Sugar prices are expected to remain under pressure in the near term owing to surplus stocks in the domestic market and limited possibility of exports, the rating agency ICRA said today.
Domestic sugar prices continue to be impacted by surplus scenario in both the domestic and global markets, it added.
Sugar prices in the domestic market have declined sharply to Rs 23,000 per tonne (ex-mill UP) by July 2015 from Rs 31,000 per tonne in September 2014, on account of surplus stock and delay in the export subsidy notification, ICRA said.
Sugar mills are likely to liquidate their stocks at low prices following pressure from various state governments to clear the high cane arrears.
High cane costs along with low sugar realisations continue to weigh heavily on the profitability and liquidity of the sugar mills, ICRA said in a report.
While government assistance to sugar mills in the form of interest free loans to the tune of Rs 6,000 crore provides some support in the short term in clearing the cane arrears, the agency said the debt burden on the industry is expected to increase.
This coupled with pressure on profitability is likely to continue to impact the debt coverage metrics in the near term, it added.
While the domestic sugar prices are under pressure, cane price fixation continues to remain mired in uncertainties.
The Uttar Pradesh government continues to fix cane price at Rs 280 per quintal for 2014-15, while in Maharashtra and Karnataka the mills are paying the Fair and Remunerative Price (FRP), being fixed by the Centre, to farmers.
Sugar production is expected to increase by 16 per cent to 28.3 million tonnes in the 2014-15 marketing year (October- September) and outstrip domestic demand consumption for fifth year in a row, mainly driven by higher sugar production in key sugar producing states, namely, Maharashtra, UP and Karnataka.
Despite higher export subsidy of Rs 4,000/tonne during 2014-15 on raw sugar exports and additional export subsidy of Rs 1,000/tonne from Maharashtra government for mills in the state, exports have been limited at around 0.56 million tonnes of sugar during the first eight months of this marketing year.
The weak global prices make exports less lucrative. With significant delay in announcement of subsidy, which came only towards the end of crushing season, there is limited window of opportunity for sugar mills to produce raw sugar, it said.
ICRA's senior vice-president Sabyasachi Majumdar said: "The current season has commenced with relatively high opening stock of 7.4 million tonnes which coupled with the surplus production during 2014-15 and limited exports to result in continued sugar surplus scenario with the closing stock estimated at around 10 million tonnes.
