Good harvest, but sugar prices firmo

Sugar prices are seen up in the medium-term despite expectations of a good harvest next year, industry analysts said.

"We are seeing a good crop next year but this should not be a reason to pull the prices down. Next year's crop is likely to be around 180 lakh tonne, a marked improvement from this year's slump at 135 lakh tonne. The crop is not a bumper one, its a normal one," said SL Jain, secretary general of Indian Sugar Mills Association.

By January, the market is eyeing London prices to cross $350 per tonne and domestic prices to cross Rs 2,000 per quintal. "There is scope for London prices to even touch $400 a tonne as the European Union subsidies will go from June 2006, as per the WTO ruling," added Jain.

"Domestic prices are technically bullish. The current consolidation phase may lead to a correction based on good monsoon and less demand. We expect sugar prices to test 2,030 levels by coming October," according to Kishore Narne, head-commodities research at Anandrathi Securities

The prevailing domestic prices are much higher than in the international market. NCDEX M-grade sugar October contract ended at Rs 1,873 per quintal or $ 416 per tonne, down Rs 9. London International Financial Futures Exchange No 5 white sugar October contract ended Thursday a dollar up at $284 a tonne.

"With the EU doing away with it's subsidies, the world sugar trade will see a short supply of 50 lakh tonne and it gives huge potential to Indian traders as the output is likely to see an upward movement now. Indian companies in Uttar Pradesh will invest around Rs 4,000 crore over the next three sugar years," said Siddharath Shriram, chairman of Mawana Sugars.

Fundamentally, analysts are now linking the rise in sugar prices to that of crude oil.

According to a report by Sucden (UK) Ltd, the increased demand for ethanol means that less cane is available to be crushed into sugar unless the planted area expands, helping push sugar prices higher. Fundamentally oil prices look set to remain high for the foreseeable future, driving up demand for alternative cheaper fuel sources, and driving demand for flex-fuel cars and ethanol.

Sucden predicts that if oil prices remain high, the demand for sugar in the future could start to be predominantly for ethanol instead of as a sweetener, leaving it permanently linked with the price of a barrel of crude oil.

"The demand is not only expected to be higher because of the high oil price, but also because it is renewable and has much better environmental characteristics, of high importance in a time of increased concerns about global warming," the report adds.

Domestic prices are currently high due to the tight supply situation till the next season begins. Analysts expect a correction soon after the sugar season begins but likely to see a rise to current levels again.

Traders and industry also blame the spiralling prices on speculative trading in futures, blaming it all on the seller-centric contracts on the National Commodity and Derivatives Exchange (NCDEX). "The current prices are still far from the high of Rs 2,100 a quintal early January this year," said a Mumbai-based analyst.