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Executive summary Domestic demand-supply outlook Demand-supply overview Supply Demand Exports Global demand-supply outlook Prices Profitability Business model analysis Ethanol-blending programme
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1.0 01 02 03 Domestic demand-supply outlook Domestic sugar consumption forecast – Methodology Alternate methodologies Raw sugar
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6.0 Ethanol-blending programme 01 Background
1.0 01 02 03 04 05 06 2.0 01 02 03 04 Domestic demand-supply outlook Sugar – Demand-supply State wise sugar production, inventory and prices Indexed MSPs of alternative crops Historical zone wise sugar production in Maharashtra Domestic and export realisations for white sugar Domestic and export realisations for raw sugar Global demand-supply outlook Global demand-supply and inventory Global inventory levels and prices Per cent age diversion of sugarcane to sugar and ethanol in Brazil Indexed domestic prices of sugar and ethanol in Brazil
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CRISIL RESEARCH SUGAR ANNUAL REVIEW
3.0 01 02 03 04 05 06 Prices Domestic and international sugar prices Open interest and net non commercial long positions in sugar Net non commercial long positions and sugar prices Indexed raw sugar prices in USD and BRL Raw sugar prices in USD and BRL Appreciation of BRL against the USD
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4.0 Profitability 01 Profitability of sugar companies in North India (UP, Bihar) 02 Profitability of sugar companies in South India (TN, Kar, Maha)
1.0 Domestic demand-supply outlook 01 Sugar - Domestic consumption 3.0 Prices 01 Domestic demand-supply situation to tighten 4.0 01 02 03 04 05 Profitability North India – Key financial ratios South India – Key financial ratios Profitability of North Indian companies in 9M SS 2007-08 Profitability of South Indian companies in 9M SS 2007-08 Comparative sugar prices – Mumbai S-30
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5.0 Business model analysis 01 Integrated model has higher returns over the complete cycle 6.0 Ethanol-blending programme 01 Alcohol surplus/(deficit) situation 02 Comparison of profitability of ethanol production under ‘C’ vs. ‘B' molasses route 03 Surplus/ (deficit) under ‘B' Molasses route 04 Ethanol prices at which ‘C' molasses route and ‘B' molasses route are equally profitable 05 Comparison of ethanol production via ‘C' molasses vs direct route (cane to ethanol) 06 Ethanol prices at which ‘C' molasses route and direct route are equally profitable
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CRISIL RESEARCH SUGAR ANNUAL REVIEW
CRISIL Research expects profitability of sugar companies to improve over the next 2 sugar seasons (SS 2008-09 and SS 2009-10) on account of higher sugar prices. Lower sugar production and increasing consumption will lead to a fall in inventory levels causing prices to rise. CRISIL Research forecasts sugar prices (Mumbai S-30) in SS 2008-09 to be between Rs 17,000 – 18,500 per tonne, a rise of 13 – 23 per cent over the average levels of SS 2007-08. Prices are expected to rise further in SS 2008-09 and be in the range of Rs 18,500 – 20,000 per tonne. Sugar production, in SS 2008-09, is expected to fall by 18 per cent from its levels of SS 2007-08 and be at 21.4 million tonnes. Sugar production in SS 2009-10 is expected to fall by a further 6 per cent and be at 20.2 million tonnes. Production is expected to decline on account of a decline in area under sugar cane as sugarcane farmers, whose earnings have fallen on account of lower sugar prices, switch to alternate crops. Maharashtra will see the largest decline in production, with production declining by 30 per cent to 6.3 million tonnes in SS 2008-09. Uttar Pradesh will emerge as the top sugar producing state in the country due to the dramatic fall in Maharashtra’s sugar production. In this report, we have revised upwards our consumption numbers (please refer Chapter 1 – Domestic demandsupply outlook for further details); we expect consumption, over the period 2007-08 to 2012-13, to grow at a CAGR of 4.3 per cent and be at 26 million tonnes in 2012-13. Sugar exports from India are forecast to fall sharply to 0.5 million tonnes in SS 2008-09, down from 4.3 million tonnes in SS 2007-08. The withdrawal of sugar export subsidies coupled with the rise in domestic prices will make sugar sales in the domestic market more attractive as compared to sugar sales in the international market. The global demand supply situation is expected to tighten on account of steady consumption growth coupled with low production in India, the EU and Thailand. Also, Brazil is diverting a higher portion (60 per cent in 2008-09 as compared to 56 per cent in 2007-08) of its 2008-09 sugar cane crop to the manufacture of ethanol. These facts are expected to support international sugar prices which are likely to remain firm in the medium term. Appreciation of the Brazilian Real, against the US Dollar, has pushed up sugar prices in US Dollar terms; the strength of the Brazilian currency will be a key monitorable. Mandatory ethanol blending is to come into effect from 1st October 2008. However, we expect that the target of 10 per cent ethanol blending will not be met on account of lower sugarcane production in the next 2 sugar seasons translating into lower ethanol production. Even 5 per cent blending will not be possible given the lower ethanol production. Blending would only be possible through the use of alternative feedstocks such as ‘B’ heavy molasses and cane juice. On the other hand, we do not expect ethanol to be manufactured from these feedstocks as it is unprofitable at current levels of sugar and ethanol prices. We conclude that the ethanol-blending programme cannot succeed in its present form.
