Sugar prices in the country are likely to remain firm in next 3-4 quarters due to tight stock position, rating agency ICRA has said.
"While the government imposed 20 per cent export duty in June 2016, and implemented stock holding limits in September, they haven't acted as a deterrent to the increasing trend in the domestic sugar prices that are expected to remain firm in near-term in spite of these measures, given the tight stock position,"said ICRA Senior Vice-President Sabyasachi Majumdar.
However,he said, these measures may dampen prospects of a further significant price rise.
"In the next 3-4 quarters, any further increase from the current levels would depend on factors like expectations of sugar production during SY2017, sugar mills' own actions on supplies depending upon their inventory-holding capacity and government action on price control measures," he said.
ICRA expects domestic sugar output to decline to 23.2 million tonne during SY (sugar year) 2017 (beginning from October 1), a decline of around 8 per cent over the previous year.
This is due to lower cane availability in Maharashtra and Karnataka due to poor monsoons last year, it said.
Although the monsoon is likely to be better this year, the impact on the cane may be seen only in SY2018, given the growing period (12 months) of sugarcane.
Domestic production falling short of consumption is likely to continue in SY2017, for the second straight year - a shortage of around 2.6-2.8 million tonne, it said.
While the sugar production is expected to decline in SY2017, opening stock of 7.6 MT is may result in the overall sugar availability between 30.5-31.0 MT, which is likely to meet the domestic consumption of 26 MT, but the closing stocks are likely to be lower than the normative sugar stock level of around 6.4 MT (based on the assumption of requirements of three months' domestic consumption), ICRA said.
While the mills in Maharashtra and Karnataka may benefit
from the rising prices and the stable cane costs, ICRA further said that 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.
"With the fair and remunerative price (FRP) of cane for SY2017 fixed at the same level as of the previous year and sugar prices on the higher side, the profitability of sugar mills based in Maharashtra and Karnataka is likely to improve. However, the extent of increase in profitability could be moderated with the decline in the cane availability in these regions," Majumdar said.
He opined that while the UP government 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 sugar 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 early 2017.
"Thus, any significant increase in SAP by the UP government may negatively affect the contribution margins of the UP-based mills. Hence, the industry's ability to secure a linkage between cane price and sugar realisations is critical for its long-term sustainability," he added.
