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External Factors To Govern Fortunes Of Indian Sugar Industry

Thursday, May 05, 2011
By Manik K. Malakar

It appears that things are ‘sweetening’ up for the sugar industry in India after some time. Sugar output going forward is expected to improve and even the acreage under sugar cane production will be better.

Good performance in the sugar industry is just one facet of generally good performance across the board in the agricultural sector per se in India.
“Domestic sugar stock position is expected to turn surplus in the current season with the sugar output likely to outstrip domestic consumption marginally,” said Anjan Ghosh, Head – Corporate Sector Ratings with ICRA. During the period 2010-11 sugar output is likely to be in the range of 24 to 25 million tonnes, representing a growth of 30 to 35%. Of this approximately 23 million tonnes will be consumed in India and thus approximately 1.5 million tonnes would be available for the export markets. Also despite the good production of sugar prices of the commodity too have been on the upswing. Prices are in the range of Rs. 28,000 to Rs. 29,000 per metric tonne, a recovery from the prices of Rs. 25,000 experienced in August 2010.

With the crushing season of SY 2010-11 coming to a close, we do not foresee any significant variation in final production from the estimated range, said ICRA in an analysis of the sugar sector.

Thus, sugar prices in the short term will be largely determined by the following factors. Firstly, the international crude oil prices, which will determine the raw sugar: ethanol mix in Brazil, the world’s largest producer. Secondly, the Government of India’s policies regarding exports of sugar and import duties. Thirdly, expectations on domestic sugar production for the coming season (Seasonal Year 2011-12), which will start becoming clearer by end April 2011 by which time the cane acreage for the coming season is known. 

ICRA based on available information expects that sugar prices would show a modest upward movement in the next 6 months. So what are the contours of the sugar industry and the prospects of the industry likely to be going forward?  “A sharp correction in sugar realisations from March 2010 and the resultant decline in conversion margins resulted in pressures on the profitability of sugar mills from Q2 SY 2009-10, with sugar mills reporting either losses or a significant deterioration in profits since that quarter,” said Ghosh.

While sugar mills have secured significant downward revision in cane prices in the current season and prices have inched upwards from Sep 2010, profitability for Q1 SY (seasonal year) 2010-11 was subdued given that most sales came from the relatively higher cost of opening stock. ICRA expects that there will be a modest increase in prices, and absolute levels of earnings for the sugar industry should improve from Q2 SY 2010-11 onwards given lower cane costs, lower proportionate conversion charges (given higher volumes of crushing) and higher by-product sales.

“Going forward, as far as the medium to long-term outlook is considered, the long-term prices and profitability of Indian sugar companies would remain volatile and dependent on domestic and international supply-demand trends,” said ICRA’s Ghosh.

Extraneous factors that would affect the industry would include climatic conditions in major producing countries. The price of crude oil price, which determine the diversion of cane crop to ethanol, is another important factor. “Consequently, the price trends in international markets would be the key determinants of future profitability,” Ghosh continued. Also action from the government and the courts in ensuring a rational linkage between cane prices and sugar prices will also be a key to long-term viability of sugar operations was the inputs from ICRA.

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