CRISIL RESEARCH SUGAR ANNUAL REVIEW
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9 months at the end of SS 2007-08. Sugar production.000 per tonne) at the end of the SS 200708. Production is expected to fall by a further 6 per cent in SS 2009-10 and be at 20.3 million tonnes in SS 2007-08 to 0. leading to a fall in inventories and support to sugar prices.000 1. CRISIL Research expects sugar consumption to exceed production in the next 2 years.200 Consumption Production Prices (RHS) Inventory E: Estimate.500 1.3-4. from levels of 5. in the SS 2008-09.800 1.9 million tonnes in SS 2009-10.7 months of off take (consumption + exports) at the end of the SS 2009-10.400 1.1. We expect consumption to grow steadily at 4.900 1. is expected to fall by 18 per cent from its levels of SS 2007-08 and be at 21.350 per tonne and Maharashtra and Karnataka state government additional subsidy of Rs 1.2 million tonnes. Inventory levels are forecast to fall to 3.0 Domestic demand-supply outlook Demand-supply overview After 2 years of surplus production in SS 2006-07 and SS 2007-08. F: Forecast Note Figures are for the sugar season (October to September) Source: Indian Sugar Mills Association (ISMA) and CRISIL Research CRISIL RESEARCH SUGAR ANNUAL REVIEW A-3 . Exports are expected to fall dramatically from 4.5 million tonnes in SS 200809 on account of the expiry of exports subsidies (Central government subsidy of Rs 1.4 million tonnes.600 1.4 per cent and be at 22.700 1.300 1. Figure 1: Sugar – Demand-supply (million tonnes) 30 25 20 15 10 5 0 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 E 2008-09 F 2009-10 F (Rs / quintal) 2.
maize.4 million tonnes.200 Maharashtra Others UP Prices (RHS) Tamil Nadu Inventory Karnataka Source: Ministry of Agriculture and CRISIL Research Figure 3: Indexed MSPs of alternative crops 160 150 140 130 120 110 100 90 2004-05 Wheat Cane . rice.Supply Sugar production.000 1.UP .500 1.SAP 2005-06 2006-07 Rice Maize 2007-08 2008-09 Cane . Historically. especially those of wheat and rice.600 1.800 1. 55 per cent of the drop in sugar production in SS 2008-09 is expected to come from Maharashtra. have been hiked substantially further increasing their attractiveness vis-à-vis sugarcane.900 1. in India.300 1. is forecast to decline by 18 per cent in SS 2008-09 and be at 21.SMP Note Figures are the UP SAP for 2007-08 is based on a price of Rs 110 per quintal. led to arrears building up and caused farmers to switch to alternative crops such as wheat.400 1. inventory and prices (million tonnes) 30 25 20 15 10 5 0 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 (Rs / quintal) 2.700 1. Minimum support prices (MSPs) of alternative crops. Source: Ministry of Agriculture and CRISIL Research A-4 CRISIL RESEARCH SUGAR ANNUAL REVIEW . Maharashtra has been the most volatile state in sugar production and we expect this trend to continue. soybean. witnessed in the SS 2006-07 and SS 2007-08. etc. Figure 2: State wise sugar production. The drop in sugar prices.
