The Hindu Business Line : Sugar stocks withstand market mayhem

Business Daily from THE HINDU group of publications Friday, Oct 19, 2007 ePaper \| Mobile/PDA Version

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Sugar stocks withstand market mayhem

Interest stirred by rising crude prices, ethanol demand

Suresh P. Iyengar

Mumbai, Oct. 18 Sugar stocks were among the few that survived the market mayhem on Thursday. Expectations of a high demand for ethanol on the face of rising crude prices had apparently renewed interest for them.

Triveni Engineering was up 10.27 per cent to Rs 105, Bannari Amman 7.75 per cent to Rs 661, Bajaj Hindustan 6 per cent to Rs 179, Balrampur Chini 5.48 per cent to Rs 76, and Dhampur Sugar 3.17 per cent to Rs 58.

White sugar prices on LIFFE (London International Financial Futures and Options Exchange) also rose to the month’s high on Tuesday on reports of a 6.8 per cent drop in output in Brazil’s Centre South — the biggest sugar growing region.

White sugar prices for December delivery rose 70 cents to $276 per tonne on Tuesday. On Thursday, it closed at $273.10 a tonne.

“Apart from the Indian Government ethanol blending programme, investors feel that high international crude oil prices may induce oil companies to ramp up their ethanol purchase from sugar companies,” said an analyst. There are also expectations that the Government may announce more sops for the sector in the coming days.

Cane prices high

However, high cane prices may hit the sugar companies in the current crushing season starting October. “With sugar prices at Rs. 12.5-13 a kg and cane prices in Uttar Pradesh at about Rs 1,350 per tonne, every tonne of cane crushed by Uttar Pradesh mills would result in a loss of Rs 1.5-2.0 per kg of sugar produced.

“The Government with its incentive policy could marginally alleviate some pain but viability problems would persist as long as cane prices are not reduced to more accurately reflect the 30-35 per cent decline in sugar prices since last year,” said Mr Bhavesh Gandhi, research analyst, India Infoline.

Another record production of over 30 million tonnes (mt) is expected in 2007-08 on the back of a record output of 27-28 mt in the just ended sugar year September 2007. “This would put huge pressure on inventories which are estimated to rise to 17-18 mt by the end of September 2008, nearly equivalent to domestic consumption of 19.5 mt.

“The carrying cost (despite a buffer stock of 5 mt announced by the Government) of such a large stock would itself financially strain the companies in addition to depressed sugar prices,” Mr Gandhi added.

Not enough sugar

Crude prices have hit a record high of $89 per barrel. The Government has also allowed sugar companies to produce ethanol from sugar cane juice rather than through molasses.

“In the short term, there’s not going to be enough sugar. Brazil is producing more ethanol these days. High international prices hold good for companies in India, which is expected to become the world’s biggest producer next year,” said an analyst.