Ethanol prices may surprise on the upside: Shree Renuka

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Domestic sugar sector has been under pressure as the food ministry has still not issued the sugar export license, despite the Empowered Group of Ministers (EGoM) have approved the sugar export of five lakh tonne. In addition to that there are concerns over rising commodity prices and inflation, which may impact sugar exports further.

One of the major sugar producers Shree Renuka Sugars has had a cloud over itself because of newsflow of Ethanol shortage that has been coming in from Brazil.

Narendra Murkumbi, MD of  Shree Renuka Sugars , in an interview with CNBC-TV18's Udayan and Mitali Mukherjee, spoke about the recent happenings in his company and the road ahead.

Below is the verbatim transcript of the interview. Also watch the accompanying video.

Q: Could you start by talking about the duty changes that are being considered by the Brazilian government? What kind of impact could that have on you?

A: It is an off season in Brazil right now and the new season has just started. There is a shortage of ethanol there. Domestic ethanol prices for Anhydrous, fuel grade alcohol, are about Rs 55 per litre.

There is also a shortage of gasoline in the country. The Brazilian government is worried about all these matters. With the slowdown in investment in the sector over the last three years, there will be continuous shortages or tight market for ethanol in the years to come. A series of measures are being discussed.

Too much is being made of this suggestion on sugar export tax. It's premature to think that this will happen. With oil at USD 120 per barrel, we are seeing ethanol prices higher than sugar. The opposite was true for the last three years.

Now, ethanol prices are higher than sugar. It looks like they will continue that way for some time. The supply is very tight. We expect considerably more discussion with the Brazilian government in terms of how they will help the industry increase supply.

Q: Do you expect to see difficulties in the near-term from your Brazilian unit in terms of losses due to delays in harvest?

A: No, absolutely not. Out of our four factories in Brazil, one has started operation last month. We are currently selling ethanol from that mill at an equivalent of 34 cents in sugar terms. The other three factories will commence in this week and the week after.

The sector is very positive to me. Ethanol prices have surprised on the upside. They have risen far higher than expected a couple of months back. The strong prices look to continue for the rest of the year. It is a very positive thing.

Speaking specifically of any taxes that could be levied on exports from Brazil, Brazil has 70% market share of the world raw sugar market. We expect the tax burden to fall on buyers rather than on the sellers.

Q: Don't you expect any drop in realisations from the Brazil unit over the next couple of quarters?

A: No, not at all. The world sugar market has peaked at 33 cents earlier in February and prices have gone lower. We expect the prices to be about 23-25 in second half of the year.

We are maintaining that target and do not see any change in that. The strength of the ethanol market has surprised us. Currently, it is trading around 30 cents and even forward prices are very comfortable.

Q: The tone of protectionism has gotten high amongst governments because of what has been happening with commodities. Do you think they will push through on this ethanol plan?

A: If we see the range of measures being discussed, the headline that has caught the attention is suggestion of sugar export tax. If we see some of the other measures concerned, some of these could be very positive for the industry.

For example, topics like more effort by Petrobras to build up stocks in the season. In this season, ethanol prices are weak because a lot of mills are selling for cash generation during crushing. In off season, prices are very high.

Volatility could be curbed if there is stronger buying from petroleum distributors in Brazil. Similarly, there is talk of extending additional financial assistance to replant cane which has gone old. There are lots of positive measures being discussed.

There is an engagement between industry and the government. This overall shortage of ethanol faced by Brazil and the world market will be very positive. It will focus and highlight the investment needed in this sector.

Q: Going back to the point about realisations in Brazil, where do you think they could get to?

A: Brazilian domestic sugar prices are at about 32 cents equivalent which is about Rs 33-34 in Indian terms. We expect them to drop to about 25 cents in the mid season.

Otherwise, we expect the world market to be in a broad range of 20-27 cents for the rest of the year. We do not see much downside below 22 cents because of the support from very strong ethanol prices.

This year, there is not enough cane in Brazil to produce required ethanol and sugar that the world market needs. The two will balance. If ethanol prices continue to be higher, it is possible that the Brazilian sugar production, commercially without any government intervention, could be dropped between 2-3 million tonne.

This could turn the world market back into a small deficit and would tighten up sugar prices. Each product is supporting the other right now because of its tight fundamentals.