Historically.6 2.1 million tonnes in SS 2006-07. Figure 4: Historical zone wise sugar production in Maharashtra (Million tonnes) 10 9 8 7 6 5 4 3 2 1 0 2000-01 2001-02 2002-03 2. Amravati. in SS 2008-09. The Central and North zone are the areas in Maharashtra witnessing the largest swing in terms of sugar production. Dharashi. The above factors combined with poor rains in the crucial months of June and July in Maharashtra (the key producing state) will see production in SS 2009-10 falling by a further 5 per cent to 20.2 2004-05 2. South zone (core region) – Comprises districts of Satara. Nanded.7 1. the Central zone and the North Zone. Ahmadnagar. However.000 17.3 1.9 2. Yavatmal. higher production) to the high prices will manifest itself only in the SS 2010-11 and not in SS 2009-10.8 2. Aurangabad. Latur. to decline by 30 per cent from its levels of SS 200708 and be at 6. This is because of sugarcane being a 12-18 month crop and most of the plantings for SS 2009-10 have been completed. in SS 2008-09 and SS 2009-10. Nandurbar.3 million tonnes.2 2. Beed. Hingoli. Maharashtra can broadly be divided into three main sugar producing zones – South zone (core sugar producing region). while being extremely volatile in the North and Central zones.000 11. Production in SS 2009-10 is expected to fall by a further 12 per cent to 5.4 0.000 10. Parbhani.4 2.Sugar prices (Mumbai S-30) rose sharply by about 20 per cent in August 2008 and are at average levels of Rs 1.1 South zone Central zone North zone Sugar prices (RHS) Source: Maharashtra Federation of Cooperative Sugar Factories and CRISIL Research As can clearly be witnessed from the above graph. Buldhana.4 1. Jalgaon.4 2. CRISIL RESEARCH SUGAR ANNUAL REVIEW A-5 . the supply response (that is. sugar production in Maharashtra has been extremely volatile moving from 2. While in the short term.8 3.1 2003-04 13.2 million tonnes in SS 2004-05 to 9.4 0.9 1. Wardha.900 per quintal.000 18.8 1. the long term trend is upwards.000 12.3 1. Akola. Washim.5 1. Maharashtra We forecast sugar production in Maharashtra.000 19. Sangli and Kolhapur Central Zone (swing region) – Comprises districts of Nashik. Pune and Solapur North zone (swing region) – Comprises districts of Dhule.000 14. Jalna.000 2005-06 2006-07 2. will come from the Central and North zones of the state.5 million tonnes.9 15. Nagpur and Bhandara. Our interactions with industry sources lead us to believe that the bulk of the fall in Maharashtra’s sugar production.2 million tonnes.000 16.4 (Rs per tonne) 20. sugar prices are expected to decline from current levels. sugar production is most stable in Maharashtra’s South zone.000 0.000 0.
due their highly fragmented nature. for the SS 2007-08. Keeping in mind the above facts. is a constraint in this approach. due to be harvested in SS 2009-10. processed foods.1 million tonnes. Based on our interactions with industry sources.Lack of sufficient rainfall in the third and fourth week of June and July has severely affected the planting of the 15-month cane crop. it is our expectation that plantings will not decline drastically. there is no data available on this large segment due to its unorganised and fragmented nature. soft drinks. As sugarcane crushing. with sugar prices expected to remain firm. diversion of cane to alternative sweeteners is expected to be lower and thus while sugar cane production in SS 2008-09 is expected to be down by 12.2 million tonnes which we have now revised upwards to 21. Our earlier estimate put sugar consumption. we estimate that about 70 per cent of sugar consumption is in the indirect form (that is – in sweetmeats. Sugar production. in UP in SS 2007-08. We have made this upward revision in our consumption estimate by revising upwards our estimates for the growth rate of per capita sugar consumption based on the growth of end use sectors (our methodology for forecasting sugar consumption looks at population growth and per capita consumption growth). We are also revising upwards our estimate for consumption for SS 2009-10 from 20.3 million tonnes despite only a 3. a large part of sugar consumption will be in the form of sweetmeats. to decline by 8 per cent to 6. This was on account of the late starting of the crushing season in UP (due to disputes over cane pricing) leading farmers to sell more cane to manufacturers of gur and khandsari.6 million tonnes. etc).9 per cent. Though.7 million tonnes and by a further 2 per cent in SS 2009-10 to 6. is expected to start as per normal towards the end of October 2008. we have revised upwards our estimates on sugar consumption.5 million tonnes.8 million tonnes to 22 million tonnes. Uttar Pradesh We expect sugar production. chocolates. Lack of availability of comprehensive and reliable data. The planting of the 12-month cane crop will take place towards the end of 2009. for all end use sectors. Demand In this report. we expect sugar production in SS 2009-10 to fall by a further 12 per cent from its levels of SS 2008-09 and be at 5. was down by 14 per cent to 7. at 20. in SS 2008-09.4 per cent drop in cane production in UP. intuitively. We have revised upwards on per capita sugar consumption. in Uttar Pradesh (UP) in SS 2008-09. sugar production is expected to be down only 8 per cent. A-6 CRISIL RESEARCH SUGAR ANNUAL REVIEW . based on the growth rates of the end use sectors. However.
