Ethanol pricing sweetens outlook for sugar sector

Sugar stocks are euphoric and so are the promoters of sugar companies after the government announced a surprise shift in pricing mechanism for the ethanol industry. The Cabinet Committee on Economic Affairs (CCEA) fixed the delivered price of ethanol in the range of Rs 48.50-Rs 49.50 per litre. 

The price will vary with the distance of sugar mill from the depot/installation of the public sector oil marketing companies (OMCs). For distances ranging from 0-100 kms, the price has been fixed at Rs 48.50 per litre. An extra 50 paise will be charged if the distance is 101-300 kms while the upper end of the band will apply to distances more than 300 kms.

Oil firms presently pay about Rs 29 per litre for ethanol but the ex-sugar mill price of ethanol is around Rs 42.02 per litre. As far as sugar mills are concerned it is profitable to sell ethanol for industrial usage or for distilleries rather than selling it as a fuel to oil marketing companies.

Because of the politics involved at every stage of sugar production, sugarcane prices were increased to please the farmers, but there was no proportionate increase in the selling price of ethanol. 

Ethanol blended petrol (EBP) programme was launched in 2003 and was later expanded in 2006. OMCs were directed to sell 5 per cent EBP subject to commercial viability. A National Policy on Bio-fuels was also notified by the government in 2009 to ensure that a minimum level of bio-fuels is readily available to meet demand at any given time.

However, the program has not extended beyond certain centres because of supply and pricing issues. The procurement price of ethanol was earlier supposed to be decided by oil companies and the suppliers of ethanol, but oil companies insisted on procuring the fuel at the earlier notified price of Rs 29 per litre.

Ethanol at Rs 48.50 per litre at the OMCs depot would be a big plus for sugar companies. Segment-wise numbers of most of the sugar companies show that they have been making steady profit by selling ethanol rather than selling sugar. 

Take the case of Balrampur Chini which has sales of Rs 2,186.31 crore from sugar in FY14 while its earnings before interest and tax (EBIT) reported a loss of Rs 108.49 crore. In comparison the distillery business, which is basically sale of alcohol, had revenue of Rs 251.74 crore and an EBIT of Rs 116.22 crore. Sugar profits have been cyclical over the years but those from ethanol sales have been steady and high.

While sugar companies will be profitable from the government policy, oil companies too are benefiting by blending ethanol with their fuel. Minister of Transport and Highways and Shipping Nitin Gadkari has been a strong proponent of use of ethanol as a fuel. In a recent statement he said [LINK 1] that he has asked his department to study whether the five big companies Volkswagen, Ford, Toyota, Honda and Fiat can import E85 engines which use a blend of 85% ethanol and 15% petrol. Presently, only 10% of ethanol is being blended with 90% petrol.

According to Gadkari, the Rs 6 lakh fuel import bill of the country can be reduced by Rs 2 lakh crore by using alternative fuels. Gadkari, said that his government is in talks with farmers in the presence of petroleum minister to explore the possibility of reviving sick sugar factories.

At a price of Rs 48 per litre, ethanol can revive most of the sick sugar companies which can be used to produce only fuel rather than sugar and generate power, as is the case in Brazil.