Agri Business

‘High crude oil unlikely to spur further ethanol production'

Harish Damodaran New Delhi | Updated on November 12, 2017

Mr Narendra Mukumbi, Managing Director, Shree Renuka Sugars Ltd.   -  Business Line

Will crude oil at above $ 100-a-barrel prompt more cane diversion to ethanol, causing further spike in world sugar prices?

Unlikely, says Mr Narendra Murkumbi, Managing Director of Shree Renuka Sugars Ltd (SRSL), which controls two companies in Brazil with a combined cane crushing capacity of 14 million tonnes (mt), yielding one mt of raw sugar and one billion litres of ethanol annually.

According to Mr Murkumbi, millers are currently making more money on sugar than on ethanol. “I don't see this changing unless sugar falls below 25 cents a pound. Only then will diversion of cane to ethanol really happen”, he told Business Line.

New York raw sugar futures for May 2011 delivery closed at 28.91 cents on Friday, with the July and October contracts trading at 26.45 and 25.13 cents a pound, respectively.

Economics now favour sugar

Mills in Brazil are now realising around 1,370 real or $820 on every cubic metre of ethanol sold domestically. As one cubic metre of alcohol is equivalent to 1.6 tonnes of sugar, it translates into an ex-factory raw sugar price of $ 512.5 a tonne. After adding freight and handling costs of $65 at Paranagua or Santos port, the free-on-board (f.o.b) raw sugar equivalent price comes to $577.5 a tonne or 26 cents a pound.

The realisations are even lower for exports, where the f.o.b price is just $750/cubic metre, corresponding to $680/cubic metre or $425 a tonne of sugar at the factory gate. If to this, freight and related costs are added, the equivalent raw sugar f.o.b price would be $490 a tonne or 22 cents a pound.

“The economics are at present loaded in favour of sugar. Sugar prices are ruling high, independent of any link with ethanol or oil. But $ 100-a-barrel oil over a sustained period will help set a floor price of, say 25 cents, for sugar. It will not go below 25 cents, so long as oil remains at $ 100-plus”, Mr Murkumbi pointed out.

No major output jump seen

During 2010-11 (April-March), mills in Brazil's main South-Central belt are expected to crush some 560 mt of cane, producing 33.5 mt of sugar and 25.5 billion litres of ethanol. This is against the corresponding 2009-10 levels of 542 mt, 28.6 mt and 23.7 billion litres.

“I estimate cane production to be flat in 2011-12, with the crop's share going to sugar rising marginally from this year's 45 per cent. While the proportion of cane for ethanol will fall, it is not going to bring about a big jump in sugar output”, Mr Murkumbi felt, while ascribing this to the absence of adequate crystallisation capacity in the country.

Mills, after crushing cane, have the option to either ferment the juice into ethanol or crystallise it into sugar. Brazil's mills, however, have primarily invested in ethanol manufacture. With their existing crystallisation capacities more or less used up, it limits the scope for further augmenting sugar production.

“While the average sugar-to-ethanol mix in Brazil is 45:55, our units have sufficient crystallisation capacity to enable us go to 65:35 and come down to 40:60 in the event of sugar prices dipping”, claimed Mr Murkumbi.

In 2010-11, SRSL produced 0.672 mt of sugar and 0.407 billion litres of ethanol from its Brazilian operations. “In the coming season, we plan to do one mt of sugar and 0.400 billion litres of ethanol”, he added.

Brazil's mills export over two-thirds of their sugar output, whereas they ship out less than a fifth of the ethanol. The bulk of the ethanol produced is consumed internally – either as anhydrous alcohol for 25 per cent blending with petrol or as hydrous spirit that can be used up to 100 per cent in flexible-fuel vehicles. Brazil is the world's No. 1 ethanol exporter and No. 2 producer after the US.

Published on March 13, 2011

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