The Hindu Business Line : Sugar cycle re-asserting itself

Depending on whether you go by the official or unofficial estimates, sugar production is set to drop by 23 to 30 per cent in the sugar year 2003-04, which stretches from October to September. Estimates of the current year's output vary between 140 lakh tonnes and 155 lakh tonnes.

A 10 per cent to 20 per cent blip in sugar output after a few years of surplus production, is an oft-repeated pattern in the sugar industry. But the magnitude of the drop projected for this season, at 25 per cent to 30 per cent, is unprecedented in two decades. The stock markets obviously think this is good news.

Stocks of leading sugar companies such as Balrampur Chini Mills, EID Parry, Bajaj Hindustan and Bannari Amman Sugars and a host of other smaller players, have tripled in value over a year.

No doubt, the shrinkage in output this year will help players liquidate their surplus stocks, which have been weighing on them for four years now. When mills started their crushing operations in October 2003, they carried an accumulated inventory of about 116 lakh tonnes, adequate to meet domestic consumption for eight months.

By the end of the season, after taking in the current year's output, stocks are expected to halve to about 86 lakh tonnes. Lower stocks will certainly mean lower carrying and interest costs for the mills.

That the mills get to liquidate these stocks at lucrative prices also helps. After languishing for several seasons, retail sugar prices have firmed up by 15 per cent-20 per cent over the past year and have recently touched the Rs 17 per kg mark in some markets. Some in the industry contend that the price rise is largely speculative. "Even with a pessimistic production estimate, we will still be left with carry forward stocks to cover sixmonths' consumption. So where is the shortage?" asks the finance head of a leading sugar producer.

But prices have firmed up; and this will definitely perk up the short-term performance of producers who can cash in on the opportunity. "Instead of losing about Rs 150 per bag, we are now be in a position to make a profit of Rs 200 per bag (of sugar sold)," points out Mr N. Manickam, Managing Director of Sakthi Sugars.

Analysts also point out that structural changes in the industry are making it more attractive for long-term investors. "I expect the rising contribution from by-products such as power co-generation and ethanol to perk up the profitability of sugar companies, even if crushing volumes drop," says Mr Jay Prakash Sinha, an analyst with Kotak Securities, who recently visited many of the South-based private sugar mills.

Players such as Balrampur Chini Mills, EID Parry, Bannari Amman Sugars and Rajshree Sugars, have recently put up additional capacities for generation of power from bagasse, a by-product of sugar crushing.

With the finances of the State electricity boards being restructured, earlier glitches in selling surplus power to the State and obtaining payments are being ironed out.

But cane availability would be key constraint even for players looking to generate additional profits from power cogeneration or ethanol. A few private mills are hoping to keep their facilities operational by resorting to imports of raw sugar under the Advance Licensing scheme. These imports are duty-free as long as the mills export an equivalent quantity of refined sugar, within an 18-month window. As of now, with domestic sugar prices hovering 30 per cent-40 per cent higher than global prices of $230 per tonne, the former is certainly the more lucrative market. As for cogeneration, mills with the capacity to source alternate feedstock such as lignite may be in a position to run their cogeneration plants even if cane availability shrinks substantially.

Therefore, the handful of players who enjoy proximity to the ports and have unhindered access to raw materials may be the ones with the most to gain from the abrupt turnaround in the sugar cycle.