The Cabinet's approval on Rs 5,500 crore package for sugar industry aims to expedite the pace of exports and likely to relieve the pressure on domestic sugar stock, a report said.
The union government Wednesday announced a Rs 5,500 crore package for the sugar industry, including over two-fold jump in production aid to cane growers and transport subsidy to mills for exports. It will also address the surplus production and stock of sugar in the country.
"Given the prevailing international prices, the companies are likely to make losses on sugar exports. However, these losses are likely to be partly offset by the production subsidy of Rs 138.8/MT of cane crushed, which translates to Rs 8.5-9/kg of sugar exported. This apart, the transport subsidy for the mills not located in coastal states of Rs 3/kg is also provided on sugar exported," Icra senior vice president Sabyasachi Majumdar said.
"The direct benefit from the production and transport subsidy would amount to around Rs 1.50-1.65/kg of sugar produced, assuming 14 per cent of sugar production is exported," he added.
Further, the mills would also save on the interest and storage costs to the extent of sugar exported. These measures also aim to expedite the pace of exports, which is likely to relieve the pressure on domestic sugar stocks and thus support domestic sugar realisations to a certain extent, he said.
Icra also said that the increase in price of ethanol produced from B-grade molasses and cane juice may provide some respite for the over-supply hit sugar industry.
With the domestic sugar production estimated (preliminary) to increase by 10 per cent to around 35 mmt in SY2018, the industry may face a situation of over-supply and thereby sugar prices are likely to be under pressure. The Government measures to increase prices of ethanol produced from material such as B-grade heavy molasses and sugarcane juice is likely to offer some protection to sugar mills' realisations and profitability in the medium-term.
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An Icra note says that the near-term upsides though are likely to be limited, given the limitations in distilling capacity available with sugar mills.
"Another year of bumper production at 35 mmt in SY2019, as per the preliminary estimates, is likely to be higher than at least 9 million MT than the consumption, adding to the existing sugar surplus in the market. Significant increase in sugar production by around 60% Y-o-Y in SY2018 is likely to result in closing stocks between 9.0 - 9.5 mmt even after considering the successful implementation of the 2 mmt exports. However, export of entire 2 mmt pose a challenge, given the subdued global sugar prices," Majumdar said.
Hence, while the prices have recovered after the announcement of the government bailout package for the industry, the over-supply scenario has resulted in a decline in the prices in August-September 2018.