After a few years of subdued performance on account of a supply glut and resultant fall in the domestic and international sugar prices, the domestic sugar industry is once again in the limelight, but for different reasons.
The International Sugar Organisation (ISO), an intergovernmental body, which closely tracks global developments in the sugar industry, estimates the world sugar market to return to deficit mainly on account of lower production in India and the European Union.
Dr Peter Baron, Executive Director, ISO spoke to Jitendra Kumar Gupta on various aspects of the Indian and global sugar industry.
Where does India stand in terms of opportunity based on per capita consumption?
The rapid economic development in India with increased purchasing power, is creating a stronger demand for sugar beyond urban and sub-urban areas. If India’s per capita consumption (now around 18kg) increases by 1kg, sugar demand rises by roughly one million tonne. The world average per capita consumption stands at around 24kg; it is 40kg in the mature markets of Europe and 31kg in North America.
The potential for an increase in India’s per capita consumption is considerable. Healthy economic growth will clearly translate inter alia into higher per capita sugar consumption, approaching the world average in the not too distant future.
Do you believe sugar is a cyclical commodity?
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Not really, sugar production in an individual country can be cyclical (like in India), and sometimes upward or downward cycles may coincide in different countries, but it will remain a coincidence rather than a rule. Meanwhile consumption is not cyclical.
Ethanol is looked at as an alternative fuel providing some relief from rising crude oil prices. Would it impact global sugar prices?
The answer depends on the extent to which sugar crops emerge as a dominant feedstock for ethanol production. Brazil accounts for the lion’s share of global fuel ethanol production from sugarcane and this will not change over the next 5 years. While other countries are embarking on fuel ethanol programs, few of these will likely result in a large volume of sucrose being diverted away from sugar and towards ethanol instead.
Depending on the underlying economics, feedstocks other than sugar crops are also likely to be used. In consequence, over the medium term, the potential for ethanol to impact the sugar market will remain centred in Brazil.
A very important development in Brazil is changing the responsiveness of its sugar production to relative gasoline and ethanol prices. The increasing fleet of flex-fuel vehicles there has led to an increasing volume of price-sensitive ethanol demand.
This is because for flex-fuel vehicles, consumers react to the relative price differential between ethanol and gasoline (gasohol). The supply of sugar from Brazil is now therefore linked to price signals and to expectations about demand for ethanol in the local and international markets.
On the other hand, any decline in crude oil prices would result in an easing in ethanol offtake and consequently greater volumes of sugar diverted onto the world sugar market.
When the world market is in deficit, the key question is at what price can the world sugar market acquire sugar from Brazilian flex fuel motorists. However, in years of global market surplus, the question doesn’t exist. This year, Brazil’s Centre/South millers have so far favoured ethanol over sugar.
What is your estimate for world sugar demand and supply?
In 2008/09, for the first time since 2004/05 world production is expected to decrease, to 161.6 million (mln) tonnes, raw value. World consumption is put at 165.5 mln tonnes, raw value. During the period from October 2008 to September 2009 world production is forecasted to be 3.9 mln tonnes lower than world consumption.
Your forecast for sugar prices over the next one year?
The ISO forecasts that the world sugar market will return to a deficit phase for the 2008/09 year (starting October 2008) - driven in large part by substantial declines in sugar production in India and the European Union.
This is generally considered positive for future world market values. Indeed we think the prospective fundamentals are the most constructive for market values since 2005/06.
The question is whether non sugar-specific market drivers - including crude oil price movements, commodity price trends, ethanol production and use, the food vs fuel debate, the general outlook for different classes of investment assets, and funds activities in sugar futures markets - will mitigate or reinforce a positive fundamental picture.
How do you read India’s ethanol programme and would it change the way Indian sugar industry is perceived today?
Fuel ethanol production in India this year is proving to be much less than originally anticipated and is presently thought likely to reach no more than 350 mln litres. Molasses prices have doubled since the beginning of the year and reached a level at which the sugar industry can not supply ethanol at the pre-negotiated prices (Rs 21.5 per litre currently).
With prospects of a marked decline in molasses production from the upcoming 2008/09 crop, it remains to be seen if the government will be able to implement its third phase of the ethanol blending programme (E10) starting October this year.
Indeed, since sugarcane and molasses production is cyclical, the changing availability of molasses and consequent variations in molasses prices directly impact ethanol production costs. Disruptions to ethanol supply will therefore remain, should pre-negotiated fixed ethanol prices continue to be a feature of the sector. Reports suggest that the government is likely to raise the fixed price to Rs 24.
In the longer term, there is a real risk that unless petroleum companies agree to link ethanol prices with that of molasses, the blending programme will be successful only in times of excess molasses production.
What is your view on sugar exports from India?
Statistically, during 2008/09 India may ship, say, 4 to 5 mln tonnes and still have enough sugar in stocks to cover domestic demand during the inter-crop period. On the other hand, domestic prices have risen to a level which makes sugar exports unattractive, at least at the current level of world prices.
Furthermore, higher exports are likely to push domestic prices even higher – an unaffordable luxury for the central government during an election year.
Although the government has already declared more than once that it will not limit sugar exports to control domestic prices, there is no long-term policy to enable the industry to export regularly irrespective of variations in output. For the time being, the ISO forecasts new season’s exports at 2 mln tonnes, raw value, compared to 4.4 mln tonnes estimated for 2007/08.
In the Indian context, from the long-term perspective, what strategy could work so that companies stand to gain?
Given the environment, it would be very imprudent for companies to put all their eggs in one basket. Therefore the strategic objective will be diversification, aiming at spreading risk and opening up new opportunities.
The starting point is always to reduce costs and thereby optimise returns. There are still a lot of productivity and efficiency reserves in the fields and the factories which have to be tapped.
Therefore, technological and scientific advances and innovations have to be implemented to the fullest extent possible and as soon as possible. Here modern high yielding, more disease resistant cane varieties, better transport infrastructure, more sophisticated logistics and last but not least state-of-the-art technology can help a lot.
Ethanol production, electricity cogeneration, production of other by-products for the chemical and pharmaceutical industry, bio-degradable plastics, all these are options and opportunities to consider. Consumers are more demanding and sophisticated hence, sugar branding might secure price differentials for unbranded sugars.
