERVIEW (Cont’d) Ministry of Health Malaysia launched a “Less Sugar Campaign” in 2010 to curb sugar intake by Malaysians. In addition, many beverages sold in the local market have a “less sugar” variety, thereby discouraging the public from consuming excessive amounts of sugar. These drives, and the growing health consciousness of consumers, serve as a strong restraint to the development of the industry. Possibility of Price Increase Due to Gradual Reduction of Subsidy The volatility of the global market prices of raw sugar in 2009 led the Government to provide sugar subsidies in a move to keep the retail price of refined sugar low for consumers. Sugar subsidies were provided at RMO.60 per kg in 2009, and increased to RM 0.80 in the early part of 2010. However, the Government slowly reduced the sugar subsidies throughout the remaining part of 2010, with subsidies decreasing to RMO.70 per kg from 1 June to 15 July, RMOA9 per kg from 16 July to 3 December and RMO.29 per kg from 4 December to 31 December. The Government increased the subsidy rate on 1 January 2011 to RMOAO per kg, and subsequently reduced to RMO.20 per kg on 10 May 2011. Sugar Subsidy Amount (Malaysia), 2009-2011
Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan The gradual decline in the subsidy has translated to higher retail prices for fine and coarse sugar in 2010 onwards compared to 2006 to 2009, when retail prices remained steady at RM1A5 per kg. In 201 0, the retail price for coarse sugar was increased to RM1.65 per kg in January, then to RM1.90 per kg in July, and to RM2.10 per kg in December. Sugar price rose for the first time in 2011 on 10 May 2011, where the retail price of coarse sugar increased by RMO.20 to RM2.30 per kg. Hence the price increases may serve as a restraint to the domestic demand for sugar. The price increases in 2010 and 2011 were in line with the 10MP, in which the Government laid out its intentions to rationalise the subsidies and price controls for sugar. 6. INDUSTRY OVERVIEW (Cont’d) 1.11.6 Outlook and Forecast of Sugar Consumption Sugar consumption is a key driver for the sugar refining industry. Frost & Sullivan estimates that consumption of refined sugar in Malaysia will grow at a healthy pace from 1.50 million tonnes In 2011 to 1.84 million tonnes in 2016, registering a CAGR of 4.19%. Domestic sugar consumption is expected to exhibit positive growth as a result of increased demand from both industrial as well as household consumers. Growth in the food manufacturing and processing industry, population growth and limited product substitution are expected to drive sugar consumption, and consequently the sugar refining industry forward. Projected Sugar Consumption (Malaysia), 2011 E-2016F 2,000 1,800
-III CIl 1,600 I:
I: 01,400

-0 0 1,200E I: 1,0000.. Co 800E ::;, III I: 600 0 0 400 200 0

2011E 2012F 2013F 2014F 2015F 2016F Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan [The rest of this page is intentionally left blank] 6. INDUSTRY OVERVIEW (Cont’d) 1.12 SUPPLY CONDITIONS AND DEPENDENCIES 1.12.1 Raw Sugar Production and Growth Trends 1.12.1.1 Global Global production of raw sugar has proven to be volatile over the past two decades, but nevertheless growing at a CAGR of 1.56% over the years 1991 to 2010. Global production of raw sugar from both sugar cane and sugar beet was recorded at 114.38 million tonnes in 1991, and has grown by 34.16% to 153.46 million tonnes in 2010. Global production of raw sugar is strongly driven by Brazil, India, China, United States and Thailand, along with the members of the EU. In 2010, these sugar producing nations collectively accounted for 64.78% of total production of raw sugar worldwide. Brazil, India and Thailand produce cane sugar, while China, United States and the EU produce both beet and cane sugar. This is because cane sugar only grows in tropical climate, while conversely beet sugar thrives in temperate climate. Tropical sugar beet has yet to be grown in a wide commercial scale. Over the past 20 years, global production of raw sugar has proven to be unstable, with production volume varying from year to year as a result of vulnerability to volatile market prices, weather conditions, natural disasters, fertility of soil, pest attack and diseases, SWitching patterns of farmers to other crops, as well as stock count from previous years. All these factors account for the unpredictable trend of historical raw sugar production. Production figures reached its highest point during the period in 2007 at 164.17 million tonnes, due to rising market prices in 2006 caused by increasing crude oil prices and a deficit in raw sugar supply. This led producers to increase output in 2007, but global production volume declined again in 2008 and 2009 due to rising prices of other commodities, leading producers to switch to more profitable crops. Raw sugar production recovered in 2010, mainly attributed to generally favourable weather conditions and rising sugar prices, as production volume reached 153.46 million tonnes that year. [The rest of this page is intentionally left blank] I Company No.: 935722-K I 6. INDUSTRY OVERVIEW (Cont’d) Production of Raw Sugar (Global), 1991·2010
