Surplus sugar in both domestic and international markets will continue to keep prices under pressure in the near term, according to a report by ratings agency ICRA.
It says that high cane costs along with low realisations in the domestic market continue to impact the financial performance of sugar mills. While government like interest free excise duty loans, export subsidy, etc, will mitigate the losses to some extent, disputes over cane price fixation and payment of subsidy on cane prices continues to be mired in uncertainty in major sugar producing states, the report says.
Higher cane acreage by about 11% and 2% respectively in Maharashtra and Karnataka, coupled with better yields in comparison to last year, will result in higher sugar production during SY15.
Though there is an 8% decline in cane acreage in UP, higher recovery will compensate leading to higher sugar production in the State this year.
On the other hand, the drought situation in Tamil Nadu continues to impact the sugar production on account of lower cane acreage and yields. In a statement, Sabyasachi Majumdar, Senior Vice-President, ICRA Limited, says, “The domestic sugar production is expected to increase by around 4.5% YoY during SY15 to approximately 25.5 million MT and outstrip domestic consumption for the fifth year in a row.”
Proposal approvedThe Cabinet Committee on Economic Affairs has approved the proposal for export subsidy of ₹4000/MT on exports of up to 1.40 million MT of raw sugar in February 2015.
However, the benefits are likely to be limited for two reasons: weak global prices make exports less lucrative and announcement of the subsidy towards the end of crushing season brings a limited window of opportunity for sugar mills to produce raw sugar.
“The current season has commenced with relatively high opening stock of around 7.4 million MT. This coupled with the surplus production during SY15 and limited exports is likely to result in continued sugar surplus scenario with the closing stock estimated to be higher by ~1.5-2.0 million MT than the normative sugar stocks,” Majumdar says.
The domestic sugar prices have fallen to ₹26,000/MT (UP ex-mill sugar price) by March 2015 from ₹31,000/MT in September 2014. This trend was further exacerbated by the weakening of the international prices due to continued high production globally and decline in crude oil prices which typically result in higher diversion of Brazilian cane towards sugar.
The threat of revenue recovery proceedings following failure of payments of cane dues to farmers in Maharashtra has resulted in mills liquidating sugar stock at lower prices during January and February 2015, while mills elsewhere have been forced to sell sugar at un-remunerative prices, Majumdar adds.