Sugar mills farm out work to smaller rivals

Sugar mills farm out work to smaller rivals

Mumbai: Big sugar refiners in North India are now farming out work to smaller mills in the south and west of the country after robust imports in the world’s largest consumer touched off an international price rise. India had contracted imports of about 5 million tonnes of raw sugar in 2008/09, of which 2.4 million tonnes have already landed, but only about a million tonnes have been refined and the remainder will be processed in 2009/10 season that started on 1 October.

Large trading houses and mills were importing raws despite higher prices to feed the roaring demand at home, stretching capacities. Smaller players, who cannot afford expensive imports, are cashing in this paucity.

“A few mills in the state are negotiating deals with private traders for refining. This will benefit both the sides," said a senior official at Maharashtra State Cooperative Sugar Factories Federation Ltd. Maharashtra is India’s No. 1 sugar producer.

In northern Uttar Pradesh state, India’s biggest cane producer, output is likely to contract on patchy rains and lower area but southern and western states like Maharashtra, Karnataka and Tamil Nadu, are set to harvest higher crops.

Officials at India’s major refiners based in Uttar Pradesh and Karnataka said smaller mills were picking refining contracts but refused to discuss their own plans.

Indian sugar mills power plants using bagasse, a fibrous waste generated in plenty during crushing season, and prefer to let plants idle rest of the year to save on expensive power.

“Energy is a big component," said Ashwini Bansod, a senior analyst at MF Global Commodities India Ltd. “It may force companies to approach mills in cane rich areas for processing."

India, the world’s second largest producer after Brazil, consumes about 23 million tonnes of sugar a year, but it produced only about 15 million tonnes in the year ending September and output is seen at 16 million tonnes this year.

Arranged marriage

Karnataka-based GMR Industries plans to refine close to 50,000 tonnes raws for “another party" in November-April, Managing Director R Ramakrishnan said, while Oudh Sugar is still negotiating refining contracts.

Bihar-based Riga Sugars has signed an agreement to refine 5,000 tonnes raws, Managing Director OP Dhanuka, said.

“We will try and take more such orders. Current prices are not feasible to import," GMR’s Ramakrishnan said.

New York raw futures jumped to 28-1/2-year high last month and were hovering near highs due to Indian demand.

Domestic sugar prices have soared by more than half in 2009 to touch an unprecedented Rs3,177.25 per 100 kg on 5 September.

High logistics cost is another import deterrent for small millers from the hinterland, analysts and officials said.

While refining costs differ from mill to mill based on capacity and location, analysts estimate a mill far from ports will have to spend about three times more than India’s largest refiner Shree Renuka Sugars.

Refining costs of Shree Renuka, which has operations in coastal states of Karnataka, Maharashtra and West Bengal, is a little over $30 per tonne, a company official had said.

Though small mills refuse to divulge details of their refining contracts, analysts say their earnings will rise.

“It is a novel concept and though it is difficult to ascertain in numbers of how much these companies will make, I can say for sure it will help their margin," a sector analyst with a foreign brokerage said.

“It’s a win-win situation."