
Govt could miss blending target after banning sugarcane in ethanol production

Summary
India achieved its target of 12% ethanol blend for supply year 2022-23 but may miss its 15% target for 2023-24 unless grain-based ethanol production is ramped up.The government took an important policy decision this week in banning the distillation of sugarcane juice and sugar syrup (sucrose) to produce ethanol for biofuel blending. This has negative implications for the sugar industry and could lead to shortfalls in the blending target for ethanol supply year 2023-24 (ESY24), which runs from 1 November 2023 to 31 October 2024.
The decision shows the government apprehends a serious shortfall in sugar production this season. It has also curbed sugar exports.
Oil-marketing companies (BPCL, HPCL, IOCL, etc) procure ethanol from sugar mills with contracts of six months or more and pay different rates for ethanol from different feedstock.
Around 25-30% of the ethanol supplied from cane for fuel-blending comes from cane juice and syrup. Another 45% comes from B-heavy molasses, which is the residue from cane juice after two rounds of sugar processing. The rest is from C-heavy molasses, the residue after three rounds of sugar processing. Apart from cane, ethanol is also distilled from broken maize and rice.
The blending of ethanol with petrol is an attempt to reduce dependence on imported crude oil. Brazil is another large sugar producer that uses this ‘gasohol’ model. The target of 12% ethanol blend for ESY23 was achieved. For ESY24 the target is 15% ethanol and for ESY26 it is 20%. But ESY24 targets may be missed unless grain-based ethanol production is ramped up.
Over October and November, sugar production was down 11% as poor rainfall hit the sugarcane crop in Maharashtra and Karnataka. Sugar production this season is likely to fall by up to 30% in these two states. This would imply all-India sugar production of a little less than 32 million tonnes after adjusting for the ban. Otherwise, juice and sucrose diverted to ethanol would have reduced production to around 30 million tonnes. Last season (October 2022 to March 2023), sugar production was over 36 million tonnes. Consumption is estimated to be around 29 MT, with the rest exported or held as inventory.
It’s hard to make concrete estimates of the ban’s impact as there’s no clarity about its tenure, but it could reduce ethanol from sugar production by 25-30% if it lasts the entire season.
Large listed sugar mills depend on ethanol distillation for alternative revenue streams. For example, Balrampur Chini and Triveni Engineering have over 200 million litres of distillation capacity each. The ban will therefore hit revenues as well as profits. Sugar prices will probably remain high, given the shortfalls, which could compensate the mills to some extent.
Most analysts are downgrading earnings estimates by around 10%, but this is tentative and may be revised once the length of the ban is known. There is also the possibility that grain-based ethanol production will be ramped up.
Sugar stocks have fallen by 15-20% in the past week, with investors assuming the worst-case scenario, in which the ban and export curbs last the entire season and distilleries are unable to switch to C-heavy molasses and grains. Valuations could be revised once there’s more clarity.