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan IMR on the Sugar Refining Industry in Malaysia 30 © Frost & Sullivan 2011 -86­6. INDUSTRY OVERVIEW (Cont’d) 1.12.1.2 Malaysia In Malaysia, raw sugar is solely produced on a commercial scale in KGFP’s plantation in Chuping, Perlis, whereby all of the raw sugar milled will be used as input in the sugar refinery in KGFP. Locally produced raw sugar accounts for 1% of the total amount of raw sugar used as input in sugar refineries in Malaysia. Domestic production of raw sugar has seen a decline over the years 1991 to 2009, falling at a CAGR of 5.82%. In 1991, Malaysia produced 50,678 tonnes of raw sugar, and this has since declined to 16,218 tonnes in 2010. In Malaysia, the annual sugar cane harvesting period typically runs from December to April. Sugar cane crops are harvested each year, for an average five year cycle whereby the yield decreases with every subsequent harvest. After five years, new crops are planted, and the cycle begins again. As there is only one commercial sugar cane plantation in Malaysia, the domestic production of raw sugar will be determined primarily by the harvesting cycle of the Chuping plantation. The decreasing production level of domestic raw sugar is also attributed to decreasing acreage of land used for sugar cane cultivation. According to DOS, the sugar cane plantation area has shrunk at a CAGR of 7.93%, decreasing from 22,500 hectares in 1991 to 4,678 hectares in 2010. The sugar cane plantation area remained relatively unchanged from 1991 to 2001, but began decreasing rapidly from 2002 onwards. Sugar cane plantation area has been decreasing since 1991 as a result of a shift to higher value crops, namely oil palm and rubber. Sugar Cane Plantation Area (Malaysia), 1991-2010
CAGR 1991-2010 =(7.93)% Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan

ICompany No.: 935722-K I 6. INDUSTRY OVERVIEW (Cont’d) Domestic Production of Raw Sugar (Malaysia), 1991·2010 80,000 ,,—————————————­70,000 +–=—-== i 60,000 +1—-1r:: r:: o ~ GI 50,000E ::s g r:: 40,000o t;::s “C ~ 30,000a. 20,000 10,000 o
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan IMR on the Sugar Refining Industry in Malaysia 32 © Frost & Sullivan 2011 -88­6. INDUSTRY OVERVIEW (Cont’d) 1.12.2 Imports of Raw Sugar Malaysia is heavily dependent on imports of raw sugar for use by its sugar refineries, whereby 99% of raw sugar utilised is imported from abroad. Over the years 2000 to 2010, the majority of raw sugar imported into Malaysia was sourced from Brazil, Australia, Guatemala, Thailand and South Africa. Malaysia also imported raw sugar from Argentina, China, the United States, Honduras and Paraguay during this period. Malaysia’s imports of raw sugar increased at a CAGR of 3.67% over the years 2000 to 2010. Since the 1970s, the majority of Malaysia’s imports of raw sugar have been made through LTCs, whereby
approximately 70% of total raw sugar imported were negotiated in advance by MITI and sugar producers. In 2010, Malaysia imported a total 1.70 billion tonnes of raw sugar.
Prior to 2006, Australia served as Malaysia’s largest source of raw sugar before being replaced by Brazil. Australia’s imports of raw sugar into Malaysia have declined at a CAGR of 3.63% over the years 2000 to 2010, while Brazil’s imports into Malaysia over the same period have increased at a CAGR of 27.61 %. Imports from Guatemala remained relatively stable over the years 2001 to 2009, growing at a CAGR of 13.80% before declining in 2010, falling at a CAGR of 22.76% over the period. Imports from Thailand declined at a CAGR of 5.37% over the same period, where imports in 2000 were recorded at 204.85 million tonnes and imports in 2010 were registered at 117.95 million tonnes. Imports of raw sugar from South Africa also declined, at a CAGR of 8.67% over the years 2000 to 2005, and no import data have been available since then. Major Import Sources of Raw Sugar (Malaysia), 2000-2010 1,800,000 1,600,000 Ii) 1,400,000 QI s::::
5 1,200,000 … g 1,000,000 EoE 800,000 ::J “0 600,000> ~ Co ~
~Totallmports -+-Brazil _Australia -*-Thailand ……Guatemala -.-South Africa Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan IMR on the Sugar Refining Industry in Malaysia 6. INDUSTRY OVERVIEW (Cont’d) 1.12.3 Factors Affecting Supply Weather Conditions The productivity level of sugar cane and the quality of its juice are heavily influenced by prevailing weather conditions. Sugar cane thrives in tropical parts of the world, whereby temperature, light and availability of moisture determine the plant’s growth, yield and quality. Weather conditions that promote sugar cane growth are low humidity, bright sunshine hours, cool nights and little rainfall during the ripening period. • Temperature: For sprouting of stem cuttings, the optimal temperature is between 32°C and 38°C. Temperatures above 38°C reduce the rate of photosynthesis. For ripening, lower temperatures of 12°C to 14°C are preferred, as it enriches the sucrose contained in the sugar cane.
