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Sugar firms fear high losses in coming season

High state-set cane prices and other input costs to exceed realisation through prices, with bumper output worsening the economics

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Dilip Kumar Jha Mumbai
Last Updated : Jan 20 2013 | 3:24 AM IST

The steady growth in sugar output is, given the set of price controls over the industry, going hand in hand with mounting losses. With an estimated output of 26 million tonnes, the overall loss is expected to surpass Rs 5,500 crore for the current season.

Data compiled by the Indian Sugar Mills’ Association (Isma), showed 219 operational mills had produced 24.6 mt of sugar until April 15 of the current season, as compared to 245 working units with an output of 21.7 mt in the corresponding period last year. The bumper cane output this year has resulted in a 13 per cent growth in output so far.

The flip side is losses for sugar mills, given the government-set prices for cane and the controls on sales. The government has, in theory, okayed an additional quantity for export under Open General Licence, but with important details such as how the extra quantity is to be allocated yet to be decided. Exporters feel by the time this is done and the pending quantity from existing quotas gets executed, the markets abroad may turn bearish on prices, with the new season supply to begin soon from Thailand and Brazil.

“Arrears to cane farmers had more than doubled to Rs 9,900 crore as on March 31, as compared to Rs 4,400 crore a year ago (on this date). By the second week of April, these are likely to surpass Rs 11,000 crore, as against Rs 6,200 crore last year,” said Narendra Murkumbi, managing director of Shree Renuka Sugars, the country’s largest refiner of sugar, which also has crushing and refining capacity and cane farming land in Brazil.

A recent report by Icra, the credit rating agency, says no significant change in the price trends seen over the past 18 months is likely for at least the next couple of quarters. In the medium term, sugar price trends will continue to be determined by three factors. First, expectations on domestic sugar production for the coming season (2012-13), to start becoming clearer by end-April, by which time cane acreage for the coming season would be known. Second, global crude oil prices, which determine the raw sugar to ethanol mix in Brazil, the world’s largest producer. Third, the government’s policies on export of sugar and import duties.

“The industry offset these arrears by selling sugar and by-products during the lean season, when the price also recovered a bit. As a consequence, the arrears were reduced to nil by October, when mills started the new season. But the scenario is likely to be different this year. Prices may not rise even during the lean season. Hence, the sugar industry may end this season with an unrecoverable loss of Rs 5,500 crore to create a huge working capital problem for the next season,” said Murkumbi.

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Against the average cost of production of Rs 33-34 a kg, mills’ ex-factory realisation is Rs 28-29 a kg across the country. There is additional income equivalent to Rs 2.5 a kg from by-products, such as molasses, rectified spirit, energy, etc, but this still leaves a loss for mills.

Last year, lean season sales proved a saviour for the mills, which helped them clear their cane arrears by November. Sugar realisation during last year’s lean season was comparatively better. Also, the average state advised price was 20 per cent lower during last season, at Rs 210 a quintal. During the current season, however, a global supply glut is unlikely to allow sugar prices to move upwards. Hence, the realisation is set to remain under pressure.

“We have not yet worked out the overall estimated loss for the current year. But, the industry would certainly end this year with a massive loss,” said Abinash Verma, secretary-general of Isma.

Of the total export allocation of 2.8 million tonnes, the industry has been able to execute hardly 0.6 mt. The current price of sugar in global markets is, at around $600 a tonne, somewhat similar to that at home.

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First Published: Apr 20 2012 | 12:09 AM IST

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