Sugar prices won't fall anymore: Shree Renuka Sugars

The glut in the sugar industry will continue as Indian sugar production is seen at 25 million tonne next year. Shree Renuka Sugars, MD, Narendra Murkumbi, told CNBC-TV18's Managing Editor, Udayan Mukherjee, the industry is likely to see a surplus production of 2-2.5 MT. He said cane prices will be 30% lower than last year but there is no room for further fall in domestic sugar prices. "The current levels are the bottom for domestic sugar prices," he said.

Talking about the cost of production, Murkumbi said it was around Rs 18-22 a kg. The export obligation of 1MT is due by march 2011, he said.

Below is a verbatim transcript of his interview.

Q: Do you agree with what Sudakshina Unnikrishnan of Barclays Capital told us about Indian production or do you have a different view?

A: We see Indian production for next year at about 25 million at the moment. There will be a buildup of stocks in India compared to the previous two years but that’s quite necessary. Our consumption is growing quite a bit and the variability in the crop remains. Cane prices would be about 30% lower this year compared to the previous year. We will have to see that impact of that on crop area in the subsequent year that is 11-12 sugar year.

Q: You do not think 28 million tonne is likely?

A: I think at this stage it is very unlikely. The crop area is up only 14%. Even assuming if that entire additional area goes purely to the sugar factories and no additional gur and khandsari is made, we are only looking at an increase of about 5 million which would take us to about 24 million. Even being a little bit more conservative we are talking of about 25-25.5 million for the next year.

Q: Where would that set the demand supply mismatch?

A: You would have a surplus of about 2-2.5 million. Now there are old export obligations of people who had imported raw sugar in the period 2003-05. Government has extended those export obligations repeatedly because of the shortage in the country though the exports are due out, close to a million tonne due out by March 31, 2011. I would expect additionally another million-two million would flow out as soon as the domestic new season starts and government is more comfortable with the stocks in the country.

Q: Where does that leaves local prices and realisations which have been under pressure, despite global raw prices having gone up quite significantly?

A: Absolutely, I do not think there is any room for domestic prices to go lower in the context of the firm global environment. The rest of the world is in deficit without Indian supply. The world market will remain at a level which makes it attractive for India to export a little.

Our prices in India would be more tending to the export parity levels of the world market which currently translates to an ex-mill level of between Rs 26-27. There is upward room for domestic prices to move up as soon as there is more clarity on the export policy for the next season rather than a downside pressures. I quite see current levels as a bottom for sugar realisations.

Q: Where are prices now?

A: Ex-mill about Rs 24.5 in Karnataka about Rs 26 in the north.

Q: Still below cost of production?

A: For the last season, the cost of production varied across the country between Rs 25-34 with a lower cane prices and a higher crushing and lower overheads. One would expect the cost of production next year to be between Rs 18-22 for the producers.

Q: What have you made of all this talk of deregulation? Do your channel checks indicate something solid is happening or is it just one more of those episodes of a lot of talk and not too much action?

A: A fairly broad ranging proposal is under preparation. The industry and the government are working hand in hand to try and see how we can have an inclusive reform agenda which includes more freedom for the farmer, better connection between farm gate cane prices, sugar, molasses and bagasse prices and more correlation between them, further freedom for the industry, in terms of sales, free sales as well as levy sales, exemption from levy sales.

The reform agenda is quite broad and I think it is now in a very concrete form and it is winding its way through the government. It obliviously needs debate at various levels but I think that it is on the front of the agenda for the government in the coming season. We are coming out of two years of deficit but we are seeing a comfortable supply environment, without an excessive supply which in the past has caused very bearish prices. It is virtually a perfect condition for deregulation of the sector. I am quite optimistic of this.

Q: What kind of pattern do you see it following? Do you think a committee will be setup to figure out a big revenue sharing formula with the farmers first and you have a concrete blue print on board or can it start in a piecemeal way by freeing up the release mechanism or the levy quota etc?

A: There was an expert committee which committed its final report about six months back. It was headed by Professor Thorat. That committee has made certain recommendations and the government is moving mainly on the main points of that report. On the specific case of looking at sharing of revenue between farmers and sugar mills which the industry and the government now believe is only way that you can depoliticise the cane price. I think on that probably a separate committee will be formed

Q: And your own assessment is that you have seen the worst of this sugar down cycle?

A: Definitely yes. The situation in Brazil is quite tight. Rainfall has been absent for more than three months, The entire South Brazil crop which supplies the world with 2/3rds of its total raw sugar requirement, is entirely rain fed. Unless we have rain we are going to have severe issues. I think currently UNICA, the association of south Brazil sugar mill has predicted a 6% drop in cane but I fear that the numbers will start climbing.

The downward revisions will be accelerated if we do not have rain for the next 60 days. The only abundantly surplus country is going to be India. The rest of the world is already in a significant deficit without additional Indian supplies. That will keep world prices firm and that keeps a bid under the domestic market as well. That is what gives me room for optimism on prices.

source: moneycontrol