• Humidity: During the growing period, high humidity of 80% to 85% promotes cane elongation, whereas moderate humidity of 45% to 65% along with low water supply is preferable during the ripening stage.
• Rainfall: Plenty of rainfall during the growing period stimulates cane elongation, while drier conditions are favourable during the ripening and harvesting period.
• Sunlight: High sunlight intensity and long exposure of 10 to 14 hours a day promotes plant growth.

Ideal Conditions for Cane Cultivation Period Temperature Humidity Rainfall Sunlight
Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan Historically, instances of the absence of favourable weather conditions have led to low production of raw sugar. Recent examples include the drought in Brazil in 2010, and the flood brought about by heavy rainfall in Australia in end-2010. In addition, natural disasters may also affect sugar supply, such as Hurricane Katrina and Rita in 2005 which caused damages to refineries in New Orleans, along with Hurricane Michelle which damaged sugar crops in Cuba in 2001, partly attributing to an increase in sugar prices in 2001 . 6. INDUSTRY OVERVIEW (Cont’d) Crop Switching Raw sugar supply is also susceptible to switching patterns of famers away from cultivating sugar. Crop switching is highly influenced by market prices of sugar as well as other commodities. If prices of other commodities are higher than that of sugar, farmers are likely to switch to growing the more profitable crop. Crop SWitching occurred in India in 2008 where famers switched to grains and oilseeds, partly attributing to a 6.99% decline in domestic raw sugar production that year. Apart from switching to other crops, producers may also switch to producing other sugar products instead of raw sugar. In Brazil, where both raw sugar and ethanol are produced from sugar cane, producers may opt to deviate to producing ethanol when ethanol prices are on the rise. Similarly in India, sugar cane is used to produce traditional sweeteners khandsari and gur in addition to producing raw sugar. Hence, an increase in demand and price of alternative sweeteners, which are not price controlled by the Government of India, will see farmers diverting portions of their sugar cane crop to producing khandsari and gur. Availability of Equipment and Machinery Sugar refining is a highly automated process that utilises a large amount of equipment and machinery. Most of the related equipment, such as filters, carbonators, vacuum pans, centrifuges, driers and boilers are typically sourced from abroad from countries such as Japan and Germany. Hence, the availability of such equipment, along with reliable after­sales services, is viewed as a key supply condition, and is able to affect the sugar refining process and delivery time. Stock Count from Previous Year(s) In many instances, the amount of raw sugar to be produced in a year is determined by the remaining stock count from previous year(s). Provided consumption patterns remain stable, raw sugar surplus will typically lead to decreased output, while a deficit in supply will lead farmers to increase acreage and yield to meet consumers’ demand levels. A surplus or deficit in end-of-year stock levels can also put upward or downward pressure on market prices, following which the market will then react by decreasing or increasing output in order to stabilise the prices. Pest Attack and Crop Disease Sugar cane crops are susceptible to a variety of pest attacks as well as diseases. Several examples of pests that attack sugar cane crops include early shoot borer, internode borer, top borer, scale insect, pyrilla, termites and whitefly. These pests favour different types of 6. INDUSTRY OVERVIEW (Cont’d) climate conditions and attack at various growth stages of the sugar cane plant. Red rot, smut, pineapple disease, wilt, ratoon stunting disease, greasy shoot disease, leaf scald and yellow leaf spot are several types of fungal and bacterial diseases that typically spread to sugar cane crops. Crop diseases cause symptoms such as drying of leaves and shoots, discolouration, presence of patches and lesions, and stunted growth. These pest attacks and diseases cause considerable loss in yield and reduced sucrose content, thereby severely affecting the production of raw sugar. 1.13 PROSPECTS AND OUTLOOK OF THE SUGAR REFINING INDUSTRY 1.13.1 Prospects and Outlook in Malaysia Frost & Sullivan estimates that sugar consumption in Malaysia will increase from 1.50 million tonnes in 2011 to 1.84 million tonnes in 2016 at a CAGR of 4.19%. This positive growth is expected to be driven by growth in the food manufacturing and processing industry, population growth as well as limited product substitution. Sugar is regarded as a staple food item, and its wide array of uses in a variety of industries ensures its continued presence in the local market. The Government of Malaysia regulates the local sugar industry to ensure food stability and security of supply. Price controls are set in place and subsidies are dispersed in order to protect the