Background on Central Sugar Refineries Sdn. Bhd.

The origin of Central Sugars Refinery Sdn. Bhd. (CSR) goes back to 1965, when it was known as United Malay State Sugar Industries, began refining and packaging raw sugars situated in Shah Alam. Central Sugars Refinery has improved on its raw sugar melting capacity from initially 100 over metric tonnes to 2,000 metric tonnes per day. In 2010 itself, Central Sugars Refinery outstripped the RM1 billion mark in their sales revenue, where 60% contributed by retail and wholesale customers while the remaining 40% from industrial users (Central Sugars Refinery, 2008) and today, Central Sugars Refinery has not only become one of the prominent producers of quality refined sugar, but also the largest exporter of refined sugar to China, Hong Kong, New Zealand and so forth (Federation of Malaysian Manufacturers, 2013).

Sugar is commonly used by Malaysian in almost every cuisine that can be found in this country and it is perceived as a necessity by the local consumers. Hence, the demand curve for sugar is inelastic. Diagram 1(a) shows an inelastic demand curve and when the price increases from P₁ to P₂, quantity demanded decreases from Q₁ to Q₂. Note that the size of change in price is larger than the change in quantity demanded which means for inelastic demand, price changes proportionately more than the quantity demanded (Sloman, Wride, Garratt, 2012).  

Subsidy on Sugar

    Subsidies had been imposed on sugar price by the Malaysian government since 2009 due to a hike in global raw sugar prices (CIMB, 2013). It is defined as the payment made by the government to producers which help to not only lessen the burden for local consumers, but also decreasing producers’ costs or provide incentives to encourage production. On 29 September 2012, the subsidy imposed by Malaysian government in Budget 2013 is RM0.34 per kilogramme of sugar (CIMB, 2013). 

Looking at Diagram 2(a), it illustrates that when there is no subsidy, the demand curve, D intersects with the supply curve, S determined the equilibrium price at P₀ and equilibrium quantity of sugar is at Q_0. When the subsidy of RM0.34 was introduced by government, first, it shifts the supply curve, S to S+Subsidy. Next, it lowers the price of sugar to P₁ and increases the quantity at Q₁ (Parkin,2014) .

Subsidy results in inefficient overproduction. At the new equilibrium quantity with subsidy, marginal social benefit reduced to the same level as the market price. Hence, Marginal Social Cost, MSC increased and it exceeds Marginal Social Benefit, MSB. This indicates that Central Sugars Refinery willing to produce more than the number of consumers willing and able to purchase. This then leads to inefficient overproduction of sugar. Looking at the Diagram 2(a) too, we can see that the gap between MSC and MSB indicates the amount of subsidy paid by government and it is absorbed by both consumer and producer. The yellow shaded area indicates the subsidy that is absorbed by consumer while the blue shaded area is received by producer (Parkins, 2014).

Domestic Trade and Consumer Affairs ,Datuk Hassan Malek

Domestic Trade and Consumer Affairs, Datuk Hasan Malek hinted that subsidy for sugar may be slash down, which will be announced in Budget 2014 on 25 October 2013. The reason behind of preparing this budget scheme is to help boost the nation’s economy, specifically to reduce the fiscal deficit (The Malaysian Insider, 2013). Back to the price of sugar, it will increase when subsidy is cut down. This will result in a decline in quantity produced as well. Reason because the incentives received from government had been reduced, hence, cost of production from Central Sugars Refinery increase. 

Price Ceiling

Price Ceiling had been imposed by the government on the price of sugar, particularly on coarse and fine granulated refined sugar (CIMB, 2013). It is defined as the maximum price a seller can charge for a product and it makes it illegal to set higher than that. To apply to Central Sugars Refinery, price ceiling is set below the equilibrium price to help consumers to purchase sugars that they could not afford at the equilibrium price (Parkins, 2014).

