The Hindu Business Line : Sugar mill margins may come under pressure

Is the party for sugar over? With international prices crashing and elections to the Uttar Pradesh Assembly due early next year, there is likelihood of mill margins coming under pressure from lower realisations and higher cane prices payable to growers.

Globally, sugar prices have been on a roll this year. With high oil prices prompting Brazil to divert its cane for making ethanol (a bio-fuel that can be blended with petrol), there was reduced supply of sugar from the world's biggest exporter. To add to this was the European Union's move to cut subsidies, leading to some five million tonne (mt) less of sugar being `dumped' in the world market.

As a result, speculative investment funds poured into the commodity. On February 3, raw sugar (No. 11) traded on the New York Board of Trade touched a peak of 19.73 cents a pound, while white sugar futures in London hit a historic high of $497 per tonne on May 12. The latter price was reached even as recently as on July 6, following India's decision to ban exports. But since then, prices have plunged, settling to a low of 12.50 a pound for No. 11 raw sugar and $384 a tonne for London whites on Monday. They have recovered after that, but interest in sugar has waned.

"Once white sugar crossed $450 per tonne, the Brazilians saw it more worthwhile to export sugar than supply ethanol for domestic blending. Some 8 mt of sugar is now ready for being despatched from their ports. They may end up exporting 18 mt this year, against 13 mt in 2005," said Mr S.L. Jain, Director-General, Indian Sugar Mills Association.

Worse could be in store next year, when the other big exporter, Thailand, also steps up shipments from two to four mt. What this means is that the new market opened up by reduced subsidised European exports would be entirely captured by Brazil and Thailand. "We were till now supplying to Sri Lanka, Bangladesh, Pakistan, Yemen and Africa. Now, even these markets will go to Brazil," Mr Jain added.

The July 4 export ban, in other words, could not have been more ill-timed, as it came when prices were high and Brazil has not fully warmed up. "We could have shipped out an additional 0.4-0.5 mt. It is not easy to re-build markets once lost," a miller pointed out.