The Hindu Business Line : Sugar exports losing steam on rising domestic prices

New Delhi, Jan 27 With domestic sugar prices firming up considerably over the last couple of months, Indian mills are not as enthusiastic, leave alone desperate, about exports the way they were till recently.

The rise in international prices, too, is prompting them to go slow in entering into fresh contracts and not lock into the existing rates, so as to cover against any upside risk.

Mills in Maharashtra are currently realising about Rs 1,250 per quintal on domestic sale of ‘S-30’ sugar and Rs 1,300 per quintal on ‘M-30’ grades. Only two months ago, these were ruling in the Rs 1,130-1,180 per quintal range. Similarly, ex-factory rates in Tamil Nadu have recovered from Rs 1,200-1,220 to Rs 1,350-1,400 per quintal now.

Cautious approach

“The increase in domestic realisations has made millers somewhat cautious with regard to entering into new export deals. They are waiting and watching the behaviour of global prices. Some are trying to even wriggle out from delivering against past contracts, though this may invite serious legal action,” trade sources told Business Line.

The benchmark March 2008 contract for raw sugar (No. 11) at the New York Board of Trade (now known as ICE Futures US) closed on Friday at 11.94 cents per pound or $263.23 a tonne. This is as compared to 9.75 cents a pound ($214.95 a tonne) till as recently as early December. Even the March 2008 white sugar contract at London’s Euronext.liffe exchange has gained from $290-340 a tonne over this period.

investment fund interest

“There is lot of investment fund interest in sugar. In the light of the current market turmoil, funds are seen to be now taking money out of underperforming equities and investing in sugar, cocoa, coffee and grains. Moreover, reports of Indian output being lower than earlier projections and forecasts of an overall one million tonne global sugar production shortfall for 2008-09 is spurring buying interest,” the sources pointed out.

The result is that merchant exporters are now having to buy raw sugar from mills in Maharashtra at Rs 930-935 a quintal and white sugar at Rs 1,000-1,025 a quintal ex-factory. There was a time when mills had to dispose of raw sugar at below Rs 850 a quintal.

Simultaneously, realisations to exporters have also gone up. The Indian Sugar Exim Corporation — a joint trading body of cooperative and private sugar mills — contracted its first raw sugar consignment to Dubai’s Al-Khaleej refinery in June at $247 a tonne f.o.b. (free-on-board). Further, it had to offer an extra $15 a tonne incentive to factories supplying the sugar on a first-come-first basis.

But in its latest contract to Singapore a few days back, ISEC has reportedly negotiated a price of $282 a tonne f.o.b. “The realisations are better now from both exports as well as domestic sales. But mills should not lose their export focus merely in the hope of a further hardening of international prices,” the sources added.

They noted at the present juncture an ex-mill price of Rs 1,300 a quintal on domestic sales seems far more attractive than the Rs 1,000 plus on exports. But then, there are advantages with exports, such as the Rs 135 per quintal subsidy from the Centre and also 4 per cent duty entitlement pass book benefit.

Constraints

Moreover, domestic sales are constrained by the monthly release mechanism, whereby, factories cannot liquidate more than 10-11 per cent of stocks and have to carry forward the remaining 90 per cent to the ensuing month. There are no such restrictions on exports and sugar can be freely shipped out without incurring interest costs of about Rs 135 per quintal over 10 months.

The sources were also sceptical over any dramatic fall in sugar output this season, especially when total cane acreage assigned to mills has increased by 6.3 per cent. “True, yields are lower this time, but then sugar recovery rates and overall crushing capacities too are higher. At most, production will remain at last year’s 28.3 mt level.

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