ICRA expects that given the continued surplus in both domestic and international sugar markets, sugar prices will continue to remain under pressure in the near term. In the domestic market, high cane costs along with low realizations continue to weigh heavily on the financial performance of sugar mills. While government assistance to sugar mills in order to support liquidity and clear cane arrears (in form of interest free excise duty loans, continuation of export subsidy, etc) is expected to mitigate the losses to some extent, disputes over cane price fixation and payment of subsidy on cane prices continues to be mired in uncertainty in major sugar producing states.
Higher cane availability in Maharashtra and Karnataka backed by relatively higher cane acreage by about 11.0% and 2.0% Y-o-Y respectively coupled with better yields when compared to the previous year to result in higher sugar production during SY15. While there has been an overall decline in cane acreage in UP by 8.0% resulting in relatively lower cane availability, higher recovery rates are expected to compensate for the same and the sugar production in the state during SY15 is expected to be largely similar to that of the previous year. On the other hand, the drought situation continues to impact the sugar production in Tamil Nadu on account of lower cane acreage and yields. Mr. Sabyasachi Majumdar, Senior Vice-President, ICRA Limited, says “the domestic sugar production is expected to increase by ~4.5% Y-o-Y during SY15 to ~25.5 million MT and outstrip domestic consumption for the fifth year in a row.”
Cabinet Committee on Economic Affairs has approved the proposal for export subsidy of Rs. 4000/MT on exports of up to 1.40 million MT of raw sugar in February 2015. However, the benefits from the export subsidy on the domestic sugar stocks are likely to be limited for two reasons. Firstly, weak global prices which make exports less lucrative. Secondly, with the significant delay in announcement of the subsidy towards the end of crushing season, there is limited window of opportunity for sugar mills to produce raw sugar. Mr. Majumdar says “the current season has commenced with relatively high opening stock of ~7.4 million MT which coupled with the surplus production during SY15 and limited exports is likely to result in continued sugar surplus scenario with the closing stock estimated to be higher by ~1.5-2.0 million MT than the normative sugar stocks.”
Domestic sugar prices continue to be impacted by sugar surplus scenario in both the domestic and international markets. Existing surplus situation coupled with the arrival of fresh sugar supply of SY15 season and delay in the notification of export subsidy for SY15 has resulted in a declining trend in the sugar prices, which have significantly fallen to Rs. 26,000/MT (UP ex-mill sugar price) by March 2015 from Rs. 31,000/MT in September 2014. This trend was further exacerbated by the weakening of the international prices due to continued high production globally and decline in crude oil prices which typically result in higher diversion of Brazilian cane towards sugar. Mr. Majumdar says “threat of revenue recovery proceedings following failure of payments of cane dues to farmers in Maharashtra has resulted in mills liquidating sugar stock at lower prices during January and February 2015, while mills elsewhere have been forced to sell sugar at un-remunerative prices given stretched balance sheet positions”.
While sugar prices are under pressure, cane prices continue to remain mired in uncertainties. While in Maharashtra and Karnataka, the mills are paying FRP to farmers, the high cane price of Rs. 280/quintal declared by the UP state government continues to impact the profitability of the UP sugar mills. However, the government has announced a subsidy of Rs. 28.60/quintal; of this Rs. 8.60/quintal has been approved, while the final order pertaining to the subsidy of Rs. 20.00/quintal is expected to be announced by May 31, 2015. However, considerable uncertainty remains on mode of delivery of the same and the ability and willingness of GoUP to make timely payments. Mr. Majumdar says “despite subsidies in UP and FRP cane price in Maharashtra and Karnataka, the weak domestic sugar realizations are impacting the conversion margins and thus liquidity of the sugar mills resulting in high cane arrears. Hence, ability of the industry to secure a linkage between cane price and sugar realizations, which works smoothly, is critical for the long-term sustainability of the industry. Despite efforts, such linkage is yet to be established.”
Your email address will not be published. Required fields are marked *
Save my name, email, and website in this browser for the next time I comment.
Sign me up for the newsletter!
Notify me of follow-up comments by email.
Notify me of new posts by email.
Coro delighted to be back as FC Goa start pre-season
Whirling Mandala – a workshop by Zia Nath
Canadian International School celebrates Onam with students & teachers from 40 different nationalities
Amway India’s ‘Power of 5’ program creates remarkable positive impact on the state of malnourished children
Mahindra partners with Salesforce to drive first of its kind digital transformation in customer experience
2014 The Global Indian New Network (TGINN)