this method fails as the official data on inventories in inconsistent due to stock adjustments made as per excise certificates. Disappearance of stocks (Opening stock + Production + Imports – Exports – Closing stock) would be a reliable method of estimating consumption. While data from the National sample survey organisation (NSSO) on per capita sugar consumption is available. this data point would only capture direct sugar consumption which would be about 30 per cent of sugar consumption. Between 1986-87 and 1995-96. Thereafter.Domestic consumption Sugar consumption (million tonnes) 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 Source: CRISIL Research 17. however.52 per cent between 2007-08 and 2012-13.2 per cent. Table 1: Sugar . would be the drivers for the increasing per capita consumption of sugar.166 1.148 1. imports and exports.4 kgs during the 2007-08 SS.184 1.058 1. We believe that rising income levels and the increasing penetration of processed food and other retail products such as soft drinks and chocolates.7 18.0 22.094 1. As incomes rise and awareness increases. the population growth rate is expected to slow down. at around 18. is one of the lowest in the world.202 1.3 20. neither of these approaches produced satisfactory results. population growth in India was at 2.4 17. Thus.Box 1: Domestic sugar consumption forecast – Methodology Population growth and rise in per capita consumption primarily drive sugar consumption. We have assumed that population will increase at a CAGR of 1.9 20.4 17.4 kgs. during the subsequent 5 years. this method is not feasible. However.220 1. hence. we attempted to forecast consumption using alternate methodologies such as basing our estimates on data from the NSSO and the relatively simple method of looking at consumption as the difference between opening and closing inventory after considering production.0 Population (millions) 1.1 22.9 23.9 25. Per capita consumption of sugar in India.238 Per capita consumption (Kg) 16.075 1.4 18.5 16.9 17. growth slowed down to 1.130 1. These adjustments will only capture sugar inventory with sugar factories and will not capture inventory with the trade.5 21.5 16.112 1.8 per cent.0-2.0 26.2 21. the per capita sugar consumption is expected to increase and reach 21 kgs by 2012-13. we have forecasted consumption using a method of growth in population and per capita consumption.4 19.5 19.9 18. in this report. CRISIL RESEARCH SUGAR ANNUAL REVIEW A-7 .0 Box 2: Alternate methodologies As a part of our review of sugar consumption.9 19. From 18.6-1.
on account of the withdrawal of sugar export subsidies by the government and the rise in domestic prices. exports have only been viable on account of the subsidies and without the subsidies only a small quantum of exports would have taken place. had announced a sugar export subsidy of Rs 1. the state governments of Maharashtra and Karnataka had announced an additional export subsidy of Rs 1. in April 2007.3 million tonnes in SS 2007-08.8 per Kg in SS 2007-08. As per our analysis. Figure 5: Domestic and export realisations for white sugar (Rs / Kg) 22 20 18 16 14 12 10 Aug-06 Aug-07 Aug-08 J un-08 Oct-05 Jun-06 Oct-06 Jun-07 Oct-07 Dec-05 Dec-06 Dec-07 Feb-06 Feb-07 Domestic realisation Export realisation (both subsidies) Export realisation (no subsidies) Export realisation (only central subsidy) Source: CRISIL Research and Bloomberg Figure 6: Domestic and export realisations for raw sugar (Rs / Kg) 20 18 16 14 12 10 8 Oc t-05 Dec-05 Jun-07 F eb-08 Feb-08 Dec -06 Aug-07 Feb-06 Aug-06 Feb-07 Domes tic real isat ion Ex port realis ation (bot h s ubsi dies) E xport realis ati on (no s ubsi di es) E xport realis ati on (only central subsidy) Source: CRISIL Research and Bloomberg A-8 Dec -07 A pr-08 Oct -07 Apr-06 Jun-06 Oc t-06 Apr-07 Jun-08 Apr-06 Apr-07 Apr-08 8 CRISIL RESEARCH SUGAR ANNUAL REVIEW . clearly depicting that export realisations without subsidies have been consistently lower than domestic realisations by an average of Rs 1.000 per tonne for sugar exported from those two states. Additionally.350 per tonne for mills in coastal India and Rs 1.5 million tonnes from levels of about 4. we have plotted the domestic and export realisations for both white and raw sugar. in the SS 2008-09.Exports We forecast sugar exports.450 per tonne for mills in the interiors. in an effort to lend support to falling sugar prices. to fall to 0. The subsidy extended to exports of both raw sugar and white sugar. The Central government. In the graphs below.
