Where is the sugar industry headed?

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Where is the sugar industry headed?

India during 2006-07 would be swimming in sugar and players in the industry are a worried lot due to the falling prices. Even internationally sugar prices have slumped. So what’s in store for the investors of sugar stocks?

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India during 2006-07 would be swimming in sugar and players in the industry are a worried lot due to falling prices. Even internationally sugar prices have slumped. But sugar sector analysts believe that Rs 17/kg would be a good price even in the face of excess sugar.

So what's in store for the investors of sugar stocks?

Chief general manager (corporate affairs), Dwarikesh Sugar Industries Ltd (DSIL) Jagdishkumar R. Banka, in an exclusive interview with Moneycontrol:

Moneycontrol (MC): Currently the Sugar industry appears to be in despair, with government control, slumping sugar prices, oversupply etc. The industry appears to be pinning its hope on ethanol prices? How much relief can ethanol provide to the industry if government accepts the industry's Rs 28/litre demand?

DSIL- Industry is plagued by frequent swings in the government policies and announcements from emergency imports to limited and canalized exports, attempting to parenting the voters by levy and release mechanism under the Essential Commodities Act garb yet allowing speculation on the commodities exchange, directly and indirectly subsidizing an irrigation and fertilizer intensive crop like sugarcane by promulgating SMP and SAP. The inefficient planning will shadow the increased production and may lead the sugar industry and consequently the sugarcane growers to a situation which was last witnessed in 2002-03.

Ethanol is a growth driver for India so far as it results in reduced dependence on imported forms of energy. The benefit to industry will largely depend on the cane price (SMP and SAP) and molasses prices to determine the opportunity cost of raw material and the conversion cost. However, without going into finer calculations, apparently Rs 28 per litre appears to be adequately covering all costs.

MC - How much ethanol is currently being produced in India? Who are the major players?

DSIL - India has an installed capacity to produce 1300 Million Liters of ethanol and all composite sugar complexes like Dwarikesh Sugar , Balrampur Chini , Bajaj Hindustan , DSL and DCMSCL etc are major producers.

MC - The govt is now pushing for 10% ethanol blending, replacing the 5%. If that comes into force, would the sugar industry still demand Rs 28/litre?

DSIL - The blending percentage will not reduce the raw material cost which is 85-90% of the total cost of production in sugar plants, although it would help in better capacity utilization of the sugar mills.

MC - Analysts say Rs 17/kg would be a good price for sugar even on the face of excess sugar. Do you agree?

DSIL - Yes, but  provided the sugarcane prices are not increased abnormally by state governments.

MC - The govt has lifted ban (partially) on sugar exports subject to approval by a trade body (DGFT)? Has that benefited the industry?

DSIL - To the best of our information the export ban has not been lifted, but as and when it is lifted, in the long run it will act as a buffer for the sugar industry. If domestic production is higher than the domestic demand and if international prices are rewarding then it makes sense for government to allow exports.

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