India sugar output to jump 30-35% to 24-25 million MT: ICRA

The domestic sugar stock position is expected to turn surplus in the current season with the sugar output likely to outstrip domestic consumption marginally. During SY 2010-11, sugar output is likely to see a 30-35 per cent growth to around 24-25 million MT, driven mainly by improved cane acreage (in response to healthy cane prices paid in SY 2008-09 and SY 2009- 10); adequate rainfall and the consequent increase in sugar production.

With domestic consumption at around 23 million MT and likely exports of around 1.5 million MT, total surplus will be around 0.5 million MT in SY 2010-11.

Notwithstanding the improved crop outlook, there has been a recovery in sugar prices since the steep decline seen during Feb- Aug 2010. Free sugar prices,1 which declined to around Rs 25,000/MT by August 2010 from around 40,000/MT in February, firmed up since then and stood at around Rs. 28,000-29,000/MT in Q2 SY 2010-11.

The recovery was largely driven by an increase in demand during the festive season; a fall in sugar releases during October-November 2010 and a rise in international sugar prices, which improved the sentiments for the domestic sugar industry (on the anticipation that sugar mills would be able to export surplus production in SY 2010-11 at remunerative prices).

With the crushing season of SY 2010-11 coming to a close, ICRA does not foresee any significant variation in final production from the estimated range. Hence, the sugar price trends in the near term will be largely determined by three factors. Firstly, the international crude oil prices, which will determine the raw sugar: ethanol mix in Brazil, the world’s largest producer.

Secondly, the Government of India’s policies regarding exports of sugar and import duties. Thirdly, expectations on domestic sugar production for the coming season (SY2011-12), which will start becoming clearer by end April 2011 by which time the cane acreage for the coming season is known. Based on the currently available trends, ICRA expects sugar prices to show a modest upward movement in the next 6 months.

On the positive side, there has been a significant reduction in cane costs in SY 2010-11 across most sugar producing states (Tamil Nadu being the major exception), with most States witnessing a reduction of around Rs. 300/MT in cane costs (delivered at mill gate).

Sugar mills have also benefited from a sharp increase in levy prices as well as a reduction in levy percentage. During the month of June 2010, the Government of India (GoI) increased the levy sugar prices (which had been stagnant at Rs. 12500-13500/MT2 across the country since SY 2003- 04) to Rs. 1650-1850/qtl from SY 2009-10 onwards.

In October 2010, the GOI reduced the levy quota from 20% prevailing in SY 2009-10 to the older level of 10%, following the upward revision in the estimates for domestic production. There is also a proposal to decontrol the sector completely and abolish the sugar levy altogether. Reduction in levy % coupled with a hike in levy sugar price is likely to benefit sugar mills significantly. ICRA estimates the benefit to sugar mills at around Rs. 1800- 2000/MT of sugar.

A sharp correction in sugar realisations from March 2010 and the resultant decline in conversion margins (given the high rates at which cane was contracted in SY 2009-10) resulted in pressures on the profitability of sugar mills from Q2 SY 2009-10, with sugar mills reporting either losses or a significant deterioration in profits since that quarter.

While sugar mills have secured significant downward revision in cane prices in the current season and prices have inched upwards from Sep 2010, profitability for Q1 SY 2010-11 remained subdued given that most sales came from relatively higher cost opening stock and also as impact of byproduct operations wasn’t fully apparent.

However, given our expectations of a modest increase in prices, ICRA expects that profitability and absolute levels of earnings should improve from Q2 SY 2010-11 onwards given lower cane costs, lower proportionate conversion charges (given higher volumes of crushing) and higher byproduct sales.

During SY 2009-10, sugar production grew to around 18.92 million MT on the back of better sowing in SY 2008-09 and favourable agro climatic conditions in several key growing areas. However, in spite of this growth, the production remained well short of the domestic consumption (of around 23 million MT) as well as highs of 26-28 million MT witnessed in SY 2006-07 and SY 2007-08.

During the current sugar year beginning October 2010, ICRA expects the sugar output at 24-25 mn MT (around 30-35 per cent growth over previous year, driven mainly by improved cane acreage (in response to healthy cane prices being paid in SY 2008-09 and SY 2009-10), adequate rains and in turn, increased productivity. However, with domestic consumption at around 23 million MT and exports of around 1-1.5 million MT in SY2010-11, total offtake is likely to match production, thus stock position is going to show only a modest increase in SY 2010-11 and the overall stock position is likely to remain modest in relation to the total demand.

Prices had shown a significant fall since peaks in Feb 2010, following upsurge in production estimates for SY 2009-10; however, there has been a reversal of trend since September 2010....

The domestic sugar industry prices had shown a hardening trend since Q4 of SY 2008-09 in anticipation of continued depressed production domestically in SY2009-10. This resulted in a sustained uptrend in prices, which reached a peak of Rs. 40,000/MT by end January 2010. However, there was a significant drop in sugar prices to as low as Rs. 25,000/MT by August 2010.

