Sugar production in India is expected to increase by 20-23 per cent to reach 24.5-25 million tonnes in sugar year 2018 (SY18) from 20.30 million tonnes in SY17. Analysts estimate that despite the increase in production, stock position in SY18 will remain tight as consumption will be around 24.5-25 million tonnes. Thus, the low closing stock levels in the domestic market are likely to support prices in the near-term and it will remain firm.
Domestic prices had remained firm at Rs 36,400 per million tonne in March. In April, the Centre allowed import of duty-free raw sugar but it had a minimal impact on prices, which remained firm around Rs 36,000 per million tonne. While the increase in import duty resulted in prices touching Rs 37,500 per million in July, rates remained rangebound (Rs 36,000-37,000 per million tonne) in August. Import of 0.30 million tonnes raw sugar at a concessional duty in September too failed to impact domestic prices, which stayed around Rs 37,000-37,500 per million tonne.
But the global prices have been facing significant pressure since November 2016 after peaking at $595 per million tonne in October 2016 (four-year high). It can be attributed to lower import demand from India and China, coupled with an expectation of a global surplus in 2017-18 on account of increased production in Brazil, the EU and India. It has caused a decline in the global prices to $510 per million tonne in March and to $445 per million tonne in May and $378 to in August. The prices continue to remain subdued in September around $370 per million tonne.
“Going forward, production prospects in Brazil, India and the EU are likely to be the main drivers of global prices. But the movement in domestic prices is expected to remain insulated from international prices owing to the government’s cautious approach towards imports/exports,” said Sabyasachi Majumdar, Senior vice-president, Icra.
In another significant development, the cabinet committee on economic affairs (CCEA) has increased the basic price of ethanol by 5 per cent to Rs 1.88 per litre for the procurement season 2017-18. Icra feels this increase in ethanol price to Rs 40.85 per litre for the oil marketing companies is likely to cause an increase in the total contribution margin by around Rs 200 per million tonne of sugar produced for fully integrated sugar mills.
The CCEA move means OMCs will be able to procure ethanol at Rs 40.85 per litre in 2017-18 against Rs 38.97 per litre in 2016-17 for blending with petrol. The applicable goods and services tax of 18 per cent and the transport charges would be borne by OMCs. The price increase aims at increasing the participation of sugar mills in EBP by providing remunerative and stable prices to suppliers and reducing the dependence on crude oil imports.
“During the crushing season 2017-18, mills are expected to produce 25 million tonnes of sugar, an increase by 20-23 per cent compared with 2016-17. Consequently with a higher quantity of molasses available this year, mills might achieve a 1.10 million litre of ethanol supply, with UP’s mills contributing nearly half of the output. With ethanol contributing nearly 10-15 per cent of mills’ turnover, an upward revision in ethanol prices is expected to encourage mills to enhance the supply of ethanol for blending, thereby augmenting their revenue and improving their ability to pay sugarcane farmers,” Majumdar said.
Analysts say the recent Rs 10 per quintal increase in UP’s state advised price for sugarcane for SY17-18 is likely to result in an increase in the cost of production by Rs 800-1,000 per million tonne. While this may result in some moderation in operating margins, it would not be a wrong notion to expect another good year in terms of profits for most UP-based mills.
“We expect sugar prices to remain at remunerative levels in the near-term, given the tight domestic stock position. Further, UP-based mills are likely to continue to derive the benefit from the improved sugar recovery rates and higher crushing volumes, arising out of cane development activities undertaken in the past. Thus efficient and forward integrated sugar mills are likely to benefit from higher by-product production and thus sales in SY17-18. Hence, we expect the UP-based mills’ profits to remain firm in the current sugar season, although there might be a moderate squeeze in margins,” said Majumdar.
ritwikmukherjee@mydigitalfc.com