Higher sugar prices may be a short-lived treat for producers
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A month ago, things were looking a bit dire for sugar mills. International sugar prices were falling, putting pressure on domestic prices. Domestic sugar cane output was expected to be higher, due to predictions of a good monsoon. Sugar mill shares were feeling the pressure as a result. A month later, the situation is looking different. Shares of Balrampur Chini Mills Ltd are up by 6.7% from a month ago and Shree Renuka Sugars Ltd by 15%, although Bajaj Hindusthan Sugar Ltd’s shares are up by just 0.4%.
What has changed? The Indian government has hiked the import duty on sugar from 40% to 50%. That is good because it gives domestic sugar mills protection from cheaper imports but the icing on the cake was that international prices have increased too. Higher international prices and a higher import duty combine to give more protection to domestic mills.
Raw sugar prices are up by 12% over their 28 June lows while white sugar prices are up by 8% in that period. Domestic wholesale sugar prices have not risen, however, and have actually declined a bit in this period. That’s not a very comforting sign.
A weak dollar can be one reason for money flowing into commodities, which could have benefited sugar along with other agricultural commodities that are traded on the financial markets. Last week’s dovish comments from the US Federal Reserve chair Janet Yellen further helped the cause of these commodities.
Internationally, the Brazilian sugar season in the south-central region so far has seen a 0.3% increase in sugar produced although the sugar cane harvest itself is down by 7.8%. That’s because of a shift away from ethanol to sugar. Actually, this seems like a negative cue for prices but is not causing concern, apparently.
Sugar demand-supply conditions globally are broadly what they were a month ago, when prices were falling. If sugar prices are rising because of a shift in financial flows towards commodities, there is a risk it can reverse quickly.
In some months, a clearer picture of the domestic sugar cane harvest should become available. Apart from global sugar price trends, investors should keep an eye on the harvest too. A higher-than-expected sugar output is likely to see prices turn soft. One more signal will be the state advised price for procuring sugar cane in Uttar Pradesh. If that increases, even as sugar prices rule flat or lower, profit margin estimates may have to be revised downwards. These are the risks, even as the current uptrend in sugar prices bodes well for domestic sugar mills.