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Sustainability of rally in sugar prices questionable

Sustainability of rally in sugar prices questionable
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First Published: Mon, Apr 19 2010. 09 11 PM IST

Graphic: Ahmed Raza Khan/Mint
Graphic: Ahmed Raza Khan/Mint
Updated: Mon, Apr 19 2010. 09 11 PM IST
International sugar prices (both raw and white) have gained approximately 7% over the last six sessions. Domestic prices have bounced back in tandem, arresting the steep fall in prices and bringing back realizations to a relatively stable level of Rs29-30 per kg.
Our interactions with sugar manufacturers suggest that it will take some more time for sugar demand to revive completely. While sugar stocks may witness some rally over the near term, the sustainability of such an upward movement appears difficult due to the turnaround in the sugar cycle in the medium to long term.
After a steep correction in global sugar prices, both raw and white sugar prices have gained approximately 7% over the last six sessions. Currently, prices of white sugar in the international market stand at $537 per million tonnes (mt), while that of raw sugar contract at $16.8 per lb, up from $474 and $15.9, respectively.
Correspondingly, the steep fall in sugar prices has been arrested as indicated by the relatively stable realizations of Rs29-30 per kg.
Graphic: Ahmed Raza Khan/Mint
The increase in international sugar prices translates to a landed price of approximately Rs25 per kg at Indian ports. The ex-factory dispatch price for imported sugar will, thus, stand at approximately Rs29 per kg. This is in sync with the current factory realization of Rs29-30 per kg of industry peers.
Domestic sugar prices have nosedived from a peak of Rs40-41 per kg to Rs28-29 per kg within a period of two months. This drop has essentially stemmed from government pressure to curb prices, leading to inventory clearance by sugar traders. Although sugar dispatches have picked up marginally of late, our interaction with the industry participants suggest that it may take a few more weeks for sugar demand to revive totally. Moreover, with an easing demand-supply mismatch, the ministry has also shifted back to the policy of releasing sugar on a fortnightly basis against the practice of a weekly release earlier.
While India is expected to report sugar production of approximately 17 mt (Indian Sugar Mills Association expectation of approximately 16.8 mt), preliminary estimates for sugar production at Brazil stand at approximately 34 mt. This quantum of sugar production will not only ease the demand-supply mismatch in India (approximately 17 mt of production and approximately 4.8 mt of imports, against a demand of approximately 23 mt), but will also keep a tab on global sugar prices. Although the sugar stocks might witness a bounce back in the near term (in line with the recovery in international sugar prices), concerns loom large over the sustainability of such an uptrend over the long term. We, therefore, maintain our cautious view on the sector.
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First Published: Mon, Apr 19 2010. 09 11 PM IST