The Government of India has made it mandatory for OMCs (Oil Marketing Companies) to blend ethanol with petrol to the extent of 10 per cent with effect from October 1, 2008, in a move aimed at promoting alternative sources of automotive fuels and helping meet auto emission norms.

CRISIL Research believes that sugar companies will not be able to supply the required quantity of ethanol to meet the blending requirements at the current fixed price of ethanol at Rs. 21.5 per litre. In order to meet the additional ethanol demand arising from the government directive, it would be imperative for sugar companies either to produce more ethanol and therefore less sugar; or produce ethanol directly from sugar cane. At current prices of ethanol and sugar, both these options are not financially viable. That sugar companies will shift to producing more ethanol at current prices is also unlikely considering other by-products of the distillation process such as rectified spirit and potable alcohol fetch a higher price at a relatively lower cost to produce as compared to ethanol. For OMCs, however, in the scenario of rising crude oil prices, blending ethanol with petrol is a beneficial move.

Mr. Sridhar Chandrasekhar, Head, CRISIL Research elaborated, "According to a detailed analysis undertaken by CRISIL Research, at current ethanol prices, blending is not an attractive proposition for sugar companies. For the blending programme to be successful,  ethanol prices should either be market determined or a pricing mechanism needs to be evolved wherein ethanol prices are set, given the prevailing prices of the related products (sugar, rectified spirit and crude oil). OMCs, however, at current petrol prices,  will be in a position to absorb additional costs due to ethanol prices even if they are increased by 45 per cent."

Sourced From: CRISIL Limited