During festive season such as Hari Raya, to keep the sugar price down, Malaysian government imposes a price ceiling of RM2.50 (CIMB, 2013). Based on Diagram 3(a), the price ceiling of RM2.50 results in an inefficient underproduction of sugar. The Marginal Social Benefit (MSB) exceeds the Marginal Social Cost (MSC), which means consumers are willing and able to buy more than the amount that Central Sugars Refinery is able and willing to produce. Price ceiling then leads to shortages as it is no longer in equilibrium. From Diagram 3(a), it is illustrated that the Quantity Demanded for sugar, QD is higher than Quantity Supplied, QS. According to the Law of Supply, when the price decrease, Quantity Supplied will decrease, moving away from equilibrium and downwards along the supply curve. On the other hand, based on Law of Demand, when the price decreases, Quantity Demanded will increase, moving away from equilibrium and downwards along the demand curve (Sloman, Wride, Garratt, 2012). This then creates a gap between QD and QS, which is the shortages of sugar.

Looking back at Diagram 3(a), before price ceiling is imposed, consumer surplus consist of the area ABC and producer surplus is the area of DEF. After price ceiling is imposed, consumer surplus can be seen as the trapezium ABD as the price of sugar decrease. However, consumer surplus shrink to area A only because B and D might be the potential loss of purchasing sugar. To illustrate, price ceiling for sugar is imposed during festive season and it creates shortage where sugar is fast-selling, so consumers will have to spend time and maybe incur some cost to buy sugar. Producer surplus shrinks to area F and a deadweight loss occur as a result of price ceiling.

       To conclude, price ceiling is enforced by the government to prevent suppliers from setting a price outrageously high simply because they can. It serves as a method that is beneficial to the consumers where they can keep their cost of living low. However, it has its downside, where it discourages suppliers to produce more. Since the the price is regulated, to earn enough profit, suppliers will have to reduce their total cost which can affect the quality of the product. Furthermore, it creates a potential loss for both parties and results in a social loss, which is the deadweight loss. 

Market Structure

Oligopoly occurs when there are only a few firms that produce either homogeneous product or differentiated product (Parkins, 2014). These oligopolist share a large proportion of this industry. In sugar refinery industry, Central Sugars Refinery actually operates in a duopoly market structure which means an oligopoly market with two firms (Maybank IB, 2012). Central Sugars Refinery is one of the subsidiaries wholly owned by Tradewinds (M) Berhad and the other subsidiary is Gula Padang Terap (Tradewinds (M) Berhad, 2009).

Their competitor is Malayan Sugar Manufacturing Co. Bhd. and together they form a duopoly (Maybank IB, 2012). The similarity between these two firms is that they do not depend much on advertising their product, since they are producing the same product. 

However, Central Sugars Refinery having their striking red logo of “CSR”, it makes the packaging stand out compare to the competitor (Central Sugars Refinery, 2008). 

Barriers to entry

It is very hard, not entirely impossible, to enter into a duopoly market structure. In duopoly, Central Sugar Refinery enjoys the “sweet” economies of scale where the increase in scale production leads to lower cost per unit of output. Central Sugars Refinery uses state-of-the-art machines to help increase their efficiency in producing different high quality of sugar ranging from general grade sugar to industrial-used liquid sugar (Central Sugars Refinery, 2008). To produce a packet of sugar, different types of machines undergo multi-stage refining processes encompass 11 steps and requires specialized workers to oversee the operations. At the end of the day, Central Sugar Refinery managed to produce up to 2,000 metric tonnes of sugar per day (Central Sugars Refinery, 2008). This proved that Central

Forklift carrying bulk bag

Sugars Refinery spend less cost by utilizing technology and specialized workers, able to produce large quantity of output which then explain that they experience economies of scale. They also used large bulk bags instead of stacking up and arrange on the wooden pallet to deliver sugars to wholesalers, hence this will not only save their cost, but also the time as forklifts are  used to carry the bulk bags easily and the bags will be reuse.

