After bitter year, sugar industry expects sweet times

The problem would have precipitated if not for the sharp increase in the output of ethanol, a byproduct of sugar and the principle ingredient in alcoholic beverages such as beer, wine and brandy.

In sugar, when there is a problem of plenty, and unpaid cane arrears rise as a consequence, ethanol can come in handy. The solution is to divert cane to produce ethanol.

This year, the government attempted to pare down sugar arrears by providing subsidy or by increasing ethanol prices. Besides reducing sugar arrears, diversion towards ethanol also helps cut down the dependency on oil imports.

The government also provided incentives to sugar mills to boost exports by meeting costs related to shipments abroad. For the next season, Indian Sugar Manufacturers Association (ISMA) revised output guidance from 35 MT to 32 MT and to 31.5 MT if cane is diverted towards ethanol. Lower production, diversion towards ethanol and exports are expected to clear arrears.

All these developments signal that the worst may be behind the industry.

Higher ethanol prices will bump up the profitability of sugar companies. Lastly, sugar prices may increase in the next season, propping up sugar companies.

But first let’s take a look at the steps taken by the government:

To pare down arrears, the Cabinet approved subsidy of Rs 5.5 per quintal to cane farmers on May 2.

The government announced MSP (minimum support price) at Rs 29 a kg and incentives for setting up distillery capacity.

The government permitted revision of the price of ethanol derived from B-heavy molasses/ partial sugarcane juice. It fixed a higher price for 100 percent sugarcane juice-based ethanol for the forthcoming sugar season (from December 1, 2018 to November 30, 2019). The Uttar Pradesh government offered a loan subsidy of Rs 4,000 crore through banks and other financial institutions on an interest of 5 percent for five years to clear cane dues.

The policy changes pushed by the central government related to ethanol and its blending in May and September are expected to benefit the sugar sector in the long run. In May, the government asked oil marketing companies (OMCs) to target 10 percent blending of ethanol from the current blending of 4-5 percent. In September, the government raised ethanol prices by 25 percent to divert the sugar surplus.

The current ethanol prices are as follows:

Sugarcane juice: Rs 59.19 a litre

C-heavy molasses: Rs 43.46 a litre

B-heavy molasses: Rs 52.43 a litre

Now, the calculation has become simple: if a sugar mill is making ethanol from B-heavy molasses, additional revenue of around Rs 23 a litre (ethanol price of Rs 52.43 – MSP of Rs 29) is generated. As the input cost for ethanol largely remains at similar levels, the additional revenue generated from the ethanol business will directly flow into the bottomline.

With the next season already underway from December 2018, the industry expects 200-225 crore liters of ethanol from sugar factories to flow to OMCs against the total requirement of up to 340 crore litres. Of this, around 40-50 crore will be from B-heavy molasses and the rest from C-heavy molasses.

The tender for ethanol procurement for 2018-19 has been launched by OMCs, and for the first time, there has been a bid for 48.5 crore litres of ethanol from B-heavy molasses and 1.84 crore litres from sugarcane juice. There will be further reduction in the sugar production because of the diversion towards ethanol. Already, Balarampur Chini has bid for 11 crore litres under tender for ethanol procurement.

Problem is only 25 percent of the sugar mills in India have distillery capacity. It is expected to take 2-3 years for the industry to meet the current ethanol demand. Companies with exciting capacity will enjoy the early benefits.

Ethanol is a high-margin business for sugar companies. Companies make margins of up to 50 percent on ethanol blending. Listed below is the Q2FY19 margins from ethanol segment and the current capacity:

Besides raising ethanol prices, the government also provided subsidies to boost sugar exports. Total assistance of more than Rs 5,500 crore was offered to the sugar sector.

That translates to Rs 13.88 per 100 kg of cane. The government also approved subsidy on freight and handling charges. India has bagged contracts to export about 8 lakh tonnes of the sweetener to countries in the Middle East and Sri Lanka. Also fixed target of 5 million tonne of annual exports for the current season.

Earlier, ISMA had projected production of 35 MT in the 2018-19 season, accounting for the higher cane acreage and forecast of a normal monsoon. Rainfall in most of the sugarcane areas in Maharashtra has been substantially lower than last year as well as below average in the last three years. The estimate has been revised to 32 million tonne for 2018-19. If ethanol diversion were to be considered, sugar production is estimated at 31.5 million tonne.

Companies are now focused on building new capacity for ethanol business due to the high margin and reduce inventory levels. Additional revenues coming from ethanol will directly flow to the profits. It is safe to higher revenues from ethanol and lower sugar inventory levels will drive the sector in the long run.