Home / Market / Mark-to-market /  Sugar mills feel the heat from declining prices

Sugar prices are declining in global and local markets, and that appears to be putting pressure on shares of sugar mills. Since early May, the Balrampur Chini Mills Ltd stock has fallen by 9% while Bajaj Hindusthan Sugars Ltd has declined by 4%. In this period, domestic wholesale sugar prices are down by 4%, although still 4% higher from a year ago.

In the international market, prices of raw sugar and white sugar have both declined. White sugar on the Intercontinental Exchange is down by 6.8%, while raw sugar futures are down by 10.7%.

In the local market, predictions of a good monsoon are setting the stage for a recovery in the sugar cane crop, reversing the previous season’s decline. Maharashtra’s sugar output could rise by 74% in the forthcoming sugar season, returning to more normal production levels, according to a Times of India report. In the previous season, drought had hit the state’s sugar output.

Globally, after two years of production trailing consumption, sugar output is expected to exceed consumption in 2017-18, according to a FO Licht estimate given in an investor presentation by the Südzucker Group. This could lead to a slight increase in closing stocks, which explains the recent decline in sugar prices, says the group. Europe will also see the end of sugar quotas from 1 October, an event that can affect prices depending on its impact on supplies.

There is some concern on the consumption front too. Sugar consumption in 2017-18 may rise by a mere 1.04%, a 23 May Reuters report said, citing analyst group Platts Kingsman. This is half the average growth seen in the past decade, a shift it attributes to growing health consciousness that is affecting sugar consumption in developed markets. Even developing markets are taking steps to curb excessive sugar consumption. This can be a key risk in the longer run and needs to be watched.

Back home, the central government benchmark for mills to buy sugar cane has been hiked by 10.9%. That may seem counter-intuitive given the recent slide in sugar prices. There is still the matter of the much higher state advised price declared by Uttar Pradesh. If that is also hiked, then UP-based sugar mills will feel the strain. Sugar mills are likely to seek concessions, if their cane costs become higher but sugar has turned cheaper.

Sugar mill shares did well in fiscal year 2017 despite lower sugar output, as rising prices saw them reap good returns. This year, output might be higher but there is a question mark on where sugar prices are headed. The large sugar mills have integrated operations; higher output means more feedstock for their power cogeneration and alcohol/ethanol operations. The monsoon and the state advised price in UP are the key factors to watch out for, apart from whether sugar prices decline further from current levels.

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