consumers from the unpredictable fluctuations in the global sugar market. In addition, there are only four sugar refiners producing sugar for the consumption of the entire nation, as the importation of refined sugar into Malaysia is restricted by the Government. By keeping the sugar industry limited to a handful of players the Government is allowed better control and ease of monitoring. Under the 10MP, the Government of Malaysia has announced its intention to gradually rationalise the subsidies and price controls for sugar. By removing market distortions, sugar prices can then be allowed to float closer to market rates, thereby preventing wastage and overconsumption, and encouraging efficient allocation of resources. The Government has since embarked on its plan, where since 2010 the retail price of coarse and fine refined white sugar have been increased four times to reflect current global market prices. Nevertheless, the Government has recognised the fact that sugar is considered a staple food item, and is widely considered a necessity in the day-to-day diet of a typical Malaysian. As such, under the 10MP the Government intends to provide assistance to households considered to be at the bottom 40% based on income level to ease the forthcoming burden of eventual price increases. Non-governmental organisations (NGOs), charities and corporations will be encouraged to participate in aid and corporate social responsibility programmes targeted at providing food and financial assistance to the less fortunate. The 6. INDUSTRY OVERVIEW (Cont’d) Department of Social Welfare provides a database to identify the recipients and also to monitor the effectiveness of these programmes. According to the 10MP, the Government intends to gradually remove price controls to reflect market prices, which has already begun with sugar. Key players in the sugar refining industry are likely to transfer this additional cost or savings to consumers. Individual household and industrial consumers will have the option of purchasing sugar from the refinery offering them the best rate or lowest rate, exerting pressure on all players in the industry to operate lean and effective refineries in order to keep operating costs low and remain commercially viable.
1.13.2 Potential Export Markets for Refined Sugar Growth rates for sugar consumption in the ASEAN and GCC regions have generally been high over the years 2000 to 2010, growing at a CAGR of 2.90% and 4.85% respectively. Hence, this positive outlook presents opportunities for local players to expand their export activities. Currently, locally refined sugar is exported to countries such as Singapore, Indonesia, New Zealand, Australia, Philippines and Pakistan. Based on publicly available information, Frost & Sullivan notes that within APAC and GCC, Hong Kong and Singapore are the only countries that have Iiberalised sugar industries in terms of price control and trade restrictions. ASEAN Sugar consumption in ASEAN has grown from 9.24 million tonnes in 2000 to 12.30 million tonnes in 2010 at a CAGR of 2.90%. Imports of refined sugar into ASEAN countries (With the exception of Brunei, Laos and Myanmar) have decreased from 914,000 tonnes to 535,000 tonnes at a CAGR of 5.77% over the years 2000 to 2009 as 2010 import data is not yet publicly available for most ASEAN countries. The import volume of refined sugar into the respective ASEAN countries serves as an indicator as to the potential of these countries as export markets. The decrease in import volume is largely attributed to the intentions of the respective Governments of selected ASEAN nations to protect the local sugar industry to achieve self-sufficiency. Summary of Consumption and Imports of Refined Sugar (ASEAN), 2000·2010

 

6. INDUSTRY OVERVIEW (Cont’d) .—–:-__.. LJ:.77%)* Note: Import data for Brunei, Laos and Myanmar are not publicly available as at the time of publication of this report … CAGR 2000-2009 Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan At RM2.30 per kg, the price of coarse sugar in Malaysia is relatively low in the ASEAN region, with the closest being Thailand at RM2.36 (THB23.60) per kg. In Brunei, the price of sugar is controlled by the Government and has been fixed at RM3.00 (BND1.25) per kg. The price of sugar is not controlled in Philippines, but the Sugar Regulatory Administration (SRA) publishes a suggested retail price, which stood at RM4.20 (PHP60.00) per kg as of 10 May 2011. In Indonesia, Singapore and Vietnam, the price of sugar floats according to market rates. As of March 2011, sugar prices in Indonesia hovered around RM3.91 (IDR11,250) per kg. According to Department of Statistics Singapore, the average price of sugar in January 2011 was RM4.06 (SGD1.69) per kg. In Vietnam, unsubsidised sugar ranged between RM3.28 and RM3.50 (VND22,500 to VND24,000) per kg, while subsidised sugar was priced at RM2.63 (VND18,000) per kg. Comparison in the Retail Price of Refined Sugar (ASEAN), 2011 Retail Price (RM/kg)Country “”>~”:’;’/ .;”” .-‘ “,’ .”.. ……..•..'(.;:;·gM~~OO{~NI:>1.~~t……..•.:’;,/ ..••.
