Sugar firms to feel pinch of export ban

There could be bitter time ahead for the Indian sugar industry, which is seen facing margin pressure if the government does not lift the export ban soon.

With the global sugar surplus being revised upwards every quarter, the export market is shrinking and exports may not be lucrative, as and when the ban is lifted.

Also, higher cane prices and a possible supply glut led by a bumper sugar crop in India do not bode well for the sugar industry.

Probably, the only factor in favour of the companies is the government-promoted ethanol-blending programme. However, that too is yet to take off with the proposed November 1 deadline already being missed.

India's sugar export ban is into its fifth month, with both the food ministry and the industry clamouring for lifting the ban. Agriculture Minister Sharad Pawar had last week said the government would "seriously consider" lifting the ban in two weeks.

Experts are, however, sceptical as the inflation, reason for which the ban was first imposed, continues to be high and is on the finance minister's radar.

India had banned sugar exports on June 22 to keep domestic supplies and prices under check. Around the time when the ban was imposed, India's annual inflation rate, based on Consumer Price Index for Agricultural Labourers, had risen sharply to 7.25 per cent in June from 6.41 per cent a month earlier, primarily because of a sharp increase in prices of food articles, including wheat, pulses, and sugar. And though, India's headline inflation rate, based on the Wholesale Price Index, fell to 5.09 per cent in the week to October 28 from 5.41 per cent a week earlier, sugar prices remain a concern.

"Prices are still high, especially in northern India," Finance Minister P Chidamabaram had said. Despite various government interventions like clamping exports and releasing higher amount of sugar for open market sale every month, retail prices are still ruling as high as Rs 21-22 per kg, especially in Delhi. The industry, on the other hand, is worried about the shrinking export market. International Sugar Organisation has estimated a higher global sugar surplus of 5.8 million tonne for the year 2006-07.

The London-based body had in August pegged the surplus at around 2.2 million tonne. "There is very little scope for exports and very soon this opportunity would also be gone if the (Indian) government does not lift the ban," said an official with an international trading house.

India can target Sri Lanka, Bangladesh, Indonesia, and a few African countries, the official said. Pakistan, India's biggest export market earlier in the year, has slapped heavy duty on sugar imports. "International prices are also easing," said Sanjay Tapriya, director finance, Simbhaoli Sugar Mills Ltd.

He said exports would be beneficial, "if domestic prices stabilise at the current levels and overseas prices are between $396-405 (Rs 17,000-18,000) per tonne.

London sugar for March delivery Friday closed at $369 per tonne, down $6.50 per tonne from a day earlier.

Industry says the mills in southern India will have a higher advantage, as they will save on carrying cost. Prices in the region are at a little above Rs 16,000 per tonne now.

However, northern region mills are faced with a problem because wholesale prices, now a little above Rs 18,000 per tonne, are likely to touch Rs 17,000 per tonne by March-April. An official with a south-based sugar company said, the export ban came at a wrong time when both prices and demand was high.

"After the ban was imposed, Brazil moved in to capture the market," he said.

India had exported a little over 1 million tonne of sugar when the export ban was imposed and the industry says the country has a potential of exporting up to 2 million tonne sugar if the ban is revoked.

After high cane prices for the past few years prompted farmers to plant more sugarcane, India is on its way to harvest a bumper sugar crop this year.

While, the government has pegged the output at 22.7 million tonne, the industry estimates it to cross 23 million tonne. India produced 19.3 million tonne sugar in 2005-06 (Oct-Sep).

The domestic demand is pegged at 18-19 million tonne. Pawar had said India could end the current year with a 7.7 million tonne surplus sugar.

Industry officials said a higher cane price is inevitable as farmers can only be prompted to sow more of the crop if the remuneration is attractive.

Farmers have been agitating, as they want higher cane prices. "We need to pay higher prices to the farmers. But our margins are coming under pressure with low demand and no exports," said an official with a north India sugar mill.

"The upside potential (for sugar shares) is very limited...If the government lifts the export ban soon the downside may be capped," said Vikram Suryavanshi of Karvy Commodities.

The industry has all its hopes pinned on the government-promoted programme of doping ethanol with petrol.

In September, the government had invited bids for supply of 540 million litre of ethanol from state-run as well as private sugar companies. The programme has not yet taken off.

At 5 per cent blending, the country would require 682 million litre ethanol in 2006-07 (Oct-Sep) sugar season, and the demand could rise to 1.3 billion litre with 10 per cent blending.

The industry says the scheme has a lot of scope for sugar companies as it will generate additional revenues.

According to industry estimates, India has about 120 ethanol producing distilleries, which can manufacture 1.2 billion litre ethanol every year.

Ethanol is made from molasses, which is a key by-product of sugarcane processing. "Crude prices have fallen from their all time highs. This would offset the demand for ethanol," said Unupom Kausik with Anagram Stock Broking Ltd.

Crude oil for December delivery fell below $60 a barrel Friday on the New York Mercantile Exchange on reports indicating increase in crude stocks from the International Energy Agency.

The government, however, remains ambitious about its fuel-blending programme and is aiming at 10 per cent doping by June.