Marginal rebound in sugar prices narrows mills' losses

Spot prices rise Rs 2 a kg in a month, realisations up Rs 2-2.50 a kg ; further increase possible

With sugar prices recovering, mills’ fortunes are improving. Open-market prices have risen in the past month Rs 2 a kg to above Rs 28 a kg. Because of the export subsidy of Rs 3,300 a tonne and with global prices rising, realisations have improved Rs 2-2.50 a kg on average.

The Indian Sugar Mills Association (Isma) estimates the average cost of production at Rs 33–33.5 a kg against a realisation of Rs 31 a kg. A month ago, the realisations were Rs 28.5 a kg, before the government had announced a subsidy for exports.

With a further possibility of a rise, the sector sees possibilities of reducing the losses in the beginning of the season. In two financial years, the cost of production has been higher than realisation. The losses deepened in two quarters due to a rising interest burden on the working capital raised during the crushing season. Poor offtake by state governments swelled the inventory.

CRISIL had last year forecast the sector would incur a loss of Rs 1,600 crore in the ongoing season beginning November compared to an estimated Rs 1,000-crore loss in the previous one. The loss was Rs 400 crore in 2010-11, it said.

“With the slight rebound, the estimated loss will narrow,” said Abinash Verma, director-general, Isma. However, the sector fears a possibility of round-tripping of raw sugar exports on a further rise in the domestic markets. The export subsidy of Rs 3,333 a tonne works out to 14 per cent of the cost of production, of Rs 24,000 a tonne. While the government has incentivised exports in a way, at 15 per cent of import duty, refineries can import raw sugar freely. This means export incentives and protection from imports remain at the same level of 15 per cent.

  “In case of over one per cent of rise in the domestic market, traders may possibly raise the quantity of imports back to what they had exported, causing round-tripping,” said an expert. Prices are at a four-month high in the global market, due to a drought in the world’s largest producer, Brazil, making room for Indian exporters. They have contracted for 1.6 million tonnes (mt) of raw sugar export and shipped 1.35 mt this season.

Shipment of another 650,000 tonnes is possible this season.

Week on week, ICE raw sugar futures are nearly two per cent higher; LIFFE white sugar futures moved up by 2.2 per cent. Last week, foreign hedge fund managers and other large speculators increased their net long positions by 44 per cent in New York sugar futures, according to US trade data. A substantial increase in net long positions is mainly due to recent changes on the fundamental side, resulting in a recovery in prices after trading near multiyear lows. Speculative net long positions were increased by 36,815 contracts to 119,662 contracts on the InterContinentalExchange. “While the price rise will help overall Indian sugar industry, export incentives would benefit only port-based mills, in Maharashtra, Karnataka and Tamil Nadu. Sugar mills in Uttar Pradesh are unlikely to benefit,” said Sanjay Tapriya, director, finance, Simbhaoli Sugars.

Sugar (S 30) price moved up by 5.32 per cent to Rs 3,029 a quintal in the Agricultural Produce Marketing Committee (APMC) on Monday from Rs 2876 a quintal a month ago. Similarly, S 30 sugar price jumped by 6.43 per cent in the last one month to Rs 2,896 a quintal from Rs 2721 a quintal.