Higher global energy prices – crude oil and gas– in the aftermath of the Russia-Ukraine war did not bode well for India’s economy, given its high import dependency. Likewise, several energy-intensive sectors such as fertilisers, chemicals and ceramics also had to bear the brunt of the massive rise in energy costs.  However, the sugar industry benefitted directly and indirectly from the higher global energy prices. This is on two counts.

For one, higher crude prices globally result in a higher blending of ethanol with petrol. This is particularly true in countries such as Brazil, the world’s largest sugar producer. With the increased demand for ethanol, sugar producers typically divert a sizeable amount of cane for ethanol resulting in lower sugar production. And the lower output helps sugar prices rule steady or even higher, depending on the quantum of diversion for ethanol.  

Second, the firm global sugar prices following higher cane diversion for ethanol are favourable for Indian producers, given that the local commodity prices closely follow the global trend. Importantly about 20-30 per cent of the domestic production is exported. For instance, in the current year, with annual production estimate of 36.5 million tonnes, the export target is forecast at 9 million tonnes, which is about 25 per cent.

In the first four months of the year, as the WTI crude prices rallied from USD 75 a barrel to USD 120 a barrel, the stocks of Indian sugar producers gained between 40 and 100 per cent. For instance, the stock of Balrampur Chini Mills gained about 41 per cent between January and April 2022, while Shree Renuka Sugars almost doubled during this period. Triveni Engineering’s stock gained 60 per cent during this period.

With global oil prices falling, the WTI Crude has corrected from its peak of USD 120 plus a barrel to about USD 83-level. Interestingly, sugar stocks also shed a good portion of the gains made early this year. For instance, in the last six months, these stocks have corrected by up to 30 per cent. While Shree Renuka Sugars was flat, Balrampur Chini Mills and Triveni Engineering fell by 31 per cent and 20 per cent, respectively. EID Parry is an exception as it gained 27 per cent due to its diversified business nature, with the sugar business contributing less than a fifth of its consolidated revenues.

In addition to falling crude and resultant moderation in global sugar prices, higher than expected production can be a near-term dampener for the sugar stocks. India is expected to close the sugar season for 2022 with an output of 36.5 million tonnes, higher than the earlier estimate of 36 million tonnes, implying a 17 per cent year-on-year growth.

However, the country’s export prospects seem to remain intact, given that the production in Europe, the world’s third-largest producer, is expected to stay lower due to warmer summer and water shortages. The yield on beet, the predominant sugar source for European makers, is expected to be lower this year and this should, to some extent, help contain any downside in global prices.

Even as the short-term challenges remain, the medium-term prospects remain intact, thanks to the Government’s resolve to implement an ethanol-blended petrol programme with a target of 20 per cent blending beginning FY24. This should augur well for companies such as Balrampur Chini, Shree Renuka Sugars and Triveni Engineering expanding their ethanol capacities.