Raw sugar is about 92 per cent processed. is limited to about 4 million tonnes. with rising domestic sugar prices and the withdrawal of the export subsidies. which India produces. We expect no sugar to be exported in the SS 2009-10. The export market for plantation white sugar.5 million tonnes in SS 2008-09. even after considering the subsidies. Selling sugar at current prices. if India is to be a large exporter of sugar it needs to produce either refined white sugar (45 ICUMSA) or export raw sugar. It is a moist. is more attractive for mills as compared to exporting. 33 million tonnes is in the form of raw sugar with the balance being in the form of white sugar. As raw sugar is an intermediate product in the sugar manufacturing process all existing plants can make raw sugar without additional capital expenditure. There is intense competition from Brazil and Thailand in this market. Both the Central and state government subsidies will be withdrawn at the end of the current (2007-08) sugar season. The solid cores of the raw sugar crystals are still covered with a layer of syrup.3 million tonnes of sugar exported in SS 2007-08. in the domestic market.Of the 4. of about 50 million tonnes. Therefore. Box 3: Raw sugar Raw sugar is an intermediate in the production of sugar. India has generally exported white sugar but the market for Indian white sugar is limited due to its inferior quality. These accompanying substances make raw sugar moist and tacky and give it its typical yellowish-brown colour and malty and burnt flavour. India has emerged as a raw sugar exporter for the first time in SS 2007-08. mills are better placed to export raw sugar. Most of the global trade in sugar. coarsely crystalline mass with sucrose content of 95-97 per cent. CRISIL RESEARCH SUGAR ANNUAL REVIEW A-9 . India has a competitive advantage in sugar exports to the Middle East on account of freight advantages enjoyed by Indian raw sugar as compared to raw sugar from alternative suppliers such as Brazil and Thailand. we expect sugar exports to fall to 0. Most of the raw sugar exported by the country has been to the Al Khaelej refinery in Dubai. about 2. is in the form of raw sugar.5 million tonnes has been raw sugar with the balance being plantation white sugar. Sugar prices have risen by about 20 per cent in August 2008 from their levels of July 2008. Raw sugar is an intermediate step in the sugar production process and thus no additional capital expenditure is required for producing raw sugar. Mills would need to incur additional capital expenditure for producing refined white sugar. Thus. Thus. while the global trade is mainly in the form of refined white sugar (45 ICUMSA). The sugar produced in India is known as plantation white sugar (150 International Commission for Uniform Methods of Sugar analysis -ICUMSA).
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0 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08E 2008-09F 100 5. CRISIL Research expects global demand to exceed global production in 2008-09. Sugar consumption is expected to exceed production by about 4 million tonnes leading to inventory declining from about 5 months of consumption at the end of 2007-08 to about 4.0 ($ / tonne) 450 400 5. CRISIL Research & Bloomberg Global consumption is expected to exceed production on account of the following: • • • Lower production in India (for details refer Chapter 1 – Domestic demand-supply outlook) Higher diversion of cane to ethanol in Brazil Lower production in the EU (European Union) and Thailand CRISIL RESEARCH SUGAR ANNUAL REVIEW A-11 . Figure 1: Global demand-supply and inventory (m ill io n to nnes) 175 170 165 160 155 150 145 140 135 130 125 2002-03 2003-04 Product ion 2004-05 2005-06 Consum ption 2006-07 2007-08E 2008-09F (m i ll ion tonn es) 68 66 64 62 60 58 56 54 52 50 Closing st ock (RHS) Source: ISO & CRISIL Research Figure 2: Global inventory levels and prices (months consumption) 6.5 350 300 250 200 150 4.7 months of consumption at the end of 2008-09.5 Inventory (months consumption) White prices (RHS) Raw prices (RHS) Source: ISO. leading to a fall in global inventory levels.2.0 Global demand-supply outlook After 2 years of large surpluses.0 4.