…….• ‘,·.,’. .~N12.36.:·(~8~2.r~~2}:.;~·.·,····· .. ·’·~M~.·g~~2~~~~£~~~~~~~~~%~~~i·~:~~~t,e()0) 6. INDUSTRY OVERVIEW (Cont’d) Note: Information for Cambodia, Laos, and Myanmar is publicly unavailable as at the time of publication of this report Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan In Brunei, the price of sugar is regulated by the Department of Economic Planning and Development, whereby the retail price is set at RM3.00 (BND1.25) per kg. Since 2004, import tariffs for refined sugar from ASEAN countries have been reduced to 0% as per the ASEAN Common Effective Preferential Tariff (CEPT) scheme in accordance to the ASEAN Free Trade Area (AFTA) agreement. An import license issued by the Information Technology and State Store Department Brunei is required for the importation of sugar. The sugar refining industry in Cambodia has been revived, following a collapse caused by the civil war in the 1970s. Foreign investments from France, Thailand and Taiwan have helped rebuild the local sugar industry with the aims of exporting to Europe, whereby imports of any products, apart from arms and ammunition, from nations under the Least Developed Countries (LDCs) category are tariff-free under the ‘Everything But Arms’ trade initiative. The importation of sugar is regulated by the Government of Indonesia. Only processors using the sugar as raw material for input in their production process are allowed to import raw and refined sugar. Indonesia’s sources of refined sugar are Thailand, Malaysia, Singapore and South Korea. The Government of Indonesia intends to achieve self­sufficiency in sugar in the near future, whereby the total installed capacity of local refineries is being increased. Local food and beverage manufacturing and processing companies are encouraged to consume domestic refined sugar. The domestic retail price of sugar is not controlled by the Government, and fluctuates to reflect market conditions. As of March 2011, sugar prices have hovered around RM3.91 (IDR11,250) per kg. Similar to Cambodia, Laos is listed under the category of LDCs by the UN, and hence benefits from duty-free exports of sugar into Europe. As such, a large proportion of sugar produced in Laos is exported to Europe while the remainder is utilised for domestic consumption. Hence, Laos still requires imports of sugar to meet domestic demand. However, information on imports of refined sugar into Laos is currently unavailable. According to the Ministry of Agriculture and Irrigation, the importation of refined sugar into Myanmar is presently prohibited. However, sugar imports will be allowed by 2015 when the AFTA agreement comes into effect and Myanmar will have to lower import tariffs to less than 5%. The price of sugar in Myanmar is allowed to float according to domestic supply and demand. As a net exporter of sugar, the Government of Philippines has focused on the domestic sugar industry for the nation’s sugar supply, and imports of refined sugar will only occur if there is a shortage in supply. Philippines has listed raw and refined sugar under the highly sensitive list of the ASEAN CEPT scheme to delay the reduction of tariffs to 5% in 6. INDUSTRY OVERVIEW (Cont’d) accordance to AFTA agreement. Tariffs will remain at 38% in 2010 to 2011, and gradually be reduced to 28% in 2012, 18% in 2013, 10% in 2014 and 5% in 2015. However in 2010 the Government introduced a zero-tariff policy on imported refined sugar in order to alleviate the shortfall in domestic supply caused by unfavourable weather conditions, effective until 31 December 2010. The price of sugar is not controlled in Philippines, but the SRA publishes a suggested retail price as a recommendation, whereby supermarkets and grocery stores are monitored by the Regulation Department of the SRA. As of 10 May 2011, the suggested retail price for refined sugar was set at RM4.20 (PHP60.00) per kg. Sugar is not a controlled item in Singapore, whereby there are no import or export barriers enforced by the Government. The domestic retail price of sugar is also not controlled and is allowed to float to reflect market rates. According to the Department of Statistics Singapore, the average price of sugar in January 2011 was recorded at RM4.06 (SGD1.69) per kg. There are no trade barriers for sugar in