When govt pours cold water on sugar mills' ethanol dreams | Mint

When govt pours cold water on sugar mills' ethanol dreams

The government has directed all mills and distilleries to immediately stop using sugarcane juice or sugar syrup for ethanol in ESY2023-24. ESY refers to the ethanol supply year, which runs from December to November (Photo: Bloomberg)
The government has directed all mills and distilleries to immediately stop using sugarcane juice or sugar syrup for ethanol in ESY2023-24. ESY refers to the ethanol supply year, which runs from December to November (Photo: Bloomberg)

Summary

  • The govt’s decision is possibly in anticipation of low sugar production during the current crushing season from Oct 2023 to Sep 2024 after a weak monsoon, particularly in Maharashtra and Karnataka, which are major sugarcane producers

Just when the party was warming up for sugar manufacturers, the government has taken the punch bowl away.

On 7 December, the government directed all mills and distilleries to immediately stop using sugarcane juice or sugar syrup to make ethanol, in what seems like a retrograde move for manufacturers who were increasingly drawn to the sector.

The order takes effect immediately. Shares of sugar producers such as Shree Renuka Sugars Ltd and Balrampur Chini Mills Ltd have slumped 9% each in the past two trading sessions on the news. This measure is possibly in anticipation of low sugar production during the current crushing season (October 2023 to September 2024) after a weak monsoon, particularly in the major cane-producing states of Maharashtra and Karnataka.

According to Prashant Biyani, vice president–institutional equity research, Elara Capital, sugar production for the current crushing season was earlier estimated at 29.5-30 million tonnes, but after the government’s latest move, production is likely to be higher at 31.5-32 million tonnes.

This would lead to excess supply, which could put pressure on sugar prices. Currently, ex-mill prices are up 10% year-on-year at 40 per kg, but this could fall to 38, he cautioned.

That said, this diversion is expected to cause a notable drop in ethanol volume projections for FY25.

The government has targeted 20% ethanol blending in petrol by ESY2025-26.

Oil marketing companies achieved 12% ethanol blending during ESY2022-23.ESY is ethanol supply year which runs from December to November.

Achal Lohade, an analyst at JM Financial Institutional Securities, agrees that the recent development is a big blow to most sugar manufacturers, mainly because the sugarcane juice route has large volumes even when realizations are low.

“This means that volumes could take a hit," he said, adding that it could be partially offset by selling more sugar instead of allocating it for ethanol production, and higher margins in the C molasses route.

It is worth noting that demand for sugar is inelastic, which means consumption would remain the same even if production increased. On the bright side, sugar mills can still produce ethanol from B-heavy molasses, and the government may consider increasing prices to boost ethanol production from this source.

Moving forward, Biyani pointed out that domestic sugar prices will be a crucial factor to monitor for the margins trajectory of sugar companies

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