India's sugar mills, already squeezed by rising cane costs, face two further years of hardship, raising the threat of "liquidity pressures", Fitch Ratings said.

The ratings agency said that India's standalone sugar mills, on which it has a "negative" outlook, have already seen their gross margins shrink to 2-3 rupees ($0.04-0.06) a kilogramme, thanks to rises in the state-decreed minimum price for cane, at a time of flagging values of the sweetener itself.

This year, mills' margins will "remain under pressure" and indeed, with cane prices high, decrease further.

And this is before a turn lower in India's sugar cycle forecast for next year when, to judge by historical patterns, a period of rising output will end in reduced production and significant mill hardship.

Defaults and delays

"After the upswing cycle, sugar production will decline in 2013 representing the start of the down-cycle for sugar production," Fitch said.

"The industry down-cycle usually begins with an oversupply situation followed by lower sugar prices and lower profitability."

This weaker performance "in turn leads to sugar mills defaulting or delaying the sugarcane payment" to growers, prompting farmers to switch to alternative crops, and in turn prompting "a subsequent fall in sugarcane acreage and sugar production".

The ratings agency warned that even in the nearer-term, "liquidity pressures could become a concern" for mills.

'Cushion to cash flow'

Enterprises better suited for the volatile environment were those producing alternative products, such as ethanol and energy, from cane besides just sugar.

These will be better able to milk the current higher phase of sugar production, which will foster improved use of processing capacity, and so bring down costs per unit.

Furthermore, "increased profitability" from these product, thanks to higher volumes, "will provide a cushion to cash flow", Fitch said.

Prospects could be further improved if the Indian government raises the mandated ethanol price from 27 rupees per litre, fixed since August 2010, as mills are requesting.

Output upgrade

The comments came as government officials raised prospects for 2012 sugar output by lifting by 10-15%, to 7.4m tonnes, a forecast for production in Uttar Pradesh, India's top cane-growing state.

The figure was also above a 6.6m-tonne estimate from the Indian Sugar Mills Association, which has estimated national output at 26m tonnes, lifted 7% year on year by rising acreage and adequate rainfall.

source: agrimoney

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