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Outlook for sugar industry uncertain

Outlook for sugar industry uncertain
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First Published: Thu, Mar 11 2010. 10 50 PM IST

Updated: Thu, Mar 11 2010. 10 50 PM IST
Falling sugar prices have unnerved investors. Ex-mill sugar prices in Uttar Pradesh (UP) have fallen from around Rs40 per kg in mid-January to Rs34. That’s far from industry predictions of prices rising to Rs50 levels by September 2010.
Reports of Indian importers backing out of contracts saw global prices crashing in the past few days. Sugar firm share prices are down, with Bajaj Hindusthan Ltd and Shree Renuka Sugars Ltd down from their 52-week high levels of January by 38% and 34%, respectively.
In January, sugar prices were headed up, with government action to cool prices and higher production being the key risks. Wilting under political pressure, the Indian government took tough measures.
Bulk sugar users were allowed to keep only 15 days of stock, further lowered to 10 days in February. The Centre allowed UP sugar mills to process raw sugar in other states, as UP banned raw sugar imports. The UP government removed this restriction on 19 February.
Graphic: Yogesh Kumar / Mint
This began to work as perceptions of sugar scarcity changed. Also, sugar prices typically decline in the crushing season. While the industry was earlier predicting sugar production of around 15 million tonnes (mt), this kept going up, with the latest estimate at 16.8 mt.
Thus, domestic prices eased considerably and global prices fell as India’s import needs seemed far lower than expected.
So where does this leave Indian sugar companies? Most sugar companies were sitting on sizeable inventories at the beginning of the quarter which include unprocessed raw sugar.
Firms had said their cost of inventory was around Rs26-28 per kg, depending on the location. They will make money even at current levels on these stocks.
But sugar made from cane during the March quarter would have been expensive because cane prices went up from Rs190 per quintal at the start of the season to around Rs260 per quintal. Firms would attempt to dispose this stock first, taking advantage of high sugar prices, holding on to cheaper stocks for later.?The?ratio?of?old to?new stock will determine whether they will suffer from inventory losses.
What could also affect calculations is contribution from by-products such as alcohol and co-generated power, which will be higher if sugar production itself is higher than expected. These can be sizeable contributors to margins.
Clarity on these factors will emerge after the March quarter results. Companies had said if farmers sell more cane and retain less as seed, next year’s cane production will get affected. That does seem to be the case, but is too uncertain even to factor in.
The end of the crushing season will see sugar prices stabilize or even firm up a bit in the second half (sugar companies follow a September fiscal year end). Any reversal of the government’s decisions will be a positive. If domestic prices keep falling, however, investors may get more nervous.
Write to us at marktomarket@livemint.com
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First Published: Thu, Mar 11 2010. 10 50 PM IST