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Sugar: The current scenario - Views on News from Equitymaster
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  • Mar 29, 2007

    Sugar: The current scenario

    In the last six months, depressed domestic sugar prices led by domestic surplus and the inability of producers to export the surplus have turned the tables upside down for the sugar sector. The sugar companies have been hampered by a slew of poor performances over the last couple of quarters. In this article, we shall take a look at the scenario currently prevailing in the domestic sugar market as well as the exports scenario.

    The domestic scenario...
    Production: India is set to produce more than 25 million tonnes (MT) of sugar in the current crushing season. This is up 30% from the previous year and higher than earlier estimates. While, Maharashtra would have an output of 8 MT, Uttar Pradesh would produce 7.5 MT. The consumption demand is around 20 MT. Also, with capacity addition plans announced by sugar companies, higher production is expected for the next year as well. This would decline the sugar prices thereby reducing the profits for sugar producers. With production expected to exceed supply over the next two years, it would continue to keep prices depressed, in our view.

    Prices:The higher output has put more pressure on prices; as a result sugar prices have declined and at present are close to the cost of production of sugar producers. Domestic sugar prices have witnessed sharp declines in the last two quarters. Sugar realisations are currently ranging between 13,500 per MT to Rs 14,500 per MT in the south, with those in the northern mills ranging around Rs 15,500 per MT. These prices represent a decline of 28% from the prices in July 2006. Expectation of surplus production and ban on sugar exports has led to the fall in sugar prices.

    Pressure on margins: The UP government has announced an increase in State Advised Prices for cane from Rs 1,150 per MT to Rs 1,250 per MT for SS07 (sugar season 07). As a result, higher raw material prices coupled with lower sugar realisations have led to lower margins. While companies with diversified revenues from by products continue to face pressure on the margin front, nevertheless the extent of the same is lower as compared to players focusing on only one product namely sugar.

    The exports scenario...
    The fall in output last year pushed domestic prices higher by 20% and the government slapped a ban on exports in August. However, with surplus expected in this crushing season and the prospects of lower price realisations, the government has lifted the ban partially. The government has so far issued permits for export of 800,000 tonnes of sugar, out of which about 300,000 tonnes have been sold mainly to Bangladesh, Sri Lanka and Yemen. However, a drop in global prices to US$ 300 a tonne from US$ 400 about six months before has made exports unprofitable.

    With the situation on the domestic front not improving and the prospects for the sector looking bleak, the government approved a package of incentives to sugar mills to step up exports. The government has also approved transport, freight and other subsidies to sugar factories. This will be at a flat rate of Rs 1,350 per tonne for sugar factories located in coastal states and Rs 1,450 for units in the northern states. Earlier, margins on exports were negative and companies were losing around Rs 2,000 per tonne in Maharashtra and Rs 1,650 a tonne in Uttar Pradesh due to low export realisations. Subsidies are now expected to offset the losses partly. Though profits may not be visible yet, export will most likely help stabilise domestic prices.

    The government has also planned to create a 2 MT sugar buffer to ease the pressure on mills from falling prices and on storage costs. This would help in avoiding the build-up of cane price arrears, stabilise sugar prices and liquidate excess stocks of sugar. The government expects 1.5 MT of sugar exports this year. The Indian production surplus represents 30% of the global production surplus.

    To sum up...
    While the government is taking steps to reduce the problems prevailing in the sugar sector, these moves cater only to the medium term scenario. Thus, expectations of a further increase in production next season will continue to remain a cause for concern going forward. Hence, one has to understand the dynamics of the sector and take a cautious approach while investing in sugar stocks.



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