Drought conditions in Maharashtra may hit the domestic sugar production in the sugar year 2016, which is estimated to decline by 10 per cent at around 25.5 million metric tonnes, rating agency ICRA has said.
"We estimates domestic sugar production at around 25.5 million metric tonnes (MT) during the sugar year (SY) 2016, a decline of 10 per cent over the previous year. This was mainly driven by a drought in the largest sugar producing state Maharashtra," ICRA said in a statement here today.
Lower sugar production along with exports of around 2 million MT is likely to bring down the closing stocks to around 7.6 million MT in sugar year 2016 from around 9.5 million MT in SY2015, it said.
"The decline in sugar stocks is positive and has resulted in an improvement in domestic sugar realisations since August last year.
"With effective cane prices after accounting for duties and state-level subsidies for SY2016 largely remaining unchanged over the previous year, the increase in sugar realisations is expected to improve the contribution margins for sugar in this year," it said.
These factors, together with the higher recovery rates, are expected to drive a significant improvement in profitability for sugar mills based in Uttar Pradesh (UP), ICRA Senior Vice-President Sabyasachi Majumdar said.
Profitability improvement is likely to be moderate for mills based in Maharashtra and Karnataka. This apart, profitability is also likely to be supported by improved realisations for by-products, Majumdar said.
Although sugar mills will have to sell sugar at the modest global prices prevailing, ICRA expects export-linked subsidies for the current sugar year and the resulting modest increase in domestic sugar realisations to offset the losses from export sales to a large extent.
While the Centre has supported sugar mills by
providing interest-free loans to clear cane dues and mandating compulsory exports to tackle the high sugar stocks in the market, the primary aspect of linking sugar and by-product realisations with cane costs is yet to be fully addressed, ICRA sees a movement towards this goal,as seen in UP.
"With renewed focus on the ethanol blending programme (EBP) and mandatory ethanol blending been revised from 5 to 10 per cent, the new fixed pricing mechanism for ethanol supplied to OMCs and removal of central excise duty is expected to augur well for the profitability of the industry as a whole through higher realisations for ethanol as well as balancing of domestic sugar surplus," Majumdar said.
In September 2015, the Centre had notified the minimum indicative export quota (MIEQ) for sugar mills to export 4 million MT of sugar during the ongoing sugar year.
The mills that meet a minimum of 80 per cent of the target notified under the MIEQ and under the ethanol blending programme, for those mills that have distillation capacities to produce ethanol are eligible for this subsidy, it said.
Meanwhile, sugar prices, after touching a three-year low of Rs 23,000/MT in July 2015, have been on a rising trend since August last year in anticipation of stock clearance backed by exports and lower production in Maharashtra.
The announcement of cane production subsidy in December, 2015, the expected increase in sugar exports and the likely global sugar deficit scenario have combined to cause sugar prices to firm up to Rs 31,000/MT in February 2016 and Rs 31,600/MT in March 2016, it said.
Going forward, the sustainability of the upward trend in sugar prices remains critically dependent on the sugar exports for sugar year 2016 as well as expectations on production figures for next sugar year 2017, it added.
