Ethanol blending to decline this year on lower raw material availability

Sharp decline in cane output to dampen molasses supply

Oil marketing companies’ (OMC) are set to miss their ethanol blending target yet again due to lack of supply of the green fuel from sugar mills.

Initiated in 2013, the ethanol blending programme was started to help sugar mills achieve better economic sense. The government had then set a target of five per cent ethanol blending with petrol in the first year and 10 per cent thereafter. However, OMCs have not been able to achieve the first year’s target of five per cent even in the fourth year.

During the cane crushing season 2015-16, OMCs were to lift 1,300 million litres ethanol from sugar mills but only 1,110 million litres were supplied. OMCs were able to achieve only 4.15 per cent of blending. This year again, OMCs, led by Bharat Petroleum Corporation Ltd (BPCL), have floated its first expression of interest (EoI), seeking supply of 780 million litres. The requirement works out to be less than three per cent of the target.

“Like last year, even if second and third tenders or expressions of interest (EoIs) are floated, ethanol supply would remain less this year due to low cane availability and skyrocketing prices of molasses and extra neutral alcohol or ENA (a form of ethanol normally used as raw material for potable alcohol manufacturing). Thus, ethanol blending is unlikely to surpass even 4 per cent this year as against its requirement of five per cent,” said Deepak Desai, chief consultant, Ethanolindia.com, a Kolhapur (Maharashtra)-based consulting firm for modern distilleries.

Sources said ENA prices have risen and currently trading at Rs 45-46 a litre, a rise of over 10 per cent this year. Since ENA is further processed to eliminate five per cent of water content to make ethanol, the process involves cost of Rs 1-1.50 a litre. So, ethanol production cost works out to be around Rs 50 a litre as against OMCs’ payment of Rs 37-38 a litre.

“So, distilleries are losing at least 30 per cent of production cost by supplying ethanol to OMCs. This has reduced interest of distilleries to produce ethanol this year,” said Desai.

According to Sanjiv Babar, managing director, Maharashtra State Federation of Co-operative Sugar Factories, a number of distilleries, especially in drought–hit areas in Maharashtra, have shut their operation due to viability issues. Since molasses prices have surged by 90-95 per cent to trade currently at Rs 8,500 a tonne, compared to Rs 4,500 last year, ethanol production has become unviable. Existing large distilleries, however, are procuring molasses from independent sugar mills for ethanol manufacturing.

According to the First Advanced Estimates from the agriculture ministry, India’s cane output is likely to fall to 305.25 million tonne (mt) for 2016-17 from 352.16 mt in the previous year.

“Sugar cane output has declined resulting into lower crushing and availability of molasses in some parts of the country this year. By contrast, demand remains high. Apart from that, since price of molasses has gone up and ethanol declined, independent distilleries are not finding ethanol production viable. The government not only reduced ethanol procurement price by Rs 2-3 a litre but also withdrew excise duty exemption distilleries used to enjoy until last year. Accumulatively, net realisation from ethanol supply has declined by Rs 7-8 a litre i.e. around 20 per cent of returns. Thus, ethanol production became less attractive this year,” said Abinash Verma, director general, Indian Sugar Mills Association. (ISMA) while explaining the reason behind the fall in ethanol supply this year.

Meanwhile, sugar mills find supply of rectified spirit, a derivative of molasses, to the potable alcohol manufacturers more lucrative than converting the same into ethanol. While the actual realisation from supply of ethanol to OMCs works out to, sugar mills receive Rs 44-45 a litre from potable alcohol manufacturers.