Balrampur, Dhampur Sugar Faces Losses Over Cane-Price Dispute

(Bloomberg) -- Balrampur Chini Mills Ltd., the Indian sugar-maker that lost half its market value this month, and its peers may return to losses after the nation's biggest producing state forced them to buy cane at above market prices.

Balrampur expects to lose at least 3 rupees (6 cents) on every kilogram of sugar produced in Uttar Pradesh state, Chief Financial Officer Kishor Shah said in an interview. The mills will delay crushing cane until a court rules on the state- government's Oct. 18 price directive, an industry group said.

The price dispute will deepen the slump in mills' earnings as world sugar demand grows at less than half last year's pace because of a slowing global economy. Mills are caught in a power struggle between the national and state governments as they woo farmers in India's most-populous state before elections by May.

``There is no assurance and certainty for investors'' in sugar producers, said Vinit Birla, an analyst at Mumbai-based Pranav Securities Ltd. ``We are not recommending sugar makers unless the cane pricing issue is resolved.''

Uttar Pradesh's order to pay farmers higher prices raises costs for mills as refined sugar prices fell to a 10-month low in London last week. The delay in crushing will add to the decline in production, reducing exports from the world's biggest producer after Brazil.

Uttar Pradesh ordered mills to pay farmers 140 rupees ($2.8) for 100 kilograms (220 pounds) of cane, up from 125 rupees a year ago. Balrampur will have to sell sugar at 20 rupees a kilogram, from 17 rupees now, just to break-even, Shah said.

Producers plan to challenge the order in court on Nov. 3.

`Legal Remedy'

``We are not starting crushing before exhausting our legal remedy,'' said S.L. Jain, director general of Indian Sugar Mills Association. ``It is not feasible to crush at these prices. We are going to court.''

Mills pay the nation's 50 million cane growers a price fixed by state governments. The rate, aimed to gain votes from the farmers, is higher than the one set by the federal government.

``Cane prices are always the target of the state government and the sugar price is fixed by the central government and both work in different directions,'' said Jain. ``The industry gets crushed between the two.''

India's ruling Congress Party-led coalition and the Bahujan Samaj Party, whose leader Mayawati is the chief minister of Uttar Pradesh, are wrestling for control of the state as it sends the largest number of lawmakers to parliament.

The interference is hurting companies. Bajaj Hindusthan Ltd., India's biggest sugar producer, reported losses in two of the eight quarters ended June 30 and a drop in profit in three. The stock has plunged 60 percent this month.

Shares Plunge

Balrampur, the second-largest producer, had a loss in three quarters and a profit decline in three quarters in the same period, while Dhampur Sugar Mills Ltd. posted a loss in four quarters and a drop in earnings in three. Shares of Dhampur have slumped 49 percent in October, more than the benchmark Sensitive Index's 30 percent decline.

``It's not viable to crush cane at current sugar prices,'' said Arhant Jain, executive president finance at Dhampur Sugar, the third-biggest by sales. ``There will be losses.''

The companies have yet to announce earnings for the quarter ended Sept. 30.

India's sugar production may drop to 20 million tons in the year to Sept. 30, because of a decline in plantation area, compared with 22 million tons forecast by the Indian Sugar Mills Association in August, Jain said on Oct. 13. Output may total 22 million tons, down from 26.5 million tons this year, according to the farm ministry.

World sugar demand will grow 1.8 percent in the season that started this month, down from 3.8 percent last year, F.O. Licht said in its first estimate of supply and demand on Oct. 29.