Sour news for sugar industry as oil prices dip

If international crude oil prices continue to tumble, it is the Indian sugar industry which may end up getting the raw end of the stick.

With the forecast for international oil prices in the near term hovering between $48 and $56 a barrel, national oil marketing companies like Indian Oil, Bharat Petroleum and Hindustan Petroleum are not too comfortable buying ethanol at the current tender price of Rs 21.50 to Rs 23 a kilo litre (KL).

While it was remunerative for them to blend petrol and diesel with bio-fuels when crude prices were above $60 a barrel, their margins came down as prices slid below that, and that it was no longer profitable to blend bio-fuels at around $45 a barrel, oil marketing company sources said.

"But given the government's policy of mandatory blending of bio-fuels, we do not have a choice," said an oil marketing company executive.

He added that the final price of ethanol for oil marketing companies was above Rs 25 a KL after taking into account additional expenditure on storage and transportation.

"The government has announced a mandatory 5 per cent blending programme and wants to move to 10 per cent blending, but oil companies are not even lifting the quantities that they have tendered for," said Ranjit Mohite-Patil, executive president of the Indian Ethanol Manufacturers' Association.

When contacted, the three oil marketing companies said they had started blending in areas where the tendering process was complete.

Mohite-Patil said the sugar industry had already started making investments to create additional capacity to support the government's 10 per cent blending programme.

Maharashtra alone has made investments of Rs 500 crore in creating additional capacity for the manufacture of alcohol, the feedstock for ethanol.

Bajaj Hindusthan, the country's largest sugar manufacturer, is doubling alcohol manufacturing capacity from 320 KL to 640 KL, and may add another 160 KL through another subsidiary.

"Already, sugar prices are low and the acreage under the crop is set to increase in the next season. We have already committed ourselves to investing in additional bio-fuel capacity, even as we are making losses at the present supply of ethanol. If we are asked to supply at lower prices at this juncture, we will not be able to afford it. If the government does not support us, the industry will be ruined," Mohite-Patil said.

Asked if he was referring to a subsidy, Mohite-Patil said, "We will see what form of support we can get from the government. We have been talking to Union Petroleum Minister Murli Deora on the issue."