Global sugar prices may remain firm as production in cyclone-hit Australia is expected to plunge to a 20-year-low of 3.6 to 3.8 million tonnes in 2011-12. The floods and cyclone that ravaged Australia may also lower the estimate for the country's sugar production to 3.4-3.5 million tonnes of sugar in 2010-11.
The adverse weather conditions would have a negative effect as the cyclone hit the key sugarcane-growing districts of Tully, Ingham and Innisfail, which together account for about 30 per cent of Australian sugarcane production, said a Crisil Research report.
INDIAN PRICES STABLE
While global prices are rising, sugar prices in India are expected to remain stable due to the marginal surplus in domestic sugar production, coupled with restrictions on exports under the Open General Licence (OGL) scheme. On February 2, 2011, domestic sugar prices (Mumbai S-30 variety) were at 18-20 per cent discount compared with global white sugar prices.
Although the government allowed exports of 5,00,000 tonnes of sugar under the OGL scheme for 2010-11 in December, it has not yet issued the release orders for the same. With inflation soaring, the Government may desist from issuing the licence in the short term. So, Indian sugar producers are unlikely to benefit from the surge in global prices. Further, with the low differential between the global raw and white sugar prices, standalone refineries are not expected to gain, because of the global tightness, in the short term, Crisil said.
RAW SUGAR AT 30-YEAR PEAK
Australia produced about 4.7 million tonnes of sugar in 2009-10, of which an estimated 3.6 million tonnes were exported. It is among the top three sugar exporters in the world, accounting for about 10 per cent of the global trade. The sugar industry is confined to Queensland and, to some extent, Western Australia.
Sugar prices in the international markets rose on an average rose by 4 per cent on February 2 as a result of the cyclone and tightness in the demand-supply situation. New York Raw and London White sugar prices have risen by 7 per cent and 8 per cent, respectively, over the last week.
On February 2, raw sugar for March delivery rose to a 30-year peak of $778 a tonne, while the white (refined) sugar prices for March delivery were at an historic high of $845 a tonne.
The global raw and white sugar prices may continue to remain firm at around these levels over the next two-three months, said Crisil. The Brazilian crop, which is expected to hit the global market in May, is expected to help the global sugar prices correct downwards in the second half of sugar season 2010-11 (October 2010 to September 2011). Raw sugar futures for October delivery are currently quoted at a 15 per cent discount to that of March contracts.
FALL IN PROCUREMENT PRICE
Given that there would be no upside to Indian sugar prices from tightness in the global demand-supply situation, Crisil has maintained its forecast of domestic prices to average in the Rs 29-32 per kg range during sugar season 2010-11.
Crisil expects the profitability of the domestic sugar mills to increase due to an expected decline in sugarcane procurement costs, but the extent of margin improvement would vary across regions.
For a sugar mill based in North India, the operating margins are expected to improve by 400-600 bps due to firm sugar prices and an estimated 15-20 per cent decline in sugarcane procurement costs. Operating margins of a sugar mill based in south India would improve by about 200-400 bps on the back of higher export realisations from the Advanced Licence Scheme (ALS) and firm domestic sugar prices, Crisil said.