The fall is attributable to a number of factors. Firstly, there was an upward revision in production estimates for the sugar season ending September 2010. Secondly, there was a significant drop in international sugar prices (Refer subsequent section: International scenario for details) due to increased sugar production in Brazil as well as India, thus resulting in lower dependence on imports in India. In addition, the GoI took several measures in order to curb sugar prices.

These measures included continued zero duty on imports, allowing bulk consumers to import sugar freely; tight inventory restrictions imposed by the government on buyers and changes in release norms (from monthly to weekly) for free sale sugar.

The downward trend in sugar prices continued until end August 2010, after which prices started rising from mid- September 2010. The price rise may be attributed to three reasons: – an increase in demand due to the festive season; a fall in sugar releases during October-November 2010; and a rise in the international prices of sugar, which improved the sentiments for the domestic sugar industry (on the anticipation that sugar mills would be able to export surplus production in SY 2010-11 at remunerative prices). Prices reached a peak of Rs. 30,000/MT by January 2011 although they showed a modest correction since then, following a pick-up in domestic sugar production and the government’s decision of withholding exports of sugar under OGLs.

While free sugar prices stand at around Rs. 28000-Rs. 29000/MT currently and not much variation is expected in domestic production vis-à-vis current estimates (as the crushing season is coming to a close), sugar prices in the near-term are likely to be influenced by three main factors:

International supply-demand scenario and sugar prices: Currently, international white sugar prices are around US$ 700/MT. The main driver of any change in the international price scenario would be the raw sugar production by Brazil for SY 2011, which will commence in mid-March. This would in turn be determined to a great extent by the international crude oil price trends which would influence the raw sugar: ethanol mix in Brazil. Should the current uptrend in crude prices continue, this would result in a relatively high ethanol proportion in the total Brazilian production, thus resulting in continued high prices for sugar globally.

GoI’s policy on exports and import duties: Currently, the GoI has allowed exports of around 1 million MT under advanced licenses (against pending export obligations) and the bulk of this quantity has already been exported. In addition, on 22 March 2011, GoI also allowed another 0.5 million MT of exports under open general licenses (OGL)3. GoI’s willingness to allow the remaining exports to happen in a timely manner will be thus a key sensitivity along with the international price movements. As for imports, the zero import duty regime for sugar that was earlier applicable until 31 December 2010 was extended until 31 March 2011.

At the current international prices, imports do not pose any threat given that domestic sugar prices are lower than imported sugar prices, zero import duty can become a threat if international prices were to be drop sharply as in CY 2010. GoI’s stance on import duties would thus be an important factor in case such a scenario were to re-occur. However, it may be noted that sugar prices are much lower in CY 2011 than they were in the first quarter of CY 2010 (when the decision to remove import duty on sugar was taken) and also sugar has a relatively low weightage in the WPI index, thus in the event of international prices falling chances of GoI supporting industry by re-imposing duty are better than in the previous year.

Expectations on next year’s domestic sugar production: Apart from international sugar prices, domestic sugar prices will also be influenced by expectations of next year’s production. Any expectations on the same are likely to start getting formed only by end April 2011 when there will be clarity on the total acreage figure.

Based on the current trends, ICRA expects sugar prices to show a modest uptrend over the next couple of quarters.

International Scenario

Sugar prices reached their record high in January 2011 amidst concerns over tight global supply and resilient demand; crude oil prices will play a role going forward…

In SY 2009-10, the world sugar consumption was recorded at about 164.3 mn MT (165.8 mn MT in SY 2008-09) and exceeded production of 160.5 mn MT (161.5 mn MT) by over 3.8 million. For SY 2010- 11, the growth in global production would be sufficient to cover sugar consumption, with the expected production and expected consumption estimated at 168.9 mn MT and 167.6 mn MT, respectively.

These factors are expected to result in downward pressures on international prices, which reached close to record highs in November 2010 amidst supply concerns from Brazil; considerable production shortfalls in western and eastern Europe due to unfavourable weather conditions and export policy uncertainty from India, which has been keeping the overall supply demand scenario in the grey. Thus, white sugar prices which had shown a significant deterioration since Feb 2010- Sep 2010 (declining from a peak of over US$730 per MT in Feb 2010 to US$508 by June 2010), started showing a steady upward trend since Sep 2010, before reaching the record high of US$ 784/MT in Jan 2011, subsequent to which they have started declining and are currently at the levels of US$ 700/MT. This weakening in the last couple of months was following expectations of larger supplies from Brazil hitting the market from March onwards.

Going forward, in the near term, raw sugar production in Brazil will be a major determiner of sugar prices with production in this country expected to commence from mid March. International crude oil prices will be a major driver of the Brazil given that most mills in Brazil have capability of switching between raw sugar and ethanol. Thus, if the recent hardening trends in crude oil were to persist this could result in a greater ethanol mix in the total production and thus high sugar prices.

