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Business News/ Market / Mark-to-market/  No treats for sugar mills yet
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No treats for sugar mills yet

A backdrop of weakening sugar prices does not spell good times ahead for Indian sugar producers

Though the fear of imports may not be a worry at present due to a duty hike, exports turn less remunerative. Photo: BloombergPremium
Though the fear of imports may not be a worry at present due to a duty hike, exports turn less remunerative. Photo: Bloomberg

Global sugar producers will be glad that Brazil’s sugar output is likely to be lower than expected. The country’s sugar industry association Unica announced that it expects sugarcane output in 2014-15 at 546 million tonnes, 5.9% lower than its initial estimate.

The revised figure is 8.6% lower than the actual output of 2013-14.

Now, the proportion of cane Brazil’s mills use to produce sugar (versus ethanol) is expected to be lower than last year due to falling prices of sugar. Unica maintains that stance, but the proportion has increased from 43.6% of cane output to 44.5%. Still, sugar output too is expected to decline by 8.6% over the previous year.

But a lower output in Brazil alone may not be enough to stem falling sugar prices. A recent Bloomberg report, citing the International Sugar Organization, said that sugar consumption needs to outstrip supply by 3-4million tonnes before prices can recover significantly.

That’s a tall order. Raw sugar prices (No 11 contract on the Intercontinental Exchange) are down by 3.3% in August, and are down by 16% from their highest level in 2014 of 18.9 cents a pound in mid-May.

A backdrop of weakening sugar prices does not spell good times ahead for Indian sugar producers. Of course, they have a higher degree of protection now that import duty on sugar has been raised from 15% to 25%. But if sugar prices keep falling in this fashion, then that protection also gets eroded. Government data on average monthly wholesale sugar prices shows August-levels to be 4.9% higher than at the start of 2014, but a flattish trend has prevailed since April.

The next few months will be crucial for the industry. The festival season sees demand for sugar increase and the industry will sell down its stocks. Also, the revised sugarcane crop estimates post-monsoon will trickle in. The Indian Sugar Mills Association’s previous forecast was 25.3 million tonnes, or 4% higher than the previous year’s output.

Another development will be the fixing of the state advised price in Uttar Pradesh. Mills based in the state are readying for another showdown with the government over this. Whether their demand for a price based on a formula that uses the market price of sugar is accepted, remains to be seen.

Sugar stocks have lost the momentum seen in June and have declined significantly from those levels. Even the import duty hike has not improved sentiment. The spectre of declining global sugar prices is a negative factor. Though the fear of imports may not be a worry at present due to a duty hike, exports turn less remunerative. Companies were using exports as an option to reduce the domestic surplus to support prices. That becomes difficult if the cost of production remains constant or even increases, but realizations keep declining. A steady rupee too does not help matters.

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Published: 27 Aug 2014, 09:02 PM IST
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