Can Ethanol Change Business Dynamics For Sugar Industry?

A few policy decisions made by the government early this year are expected to give a fillip to the sugar industry.

Now that ethanol has turned more remunerative, what would it mean for a sugar company to produce more of it? Here is an example based on our interactions with industry experts and analysts.

The years ended March 2016 and March 2018 were difficult for the sugar industry due to high production. Price pressures led to negative margin. Ethanol margin, on the other hand, are largely stable as the government fixes its procurement price before every sugar season. Producing more ethanol reduces the cyclicality of earnings for mills with distillery capacity and increases profitability which in turn would curb the issue of cane arrears, brokerage Stewart and Mackertich said in a report.

Realisation, though, may take at least a year as sugar mills have to invest in increasing capacity to produce ethanol, Tarun Sawhney, vice chairman and managing director of the distilleries company Triveni Engineering and Industries Ltd., told BloombergQuint.

Other Positives

The potential to blend ethanol with fuel is high, with the government targeting 10 percent blend. The current national average, according to Indian Sugar Mills Association, is 4.02 percent.

Oil marketers have released tenders to procure nearly 48.5 crore litre of ethanol produced from B-heavy molasses and 1.84 crore litre of the fuel made from sugarcane juice. The association estimates that this could result in sugar production dropping by nearly 0.5 million tonnes.

Sugar prices have rallied over 25 percent in the international market in October due to lower-than-anticipated production in Brazil. “Higher rainfall in key cane growing regions and strong ethanol demand is expected to lower Brazil’s output by nearly 9 million tonnes,” said Narendra Murkumbi, former vice chairman and managing director of Shree Renuka Sugars Ltd.

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India could export 4-4.5 million tonnes of the commodity, due to the government’s incentives and exports becoming competitive due to a depreciating rupee.

Industry experts and analyst said that while this may not be the start of a bull run, it’s a long-awaited welcome change, and the sector that has been in tumult over the past decade, could stabilise.