Around 17% increase in realisation in the fourth quarter of the current sugar season (SS) coupled with reduced production estimates for the upcoming season is likely to improve financial health of sugar producers next year.
Sugar crushing season begins in October and continues until September next year.
A recent Icra report said that risk for surplus availability of sugar during the last sugar season was mitigated with substantial exports and reduced production estimates in SY 2012-13 following weak and delayed monsoons in certain key growing regions.
Thus, free net sugar realisations (ex-factory, all prices quoted in this release are ex-Uttar Pradesh unless otherwise specified), which had remained range bound between Rs 28-30 a kg between October 2010 to April 2012 have increased to around Rs 35 a kg by Q4 SY 2011-12.
Given that sugar production is expected to decline between 6-8% and remain almost in balance with domestic sugar consumption in SY 2012-13, the current price is expected to be sustained in the short-term.
“The operating profits for mills in most parts of the country barring Uttar Pradesh have been supported by higher volumes and improved conversion margin, however the impact at the net level has been moderated by higher interest costs," said Sabyasachi Majumdar, Senior Vice-President, Icra.
"However, for UP mills, profitability indicators and cash flows for sugar mills in the first nine months of SY 2011-12 have been impacted severely because of reasons mentioned earlier. Although the profitability is likely to recover significantly in the last quarter following the recovery in sugar prices in Q4 SY 2011-12, overall the profitability numbers for UP sugar mills are likely to remain stressed in SY 2011-12," he said.
"For SY 2012-13, while sugar mills are likely to benefit from steady sugar and by product realisations, fixation of cane prices will be the key variable, especially in SAP states,” Majumdar added.
The Icra study, however, warns that while improved prices are a positive for the sugar industry, fixation of cane prices for SY 2012-13 will remain a crucial determinant for profitability of sugar mills in the coming sugar season.
This apart, government/court action in ensuring a decontrol of the sugar industry and a rational linkage between cane prices and sugar prices will remain critical for the fortunes of the sugar industry, especially in states governed by the state advised price (SAP) mechanism.
The domestic sugar industry is likely to remain in surplus with the sugar output likely to outstrip domestic consumption for the second consecutive year.
During SY 2011-12, sugar output is likely to be around 26 million tonne (a 7% growth over the previous year), which is likely to outstrip domestic consumption (expected at around 23 million tonne) by 3 million tonne.
However, the impact of this surplus has been largely mitigated by exports of around 3.2 million tonne till July 2012.
Thus, sugar stocks are likely to remain stable at about 6 million tonne or 3 months domestic consumption.
Going forward, Icra expects sugar production for SY 2012-13 to decline to around 23.5-24.5 million tonne, with Maharashtra likely to witness the largest decline, driven mainly by weak and delayed monsoon in several key growing regions.
The uptrend in prices followed significant export of sugar, which relieved pressure on domestic stocks, lower sugar releases but most importantly concerns over delayed and weak monsoons affecting sugar output in the coming season SY 2012-13.
With production likely to decline next year and prevailing international prices and import duty deterring imports, Icra expects sugar prices to be supported at the current level in the next 12 months.
In the medium-term, the sugar price trends will continue to be determined by the following three factors. Firstly, domestic sugar production for the coming seasons (expected to decline to 23.5-24.5 million tonne in SY2012-13) and secondly, the international crude oil prices, which will determine the raw sugar: ethanol mix in Brazil, the world’s largest producer; and finally, the government’s policies regarding exports of sugar and import duties.
Sugar mills have been smartly diverting byproducts to generate higher profit.
Rectified spirit is diverted extensively to chemical industry for industrial uses and also to liquor companies for manufacturing of potable alcohol.
On account of the higher prices offered by the chemical industry and potable alcohol manufacturers, sugar mills have been diverting ethanol to these users.
Currently, oil marketing companies are offering Rs 27 a litre of ethanol as against Rs 34 a litre offered by the other competitive users.
