Extension of sugar stock holding limit by the government till April next year is not likely to have any significant negative impact on sugar prices, which will remain firm in the next 3-4 quarters due to the tight domestic situation, ICRA said in a report.
ICRA believes that the extension of stock-holding limits for sugar mills and traders by six months till April 2017 is unlikely to have any significant negative near-term impact on sugar prices as there is deficit situation in domestic and international markets.
"However, this move in conjunction with earlier measures such as imposition of a 20 per cent export duty on sugar and withdrawal of incentives on sugar exports is likely to restrain any further hike in the near term," ICRA Senior Vice-President Sabyasachi Majumdar said.
He said that in the next 2-3 quarters, any increase in prices from the current levels will depend on factors like expectations of production during sugar year (SY2017), beginning from October 1, sugar mills' own actions on supplies depending on their inventory-holding capacity, and any further government measures on price control measure.
After remaining stable at Rs 36,000 per tonne in September, prices increased to Rs 36,500 in October, mainly supported by an expected decline in the sugar production during SY2017, actual decline in the domestic stocks during SY2016, and also a global sugar deficit scenario, which drove up international sugar prices, it said.
Further, the domestic sugar prices are likely to remain firm in the next 3-4 quarters, given the tight domestic situation, it added.
In order to boost availability of sugar in the open market and help control the price rise, the government has imposed stock limits in April 2016, it said.
The limit on stock holding was approved for six months and fixed at stock limit of 500 tonnes and a turnover limit of 30 days for sugar traders in the country.
In a recent notification, the government has extended the limit for another six months till April 2017.
This apart, the recent reduction in ethanol prices offered to sugar mills is likely to have a marginal negative impact on sugar mills, which are forward integrated into distilleries, ICRA said.
While the mills in Maharashtra and Karnataka are likely to benefit from the rising sugar prices and the stagnant cane cost, cane pricing in Uttar Pradesh, which is yet to be fixed for SY2016-17, will be crucial for the sustainability of the profitability for the UP-based sugar mills, going forward, it said.
"While the UP government has maintained the state
advised price (SAP) at Rs 280 per quintal during SY2016, for the fourth year in a row, the significant increase in the domestic realisations is likely to act as a trigger for an increase in the SAP during SY2017, especially given that the state Assembly elections are due in 2017," Majumdar said.
Thus, he said, any significant increase in the quantum of SAP by the UP government is likely to affect contribution margins of the UP-based mills.