Thailand, but the Office of the Cane and Sugar Board regulates the amount of sugar utilised for domestic consumption. The Office of the Cane and Sugar Board has estimated an allocation of 2.8 million tonnes from the nation’s total sugar output for domestic consumption in 2011, which will be supplemented by imports should there be a shortfall in the initial estimation. The Government provides subsidies to sugar manufacturers for sugar packaging activities. Sugar prices are regulated by the Ministry of Commerce, and have been set at RM2.36 (THB23.60) per kg as of March 2011. Effective 4 April 2011, The Ministry of International Trade Vietnam will reduce the import tariff of refined sugar from 40% to 15%. Domestic retail prices of unsubsidised sugar have hovered between RM3.28 to RM3.50 (VND22,500 to VND24,000) per kg, while subsidised sugar is priced at RM2.63 (VND18,000) per kg. The Ministry of International Trade Vietnam has also announced an import quota of 250,000 tonnes of sugar for 2011. The measures were introduced to stabilise the domestic prices of sugar, which are not controlled by the Government. [The rest of this page is intentionally left blank] I Company No.: 935722-K I 6. INDUSTRY OVERVIEW (Cont’d) Summary of Selected Regulatory Initiatives (ASEAN), 2011 ~ ImportCountry DescriptionRestrictions~
Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan IMR on the Sugar Refining Industry in Malaysia 41 © Frost & Sullivan 2011 -97 ­I Company No.: 935722-K I 6. INDUSTRY OVERVIEW (Cont’d) Summary of Consumption of Refined Sugar (ASEAN), 2000·2010 I0.00% i 7.42% f ——•-…L–.__..-L-. .
Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan [The rest of this page is intentionally left blank] IMR on the Sugar Refining Industry in Malaysia 42 © Frost & Sullivan 2011 -98­ICompany No.: 935722-K I 6. INDUSTRY OVERVIEW (Cont’d) Summary of Import Volume of Refined Sugar and as a Percentage of Consumption (ASEAN), 2000-2009
Note: The value ‘0’ denotes import volumes of less than 1,000 tonnes * CAGR 2000-2008 ** CAGR 2002·2009 *-Import data for Brunei, Laos, Malaysia and Myanmar are not publicly available as at the time ofpublication of this report **** In 2010, import data for Indonesia and Thailand are 594,000 tonnes and 11,000 tonnes respectively Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan IMR on the Sugar Refining Industry in Malaysia 43 © Frost & Sullivan 2011 -99­6. INDUSTRY OVERVIEW (Cont’d) In GCC, the consumption of refined sugar has displayed strong growth over the years 2000 to 2010, growing from 799,000 tonnes in 2000 to 1.28 million tonnes in 2010 at a CAGR of 4.85%. Imports of refined sugar into the region grew at a CAGR of 4.81 % from 2000 to 2009, whereby initially imports grew steadily from 257,000 tonnes in 2000 to 968,000 tonnes in 2008, before declining to 393,000 tonnes in 2009 due to an increase in regional capacity. GCC is a net importer of sugar and on average, imports have constituted 43.81% of total consumption in the region over the years 2000 to 2009. In 2010, imports of refined sugar into Bahrain and Oman were 53,974 tonnes and 99,610 tonnes respectively, while import data for other countries are not yet publicly available. The sugar refining industry in GCC is beginning to expand since the establishment of AI Khaleej Sugar Co. in Dubai, United Arab Emirates, the first sugar refinery in the region. The refinery was established in 1995. and currently exports refined sugar to other countries in the Middle East, Africa and Asia. The refinery has a daily production capacity of 2,400 tonnes. Other refineries in GCC include the United Sugar Company refinery in Jeddah, Saudi Arabia, and the Arabian Sugar Company in Bahrain which is currently under construction and project completion expected in the last quarter of 2011. The AI Khaleej Sugar Co. refinery and the United Sugar Company refinery presently serve both the domestic and regional markets. Consumption and Imports of Refined Sugar (GCC), 2000-2010
Note: 2010 import data for Kuwait, Qatar, Saudi Arabia and United Arab Emirates are not publicly available as at the time ofpublication of this report * CAGR 2000-2009 Source: Extracted from the Independent Market Research report prepared by Frost & Sullivan

 

 

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