Ethanol price fixing - Not much of significance: CARE

CARE Ratings article on Ethanol price fixing

The Cabinet Committee on Economic Affairs (CCEA) approved a mechanism for procurement of ethanol by Oil Marketing Companies (OMC) to carry out the ethanol blending program, fixing the ethanol delivery price (by sugar mills) in the range of Rs.48.5 per litre to Rs.49.5 per litre depending on the distance of sugar mill from the depots of OMCs. Earlier, the OMCs were following a benchmark pricing system to determine the price of ethanol. CARE's view on the impact of the announcement on the sugar industry is as below: With sugar business reeling under sustained pressure, it has been the distillery and power divisions that had lent support to sugar companies. However, supply of ethanol to OMCs has been marred with issues in the past: delay in tendering, delay in fixing the price and procurement; this has left many sugar companies not participate in the program. While we expect the Center's move to fix the price at Rs.48.5/ litre considering the present input costs, address some of the said issues, we do not see much of a change happening even though the new price offers better realisation. Sugar companies are already realizing upto Rs.44/ litre for supply of industrial alcohol at present. Selling ethanol at a price of Rs.48.5/ litre which includes transport and taxes and additional processing cost does not translate into any better profits. In addition, CCEA's decision to allow the OMC to incorporate “supply or pay” clause backed by bank guarantee (BG) will only increase the cost further and could inhibit sugar companies. In the light of the above, ethanol supply to OMCs may continue to remain disadvantageous for sugar mills. The sugar season 2013-14 has ended with a total sugar production of 243 lakh tones of sugar. The closing stock is a high 75 lakh tones. With an unviable export market, sugar companies are looking at avenues which can soften the impact of the poor business environment for sugar. One such avenue is implementation of the ethanol blending program with a market-driven price for ethanol procurement which could benefit the ailing industry. Even as Government has an ambitious target for ethanol blending, implementation has been faced with several hurdles. At the current government mandated 5% blending target (and 10% blending allowed in six states), the current ethanol requirement is about 1,500 million litres. However, OMCs have not been able to achieve even 2% blending. Increase in procurement and at a viable price could encourage sugar companies divert molasses directly for the production of ethanol, in turn 'helping' reduce sugar production. Ethanol blending program is of such significance, that if successfully implemented, could help sugar companies weather the business cyclicality associated with the sugar business and improve their financial position.

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