With crude oil prices dropping below $30/barrel, oil marketing companies (OMCs) may not show as much interest for ethanol-blended petrol programme.

In 2018-19 ethanol supply year (December-November), oil marketing companies lifted 188.5 crore litres of ethanol from sugar mills, which helped the blending rate to go up to 4.92 per cent from 4.22 per cent in the previous year. But in 2019-20, it looks like the blending rate may drop to 4 per cent: sugar mills have offered lower volume of ethanol to OMCs due to drop in cane output.

According to the Indian Sugar Mills Association (ISMA), for the current ethanol supply year, contracts for approximately 160 crore litres of ethanol have been signed. It needs to be seen by year end if sugar mills supply this entire quantity. Last year, while total contracts entered into by mills for ethanol was 245 crore litres, they ended up giving only 188.5 crore litres. Mills that were allotted depots far away or allotted depots in States that charged additional duty on ethanol didn’t honour their contract to OMCs.

If oil prices continue to quote at $30-$40/barrel in the international market, OMCs may not show much enthusiasm in ethanol blended petrol next year. In that case it may be difficult for the Centre to meet its target of 10 per cent ethanol blending by 2022.

Price equation to change

Oil marketing companies sell ethanol blended petrol at the same price of petrol at retail pumps and make money. In 2018, when the cost of petrol at the retail pump in Delhi was ₹80.73/litre and the cost of ethanol from C-heavy molasses (₹40.85/litre) was about ₹61.98/litre including GST and other charges, OMCs saved ₹18/litre.

But in 2019, as crude prices drifted lower and so did retail price of petrol and on the other hand the government increased price for ethanol, savings from selling ethanol blended petrol reduced for OMCs. Now, in the last few weeks, as crude oil prices have plummeted below $30/barrel, the ethanol-petrol equation is set to change again.

However, given that the Centre has not cut prices of petrol and so lower crude prices haven’t translated to lower prices on petrol, there is still ₹5/litre saving for OMCs when they sell ethanol-blended petrol: The price of ethanol from C heavy molasses is now ₹43.75/litre. With GST, transportation cost, denaturant fee, dealer’s margin, etc., the total cost of ethanol comes to about ₹65/litre for OMCs. At the retail pump in Delhi, petrol is sold for ₹70/litre inclusive of excise duty and VAT. That said, going ahead, if crude oil prices remain at current levels for a longer time, the government may revise retail petrol prices down, and, once that happens, savings will disappear for OMCs.

Not all sugar mills are keen on business with OMCs, either. While in recent years the Centre has increased prices of ethanol from C heavy, B heavy molasses and also sugarcane juice, still, extra neutral alcohol (ENA) and rectified spirit make more business sense for sugar mills as margins are higher vis-à-vis ethanol which is pure alcohol; in ENA and rectified spirit, 5-6 per cent is water and remaining alcohol.

Is there enough cane, though?

With shortage of cane given drop in sugar output estimated at 20 per cent this year, will demand for ethanol from OMCs and ENA from manufacturers of hand-sanitisers, be met in full by sugar mills?

Abinash Verma, Director General, Indian Sugar Mills Association, says that there is enough cane available for manufacture of ENA as demand overall from the sanitiser industry is not much. “Across the country, the monthly requirement of ethanol/ENA by all sanitiser manufacturers is 80 lakh-1 crore litres. This is when they function at their usual 60-65 per cent utilisation. If they run at 100 per cent capacity, they will require about 10 crore litres in a year, which the sugar mill industry can provide easily. Currently, the sugar mills industry has the capacity to produce 300-350 crore litres of ethanol in a year…”

For supply of ethanol to OMCs, from the contracts already signed, it can be seen that the sugar mills have not agreed for as much quantity as last year because of shortage of cane.

Only a continued determination from the Centre through right policy support can keep both sugar mills and OMCs motivated to reach the target under EBP, say experts.

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