Glut drags sugar prices down

Nothing seems to help the much-beleaguered Indian sugar industry battling supply glut, falling prices and government controls.

The country's sugar output for the season ending September is seen at a record 28.5 million tonnes and nearly 30 million tonnes next year. The country produced around 19.3 million tonnes of the sweetener in 2005-06. In the wake of rising output, domestic prices have fallen over Rs 900 per 100 kg to Rs 1,200-1,300.

Exports of raw sugar, which emerged an attractive alternate to white sugar sales had kindled hope for the industry, but even that may fizzle out now as the world prepares itself for another year of surpluses.

On Friday, the International Sugar Organisation in its monthly report pegged the surplus for next year at over 10 million tonnes compared with 9.1 million tonnes for the year ending September.

Following the news, raw sugar prices for October delivery fell to a one-month low of 9.84 cents a pound, down 0.29 cents from the previous close. "With increasing sales from India, prices could easily see a fall to 9-10 cents a pound," said the official.

Last year in February, raw sugar prices rose to a 25-year high of 19.73 cents, leading many sugar growers to increase plantings which in turn lowered prices. "Those kind of prices can easily be ruled out next year," said another industry official.

Indian sugar companies in the wake of domestic and global white sugar glut, and untimely government intervention, have turned to exporting raws. Deals of over 400,000 tonnes have already been struck for shipments beginning November. Last year, the Centre "" in order to keep a check on prices and tame inflation "" had banned white sugar exports when the commodity touched multi-year highs of $496 a tonne.

It removed the ban in January but India's competitors had already captured the white sugar export market that was shrinking due to a global glut. The situation has changed now as the government and the industry is worried about falling realisations.

The food ministry and the industry have not only been exploring ways and means of promoting raw sugar exports for next season beginning October, but also planning earmarking a percentage of total sugar output as raw sugar and doling out subsidies to encourage exports. Analysts and experts are however, not so optimistic of the move. "Raw sugar prices may run as high as 11.50 cents a pound in the months ahead, but will be capped by a hefty surplus in the market," said an official with UK-based Sucden, a leading commodities, financial futures and options broker.

Analysts say raw sugar prices, in the coming few months, may witness some kind of upside movement on a momentary supply squeeze ahead of the harvest in top grower and exporter Brazil.

In fact, most analysts are of the opinion that falling raw sugar prices can only be supported if crude prices consistently remain above $70 a barrel till the end of the current calendar as it would mean a higher demand for ethanol and diversion of cane from sugar by Brazil.

"If (crude) prices stay between $70 and $74 a barrel on a consistent basis for the next three-four months, chances are that sugar prices may see some kind of upside," said an official with a global sugar trading firm.

Crude oil for September delivery was at $71.75 a barrel, up 28 cents, in after-hours electronic trading on the New York Mercantile Exchange.

The contract however, touched a five-week low of $71.47 a barrel. Crude prices have fallen 8.9 per cent from the record high of $78.77 on August 1 as the US stockpiles rose and falling equity prices weighed on investor confidence.

Analysts believe volatile global equity markets have raised concerns about slowing demand growth. Speculators and hedge funds have reduced bets on rising prices by 17 per cent in the week ended August 7, according to data from the Commodity Futures Trading Commission.

For Indian sugar mills, the window of opportunity is fast shrinking and exporters are trying to strike as many deals as possible. Soon, however, they may have to look for newer avenues to take pressure off their already squeezed margins.