With sugar prices remaining at high levels during the first half of SY2009-10, sugar mills contracted cane at high rates. While these rates made sense when they were contracted (given that sugar production was expected to remain depressed), however a sharp correction in sugar realizations from March 2010, following increased estimates of sugar availability for SY 2009-10 resulted in pressures on the conversion margin of sugar mills from Q2 SY 2009-10 onwards.

On the positive side, in the current season, sugar mills have secured significant downward revision in cane prices with a reduction in cane prices of Rs. 300-400/MT in most producing states. Tamil Nadu, where mills had paid relatively low sugar prices in SY 2009-10 was however an exception and showed an increase in cane costs in SY 2010-11. Apart from lower cane prices, recovery rates are also expected to improve by upto 50 bps in SY 2010-11 across most producing regions and these two factors are expected to result in lower cost of production in SY 2010-11.

Increase in levy sugar prices from SY 2009-10 and decrease in levy quota a positive for sugar mills; further increase in levy prices (although marginal) should boost overall realisations....

During the month of June 2010, the GoI increased the levy sugar prices (which were stagnant at Rs.12500-13500/MTl5 across the country since SY 2003-04) to Rs. 16500-18500/MT from SY 2009-10. Further, the GOI from October 2010 also reduced the levy quota from 20% prevailing in SY 2009-10 to the older level of 10%, following the upward revision in the estimates for domestic production. There is also a proposal to completely decontrol the sector and abolish the levy sugar altogether. Reduction in levy % coupled with a hike in levy sugar price is likely to significantly benefit sugar mills. The analysts estimate mills to benefit by around Rs. 1850- 2000/MT of sugar.


By-products operations continue to support profitability

Strong demand from paper and cogen/ biomass-based power projects (some of this output was being sold at merchant rates of well over Rs. 5/unit until FY 2010) resulted in firming up of bagasse prices, which were prevailing at above Rs. 1,500/MT in several key markets. While merchant power prices softened since then, most state level regulators (SERCs) lent a supportive regime to cogeneration and biomass projects by allowing healthy tariffs. This partly mitigated the pricing pressure in the core business.

Healthy offtake from power segment, coupled with strong demand from paper, have also supported bagasse prices for non-integrated mills as well. While alcohol as well as molasses prices have corrected since SY 2008-09 with improved supplies as well as tardy progress in ethanol doping of petrol in SY 2009-10, healthy offtake from the potable and industrial alcohol segment resulted in alcohol and molasses realisations remaining at satisfactory levels (although lower than peak levels seen in SY 2008-09 and early parts of SY 2009-10). With ethanol doping taking off in SY 2010-11, molasses and distillery profits are likely to show some improvement for the industry in spite of higher production.

Profitability takes a hit during SY 2009-10 on account of falling sugar realisations and high cane costs; while cane prices have corrected in SY 2010-11, sugar prices will hold key to the extent of recovery in SY 2010-11 A sharp correction in sugar realisations from March 2010, following increased estimates of sugar availability for SY 2009-10 and the resultant decline in conversion margins (given the high rates at which cane was contracted for SY 2009-10), resulted in pressures on the profitability of sugar mills from Q2 SY 2009-10, with sugar mills reporting either losses or a significant deterioration since that quarter. While sugar mills secured significant downward revision in cane prices in the current season and prices inched upwards from September 2010, Q1 SY 2010-11 was not very profitable for most sugar mills given that most sugar sales were coming from relatively higher cost opening stock and also as impact of byproduct operations were not fully apparent6. However, should the current price trends continue, profitability and absolute levels of earnings are likely to improve from Q2 SY 2010- 11 in view of lower cane costs; lower proportionate conversion charges (given higher volumes of crushing) and higher byproduct sales.

As can be seen from the above table, profitability in Q1 SY 2010-11 has been modest and much lower than the corresponding quarter of the previous sugar year. However, this must be contrasted against the large losses reported in the immediate preceding quarter. The profitability in Q1 of SY2010-11 remained modest on account of subdued sugar realisations during the quarter. Further, most sugar sales came from relatively higher cost opening stock (delay in commencement of crushing on account of dispute in farmers and mills on cane prices) and the impact of byproducts operations was not fully apparent.

Going forward, as far as the medium to long-term outlook is considered, the long-term prices and profitability of Indian sugar companies would remain volatile and dependent on domestic and international supply-demand trends. These in turn would depend on agro climatic conditions in major producing countries and crude oil price trends, which determine the diversion of cane crop to ethanol. Consequently, the price trends in international markets would be the key determinants of future profitability. Further, government/court action in ensuring a rational linkage between cane prices and sugar prices will also be a key to long-term viability of sugar operations, especially in States governed by SAP.

source: icra.in