Sugar price to move up on supportive fundamentals

Prices move 18% globally on deficit forecast, lags behind in India with a gain of just 4%

Sugar prices are likely to move up in local markets following global trends and the possibility of export incentives by the government of Maharashtra to move surplus stock out of the country.

“Of late, sugar prices in India have started following global trend. Over the last few months, sugar price has moved up significantly in global markets but lagged behind locally. So, sugar prices would certainly move up in local markets,” said an analyst with one of the largest trading firms.

While the price increase has begun, the quantum of jump remains relatively lower in India compared to global markets. Against a mere 4% increase to Rs 33.50 a kg in the local wholesale markets so far this calendar year, sugar prices have jumped a handsome 18% in the world market. On the benchmark InterContinental Exchange (ICE), sugar prices have shot up to 14.80 cents/lb on Monday from 12.67 cents/lb at the beginning of this calendar year.

 

The possibility of sugar price rise will come as a breather for crushing mills that have been reeling under price pressure for the past four years. Barring a couple of sporadic instances, sugar prices have remained way below cost of production in that period, resulting in a huge financial crisis for mills. Understanding the crisis, therefore, both central and state governments have announced incentives to prevent mills from bankruptcy.

Fundamentals have also been gradually supportive in the last few months. From a surplus estimate in the global markets, analysts have started forecasting deficit of over 2 million tonnes in the world market. Agencies like International Sugar Association along with a host of other research organizations have forecast a global deficit of 2 - 4 million tonnes in 2016 due to crop damage in Brazil on unfavourable climatic condition.

“So, this will give a chance to India to export large quantity of sugar this year to which the government has fixed a cap of 3.2 million tonnes. The quantity equivalent to export would reduce domestic availability and supply pressure thereupon. Since, we have forecast sugar output in India to remain lower at 26 million tonnes, exports are needed to reduce domestic supply pressure,” said Abinash Verma, Director General, Indian Sugar Mills Association (ISMA).

In fact, the sugar industry estimates 7.5 million tonnes of carryover stocks from the last year. With 26 million tonnes of output for this season as against an estimated consumption of 23 million tonnes, 3 million tonnes of surplus production will result in 10.5 million tonnes of overall supply for the current crushing season ending September 2016.

To reduce the supply pressure, therefore, the Centre has announced Rs 4.5 per quintal of cane crushed production subsidy which helped producers to contract around 1.25 million tonnes of white sugar for exports. Of this, however, around 1 million tonnes have moved out of factories.

Meanwhile, the central government has met with state chief and corporation ministers recently and briefed them about the lackadaisical performance of fulfilment of export quota by mills in Maharashtra. The state is the country’s largest producer of sugar, contributing around 25% of national output. 

Subsequently, the government of Maharashtra held a meeting with the sugar mills in the state where it was decided that mills which export 12% of the current season’s production will be entitled to exemption of state purchase tax on sugarcane. In Maharashtra, sugar mills are required to pay purchase tax of 3% on the fair and remunerative price (FRP), which works out to around Rs 9 per quintal of sugarcane.

“Mills are, however, waiting for the notification in this regard. Following the notification, mills in Maharashtra would be able to achieve 1.12 million tonnes of export quantity cap allocated to them. Sugar mills in Maharashtra have contracted only 0.4 million tonnes for sugar exports. On achieving the exports quantity target, supply pressure would ease in local markets,” said Verma.

Sugar mills have produced 19.95 million tonnes of the sweetener so far this season which stands almost similar to last year’s output till date