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Ethanol: The next big thing? - Views on News from Equitymaster
 
 
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  • Sep 19, 2006

    Ethanol: The next big thing?

    In recent times, there have been talks about the ethanol blending policy of the Indian Government. The government had introduced this policy in December 2002, stipulating a blending ratio of 5% in nine states and union territories. This increased the scope for the ethanol industry in the country. But due to some roadblocks on the pricing and supply between distilleries and oil refining companies, the 5% blending was discontinued in 2003. However, the program again took off in August 2005, when the Government announced the re-introduction of the program in nine states and union territories, and Indian Oil Corporation signed a pact with ISMA (Indian Sugar Mills Association) to purchase ethanol at Rs 18.75 per litre. The Government of India is now planning to extend the blending policy of 5% across all states and union territories in the country and also raising the blending rate to 10% from October 2007.

    States Union Territory
    Andhra Pradesh Daman & Diu
    Goa Dadra & Nagar Haveli
    Gujarat Pondicherry
    Haryana Chandigarh
    Karnataka
    Maharashtra
    Punjab
    Tamil Nadu
    Uttar Pradesh

    For 5% Blend in Gasoline
    Requirement on all India Basis 500 m ltrs. per annum
    Requirement in 8 States 300 m ltrs. per annum
    Source Govt. of India Ministry of Petroleum
    This alcohol made by sugar mills is used not only by oil companies for blending purposes, but also by industrial alcohol-based chemical manufacturers and potable alcohol manufacturers. Ethanol is a 99.99% purified form of alcohol, which is made from rectified sprit in the distillation process. Currently, the market price for rectified sprit is Rs. 21 per litre and for ethanol, Rs. 18.75 per litre. The demand for industrial alcohol and sprits is not certain, which leads to high volatility in their prices. In order to hedge the risk of volatile prices and un-assured requirements, sugar companies are more interested in producing ethanol than any other alternative products.

    Raw materials
    Molasses is also a raw material for industrial alcohol and other chemicals. Sugar companies are more inclined towards directing molasses to ethanol. If on an average, 50% of molasses are set aside for these products, then 5% blending in 9 states and UTs can be easily done. According to Cris INFAC, 5% blending is feasible, as 3.65 MT of molasses will be required while available molasses is 10.9 MT. However, 10% blending looks difficult as 12.9 MT of molasses will be required.

    Capacity
    According to the latest CRIS INFAC survey, there are adequate distillery capacities in India to take care of India's ethanol demand at 5% blending. Total distillery capacity in India is around 3,000 m litres (industrial alcohol and ethanol), which is currently adequate to meet the requirements of 500 m litres at 5% blending and 1,000 m litres at 10% blending. Also, there are additional capacities coming up in various parts of UP by leading sugar producers to the tune of 180 m litres. Bajaj Hindusthan is expanding its industrial alcohol capacity from 320 KLPD, to 800 KLPD by FY08E, while Balrampur Chini is set to increase the distillery capacity by 45% to 320 KLPD in FY07.

    What to expect?
    Though a big potential area, the demand for ethanol till now has not been too strong in the country, as initially there were some issues on blending. Also, currently, the OMCs are not willing to pay the price demanded by the sugar companies. Hence, a lot will depend on government policies in terms of fixing of a price for ethanol.

     

     

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