On top of that, new firm who wish to enter into this market structure must have a huge expenditure for capital that can reach up to millions (Sloman, Wride, Garratt, 2012). Not only that, the firm ought to acquire a huge piece of land to build sugar refinery plant. The plant size of Central Sugars Refinery in Shah Alam is approximately 66,320 square metres and it is identified that their authorized capital is around RM50 million. Even though the new firm has the capital and land, but it does not mean that it has the knowledge and experience on the market as compared to Central Sugars Refinery’s more than 40 years of establishments (Central Sugars Refinery, 2008).

The next barrier to entry is on the legal side, where firm needs licence to import raw sugars. To illustrate, Central Sugars Refinery imports raw sugars mainly from Australia and they issued the licence to imports from Ministry of International Trade and Industry. Same goes for exporting where Central Sugars Refinery have licence to export sugars to other countries like Singapore, Indonesia and so forth. (Ministry of International Trade and Industry, 2012). Plus, there is a trade barrier, or specifically import quota for importing raw sugar which is 45% for Central Sugars Refinery, meaning only 45% of raw sugars imported is allowed, while the other 55% goes to the competitor, Malayan Sugar Manufacturing Co. Bhd. (Borneo Post online, 2010). So this trade barrier limits the amount of raw sugar imported.

To conclude, Central Sugars Refinery is in a duopoly market structure and it produces homogeneous goods. New firms can hardly enter into this industry due to a few barriers to entry such as economies of scale, huge capital and also legal barriers to entry.

Reference List

Borneo Post online (2010) Sugar importers keeping prices low for consumers. Available from: http://www.theborneopost.com/2010/08/09/sugar-importers-keeping-prices-low-for-consumers/ [Accessed 23 October 2013]

Central Sugars Refinery (2008) Company Background. Available from: http://www.central-sugars.com.my/about.htm [Accessed 16 October 2013].

CIMB (2013) Govt to raise sugar prices?. Available from: http://webcache.googleusercontent.com/search?q=cache:rVfGfjaLbMkJ:https://cimbequityresearch.cimb.com/EFAOnTheWeb/EFAWebAPI/GetDocPDF.asp%3FDocGUID%3DCFC17EFA-D9B4-406E-858F-486DDD3DFB4A%26A%3DCIMB+&cd=3&hl=en&ct=clnk&gl=my [Accessed  21 October 2013].

Federation of Malaysian Manufacturers (2013) Company Detail. Available from: http://www.fmm.org.my/Member_Detail.aspx?MemberId=2E47C145-808B-4BC8-89AF-5982A872FDFD [Accessed 16 October 2013].

Maybank IB (2012) Felda Global Ventures. Available from: http://upload.xinhua08.com/2012/1016/1350380265182.pdf [Accessed 17 October 2013]

Ministry of International Trade and Industry (2012) Issuance of Licences for Import/Export of Items Listed in the Custom Prohibition of Import/Export Orders Under the Customs Act 1967. Available from: http://www.miti.gov.my/cms/content.jsp?id=com.tms.cms.article.Article_bbb6f0ff-c0a81573-aba0aba0-750fd5e5 [Accessed 23 October 2013]

Parkin, M. (2014) Economics. 11th ed. Harlow: Pearson Education Limited.

Sloman, J., Wride, A., Garratt, D. (2012) Economics. 8th ed. Harlow: Pearson Education Limited.

The Malaysian Insider (2013) After petrol hike, sugar and flour prices next? Details in coming budget, paper reports. Available from: http://www.themalaysianinsider.com/malaysia/article/after-petrol-hike-sugar-and-flour-prices-next [Accessed 20 October 2013].

Tradewinds (M) Berhad (2009) Annual Report [online]. Kuala Lumpur: Tradewinds (M) Berhad. Available from: http://cdn1.i3investor.com/my/files/dfgs88n/2010/05/31/1449800767--1172917989.pdf [Accessed 23 October 2013].