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Sugar stocks up on hopes of ethanol pricing issue

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Oil companies and the sugar industry have been at loggerheads

Deeptha Rajkumar

Mumbai, Aug. 7

Sugar stocks ended higher over the last three trading sessions on expectation of an amicable settlement on the issue of ethanol pricing for blending with petrol. The counters have appreciated between 11 per cent and 22 per cent.

With crude prices on the rise, there is expectation that the soon-to-be fixed ethanol price will favour the sugar industry. Over the last three sessions, the counter of Uttam Sugar has appreciated by 17 per cent to end at Rs 151.90, Dwarikesh Sugar gained around 17 per cent at Rs 125.65, Mawana Sugar by 22 per cent to close at Rs 66.70, Dhampur Sugar by 15 per cent at Rs 113.20, Balrampur Chini by 11 per cent to Rs 100.20 on the BSE.

"While it may not change fortunes, the pricing of ethanol will have a long-term impact for sugar companies in that it will provide visibility to earnings. Given the rising crude oil prices, the Government is steadfast in looking at this form of bio-diesel," said an analyst tracking the sector.

Benchmark price

Oil companies and the sugar industry have been at loggerheads over the pricing of ethanol required for petrol blending. While the oil companies have benchmarked Rs 18.75 a litre for ethanol, it is unacceptable to ethanol producers who are asking for a price of around Rs 27.83 a litre.

"The benchmarked price by the oil companies is when crude oil price was ruling at around $35-$40 a barrel. Today, prices are around $76 a barrel. Ethanol pricing has to be on a price discovery formula. It should factor in raw material costs (molasses and rectified spirit), conversion cost plus a reasonable profit. A meeting to decide on this issue will be held in New Delhi on August 10," a leading sugar industry source told

Business Line

.

On their part, oil industry sources argue that when domestic petrol prices are not as per import parity why should one seek to impose parity in ethanol pricing with international crude oil prices.

Ethanol contribution

A section of the market, however, is of the view that ethanol production at best contributes to around 5-10 per cent of the total revenue base of most sugar companies. As such, they attribute the upside in sugar stocks to be in part due to the perception that the export ban has been diluted.

Industry sources were quick to clarify that the corrigendum issued on August 2 was to clarify that the export ban was not applicable to those goods cleared from factory before the ban was introduced.

"The ban is still in place. The corrigendum is applicable only to the extent of the material lying at the port. The Food Minister has, however, said the issue will be reviewed in October and the state governments will be consulted on the same," said an industry source.

Sources also said that by November, sugar will be in excess. As such there is hope that the Government will allow export of sugar. "In all likelihood, they will initially give permission to advance license exports pending to the tune of 12 lakh tonnes. After exhausting that they will look at OGL. It is unlikely that everyone will be allowed to export as it will push up domestic prices," a senior sugar industry source said.

(This article was published in the Business Line print edition dated August 8, 2006)
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