Want raw sugar export subsidy at Rs 4-4.5/kg: Shree Renuka

The previous UPA government had in February 2014 introduced the sugar subsidy scheme and decided to review it every two months. Under the scheme, raw sugar exports of up to 4 million tonne during 2013-14 and 2014-15 marketing years (ending Sept) would receive a subsidy of Rs 3,300/ tonne, which was subsequently revised for the August September month to Rs 3371/tonne.

Abinash Verma, director general of Indian Sugar Mills Association too agrees with Murkumbi that atleast Rs 4-4.5 per kg subsidy is needed as the difference between international and domestic production price stands at around that level.

On ethanol blending, Verma says that the current NDA government is very keen on the idea. But implementation all along has been an issue, he adds.

There are reports that the government is mulling incentives for increasing ethanol production. Ethanol blending in petrol has already been increased to 10 percent from 5 percent earlier.

Murkumbi expects sugar business to turn black in the third and the fourth quarter.

The sugar industry has paid Rs 47,852 crore to cane farmers till July 31 of the current marketing year ended September, while Rs 9,252 crore remains unpaid. India had exported 7 lakh tonnes of raw sugar in 2013-14 marketing year that ended last month.

Sugar production of India, the world’s second-largest producer, is estimated at 25-25.5 million tonne this marketing year as against the annual domestic demand of 24 million tonne. There is also a carry forward of 7,500 kg this year.

Below is the verbatim transcript of Narendra Murkumbi and Abinash Verma's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Sonia: Can you tell us how much would it impact if the subsidy comes through and if it is to the tune of around Rs 3-3.5 per kilo then what would your reaction be?

Murkumbi: We have a surplus of about 1.5-2 million tonne this year and it is essential to get that surplus out because currently that is affecting the price of the remaining 24 million tonne that is sold within the country. Last year, the United Progressive Alliance (UPA) government had approved a subsidy for two seasons, including the current season and it was to be based on the difference between domestic and international prices. So, I expect it to be workable and at this current market levels it should be between Rs 4,000 per tonne and 4,500 per tonne. We expect it to be continued. After the new government took over they extended this subsidy up to September and now we are looking for further extension for the rest of this season up to September 2015.

Latha: If it is indeed Rs 3.5 or Rs 3.3 as we hear and not Rs 4.3 as you want, you will not refine raw sugar and export it?

Murkumbi: For domestic raw sugar export right now the viability gap is about Rs 4,500 per tonne, so anything lower would probably not be enough to push the sugar out.

Latha: No one touches it you think?

Murkumbi: The world market is at a lower level, so it would be difficult.

Sonia: Do you get a sense that this Rs 3-3.5 per kilo is not enough and do you concur with the view that Mr. Murkumbi shares that only if it is about Rs 4-4.5 per kilo then it’s a workable situation?

Verma: I totally agree with Mr. Murkumbi because current international prices and the current cost of production in the country – there is a difference of about Rs 4.5 and that gap needs to be filled. However, if global prices improve slightly; it’s around 15.5-15.7 cents per pound today, if it improves then the requirement of the subsidy might be lower but at current levels yes, it will be about Rs 4.5 per kilo.

Latha: If this 1.5-2 million tonne doesn’t move out in the form of exports, what is the price scenario looking like if we have to deal with that entire 25.5 million tonne of sugar in the local market. What is your best guess of sugar price?

Verma: Let me add that beyond 25.5 million tonne which we are going to produce in this season, there is a carry forward of 7.5 million tonne which is putting pressure on the domestic market. If this 2 million tonne doesn’t move out of the country or doesn’t get converted into ethanol with the support of the government then it will continue to put pressure on already repressed sugar prices. Domestic sugar prices is around Rs 27-29 per kilo across the country whereas the cost of production is almost about 32 to 36, so therefore there will be a lot of pressure, not only on the margins of the sugar mills but also it will be a huge challenge for the industry to even pay fair and remunerative price (FRP) to the farmers this year.

Sonia: You were telling us about incentivising ethanol production. If that comes through then what would the benefits be for a company like yours?

Murkumbi: The programme has been expanded to blend 10 percent with petrol and currently supplies are not even enough to cover 5 percent blend. So there is a viability gap right now. Oil companies have their own internal calculations where they are not above a certain rate even though they have got offers for almost 58 crore litre. I believe the orders placed are less than 30 crore litre. A second tender that was issued and was to be opened this month has been cancelled, so there is a lot of uncertainty there from the side of oil companies. Therefore, we are looking to the government - both for increased pressure on the oil industry to adhere to the government’s decision and also there is a proposal which is very good both for sugar surplus and for ethanol programme which is to convert surplus sugar; not make as much sugar, divert more of it to ethanol just like in Brazil and this would take care of about a million tonne of sugar which instead could become ethanol and which is easily absorbed in 10 percent blend mandate that is already in force in the country. So, we are looking for some direction on that and that’s what we are talking to the government. So these are our two main expectations right now from the government.

Latha: Are you expecting that the government will listen to this and allow more sugar to be diverted to ethanol? Is that in consideration in today’s meeting?

Verma: I do not know what exactly is in consideration in today’s meeting. I can only say that the feedback that we are getting from this government is that they are very positive on ethanol blending programme and that positive attitude on this programme is giving us that encouragement, that belief that we will move on in this programme because 5 percent mandatory blending is already approved by the government but the implementation has been an issue. As mentioned by Mr. Murukumbi, even though we offered 62 crore litres, in the last tender, only 35 crore litres got accepted. Another big concern is that the recent tender which was floated was suddenly cancelled on the last day. So implementation is an issue and we expect that the government will put pressure on oil marketing companies (OMCs) to be more transparent and more positive on this programme and this programme as it is used in Brazil can be used in India to balance off surplus sugar, not only to reduce surplus sugar but also give more ethanol for a very good green fuel programme in the country.

Latha: Net-net if conversion of more sugar into ethanol permission is given, does it at least pull-up some of the companies into green. Many of them have been reeling with very large losses. What might be the incremental benefit if this rule comes through?

Verma: This is a big by-product of the sugar industry and ethanol, if the programme takes off then surplus molasses that a lot of sugar mills are forced to export for cattle feed in the European Union can get diverted into this important biofuel programme in the country. It not only gives return to the industry, it gives important cash flows and the mills will be able to pay to the farmers on time, but it also substitutes substantial quantity of petrol consumption in the country and I believe that it can reduce foreign exchange savings, it can give us almost about Rs 2,000-3,000 crore which is quite a lot.

Latha: Speaking about earnings – how much will you make?

Murkumbi: Both these measures which we have been pushing, asking from the government, more than the direct impact – obviously there will be positive impact in terms of higher ethanol consumption and higher prices, there is a gap of Rs 6 between what the oil companies want to pay and what we want to receive but much more than that will be the impact on domestic sugar prices.

These two measures will cure the surplus, take the surplus out and that should add at least 10-15 percent to domestic sugar prices which is the minimum required to go back in the black for the industry and for me therefore the main effect is an indirect effect on domestic prices and especially with ethanol policy that is now under consideration, this could be a structural game changer because this can go on continuously. It has no dependence on world market or world demand and supply. It’s purely a domestic solution to higher production.

Sonia: Can you tell us how much this will impact your EBIT in the sugar business. It continues to be loss making, so from which quarter you expect it to turn into black?

Murkumbi: In Q3 and Q4 typically there is good cogeneration income and peak production, so we would expect this to be in the black. A 10 percent increase in sugar prices helps us by about Rs 30-40 crore in each of the next two quarters.

Posted By: Devika Ghosh