OMCs to pay 30% more to sugar mills

Analysts say the decision will increase sugar mills profitability by 25%

Oil marketing companies (OMCs) have agreed to a 30 per cent rise in ethanol prices for its mandatory blending with petrol. Analysts believe the decision will increase sugar mills' profitability by 25 per cent, beside attracting a lot of fresh investment in byproducts.

The OMCs had decided to procure 1,100 million litres of ethanol in November 2012, for which tenders were floated. The sugar industry offered 550 million litres. The OMCs have started issuing Letters of Intent (LoIs) to the lowest bidders at a base price of between Rs 34-36 a litre, around 30 per cent higher than the Rs 27 a litre until last year.

"Now, we are able to find a market for surplus molasses, which mills were selling at a throwaway price. With stable and assured returns, the industry will be able to use molasses better. The sugar industry will attract lots of investment in the byproduct sector and earn more returns. Consequently, mills will be in a better position to pay farmers' arrears in time," said Abinash Verma, director-general of the Indian Sugar Mills' Association (Isma).

"The decision is favourable for sugar mills, as they were expecting it for quite some time now," said Narendra Murkumbi, managing director of Shree Renuka Sugars, one of the largest ethanol producers and suppliers.

The picture, though, is not uniform through the country. According to informed sources, a majority of mills in Tamil Nadu and part of Karnataka have got LoIs. However, mills in other states, including Maharashtra, Uttar Pradesh and part of Karnataka, quoted a higher price and are therefore, still awaiting LoIs.

With uncertainty over the OMCs' final decision, most sugar mills had disposed of all their byproducts in raw form as molasses. A large quantity was used as fodder and another big lot exported. Only companies with high holding capacity and a profitable business model had held on to the byproducts in anticipation of a favourable decision from OMCs.

  According to industry sources, sugar mills had actually bid for much more than the revised base price. The OMCs had asked them to cut their offer prices, to bring these in line with the revised base price. Though some small players have done so, the bigger ones are reluctant. If OMCs do not get enough supply to meet their five per cent mandatory blending programme, then they might start the process afresh through new tenders. They've sought advice from the petroleum ministry, which is set to come in a day or two. So, next week will be crucial for sugar mills that did not get LoIs until on Friday. Many large players have offered Rs 44-45 a litre in their bids in response to the OMCs tender.

At an average base price of Rs 36 a litre, including licence fee, cost of denaturant and transportation, the depot price works out to Rs 38.53 a litre. If added to state levies, including excise, central sales tax, value added tax and dealers' commission, the landed price at a fuel pump is Rs 54.70 a litre. Against the average price of petrol at Rs 67.29 a litre, the OMCs will save at least Rs 12.59 a litre, resulting in a Rs 700-crore saving for OMCs of the tendered quantity of 550 million litres.

Although it is hard to quantify sugar mills' accumulative returns because of unavailability of a benchmark price of molasses, rectified spirit and extra-neutral ethanol, experts believe the sugar industry will earn around Rs 700 crore through this decision. "It is a win-win situation for both sugar mills and OMCs," said Balrampur Chini managing director, Vivek Saraogi.