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Sugar sector: Bitter sweet times - Views on News from Equitymaster
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  • Mar 4, 2009

    Sugar sector: Bitter sweet times

    The sugar sector which was in doldrums over the last two years has been gaining limelight in the last couple of months due to reversal in the sugar cycle and hike in prices. In this article we have a look at what is in store for the sector going forward.

    Domestic shortage: The sugar production in the current year is expected to be the lowest in the last three years. During the sugar season 2007-08 the sugar production fell to 26 million tons (MT) from 28 million tons in 2007-08. As against that, the production in the current year is estimated to be only 16.5 MT. In fact, as per Indian Sugar Mills Association (ISMA), with consumption expected to remain stable, India may have to import raw sugar to bridge the supply-demand mismatch.

    The key reasons for lower production are:

    • Shift in acreage from sugarcane to other crops like wheat, paddy on account of the higher prices of the latter. The sugar prices had stagnated in the last two years. The sweetener lost 12% acreage area, which came down to an estimated 4.4 m acres from 5 m acres last year due to farmers shifting to more remunerative crops.

    • Un-seasonal pre-monsoon rains also affected production.

    • Cane payment arrears of previous years.

    These factors have led to Maharashtra's sugar output to decline to as low as 5 m tonnes this year compared with 9.1 m tonnes last year. Sugar output in Uttar Pradesh (largest sugar producing state in India) has also dipped by 30% in 2008-09 crushing season following low cane production and under-recovery. The recovery percentage of cane is lower by 0.75% to 1% as compared to 2007-08.

    Global output: As per the International Sugar Organization (ISO), global sugar consumption is expected to rise by 2.4%, while the production is estimated to drop by 3.8% in the year through September 30, 2009. This would lead to a drop in the global production for the first time since the 2004-2005 season leading to a deficit after two years of surpluses. The production in Brazil (the largest sugar producer) is also on the lower side as credit shortage drove some mills out of business.

    World sugar scenario
    (MT) 2007-08 2008-09E
    Production 168.6 162.2
    Consumption 162 165.8
    Surplus/Deficit 6.6 -3.6
    Import demand 45.8 47.7
    Export availability 47.4 47.7
    End stocks 69.3 65.6
    Stock to consumption ratio (%) 42.8% 39.6%
    Source: ISO quarterly market outlook, November 2008

    Realisations: The sugar prices which had bottomed at Rs 13 in September 2007 is witnessing upward trend due to lower production. The realisations increased by 27% YoY in September 2008, to touch Rs 18.4 per kg. The sugar prices that are currently hovering around Rs 20 to Rs 21 per kg are expected to go up to Rs 25 per kg going forward. Further, on account of global shortage and low production in Brazil, Australia and India, even the international prices are expected to move up further.

    Raw materials: Allahabad High Court's on December 8, 2008 dismissed the private sugar millers petition filed against the cane price fixed by the state government at Rs 140 per quintal (for normal variety) for the current sugar year (Oct 2008-Sept 2009) as against Rs 125 per quintal the year earlier. On account of tight supply, the companies are paying higher cost of Rs 150 to Rs 160 per quintal for the cane. The government is of the opinion, that reducing acreage under sugarcane in recent years comes in tandem with marked hikes in floor support prices for food grains, oilseeds and coarse cereals. Hence the sugarcane farmer needs to be paid well to avoid shift to other crops, as this could lead to shortage.

    Ethanol: While ethanol had caught the fancy of the policy makers across the globe on account of record high crude prices last year, significant meltdown in the crude prices has now led to ethanol industry facing serious jeopardy. With slowdown in economy activity and demand for cars, the ethanol industry is burdened with excess capacity. In US and Brazil, the companies are closing capacities. In India, while the government is taking steps to encourage the sector, on account of shortage of sugarcane of up to 30%, the availability of molasses will be on lower side thereby resulting in higher raw material costs.

    Health of sugar companies: The expectations of decline in sugar production would have a positive impact on prices. However, despite higher realisations, the financials of the sugar companies would not drastically improve due to higher cane prices which would affect their margins. Further, lower production would lead to sugar volumes and lower crushing period, thereby also affecting the allied segments. However, the inventories on their books would reduce due to lower production. As a result, the sugar companies may not see a reasonable earnings growth and their return ratios would continue to remain low in the medium term.



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