High diversion of cane to ethanol in Brazil In 2008-09. is due to the fact that manufacturing ethanol is more attractive as compared to manufacturing sugar. Surging corn prices in USA have pushed up feedstock costs for US-based corn ethanol manufacturers. making Brazilian ethanol competitive in USA even after the import duty of 54 cents per gallon. to ethanol. Flex fuel vehicles account for 23 per cent of Brazil’s total vehicle fleet. Figure 3: Per cent age diversion of sugarcane to sugar and ethanol in Brazil 100 90 80 70 60 50 40 30 20 10 1996-97 1997-98 1999-00 2000-01 2001-02 2003-04 2004-05 2005-06 2007-08 Mar-08 M ay-08 2008-09 Jul-08 0 2002-03 2006-07 Jan-08 1998-99 P er c ent of cane f or s ugar Per c ent of cane for et hanol Source: IBGE. Brazil is expected to divert 60 per cent of its sugarcane crop for ethanol manufacture as compared to 56 per cent in 2007-08. USDA & CRISIL Research Figure 4: Indexed domestic prices of sugar and ethanol in Brazil 215 195 175 155 135 115 95 75 May -05 M ay -07 May -06 S ugar Et hanol Source: CEPEA & CRISIL Research A-12 Nov -07 Jul-05 Sep-05 Nov -05 Jan-06 Mar-06 Jul-06 Sep-06 Nov -06 Mar-07 Jul-07 Sep-07 Jan-07 CRISIL RESEARCH SUGAR ANNUAL REVIEW . Strong ethanol exports to US support Brazil’s demand for ethanol. flex fuel vehicles accounted for 83 per cent of vehicle sales. In the first 6 months of 2008. The high diversion. Brazil’s ethanol demand has been growing strongly on the back of strong sales of flex fuel vehicles (vehicles which can run on any combination of petrol and ethanol).
1 per cent decline in area under sugarcane production. The decline is on account of a 5.2 million tonnes.2 per cent to 16. The low sugar prices. sugar production. As Thailand exports about 67 per cent of its sugar production.8 million tonnes. is expected to decline by 6 per cent to 7.Lower production in the EU and Thailand Sugar production in Thailand. it is vulnerable to swings in global prices. CRISIL RESEARCH SUGAR ANNUAL REVIEW A-13 . EU member states are cutting sugar production as per reforms agreed by the EU commission (please refer to Chapter 8 – International Scenario in Part B of this report for background information on EU sugar policy) As a part of the ongoing reform process. is expected to decline by 5. in 2008-09. have caused farmers to plant alternative crops resulting in a decline in area under cane cultivation. witnessed globally in 200607 and the first half of 2007-08. in the EU in 2008-09.
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the government declared a lower release order for August 2008. prices are expected to continue their upward move. however.850 per quintal. We expect domestic sugar prices in SS 2008-09 to remain between Rs 1. In the long term.000 (USD / tonne) 550 500 450 400 350 300 250 200 150 Oct-03 Oct-04 Oct-05 Oct-06 Jan-04 Jan-05 Jan-06 Jan-07 Oct-07 Jan-08 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 100 Jul-08 Jul-04 Jul-05 Jul-06 Mumbai S-30 Raw (RHS) Jul-07 White (RHS) Source: Bloomberg and CRISIL Research CRISIL RESEARCH SUGAR ANNUAL REVIEW A-15 .9 million tonnes to 1. Thus. caused this dramatic price rise. Out of the total buffer stock of 5 million tonnes.3 million tonnes in August 2007. Figure 1: Domestic and international sugar prices (INR / tonne) 2.0 Prices Domestic sugar prices have been consistently moving upwards since November 2007 on account of an improving demand-supply situation. In August 2008.75 million tonnes were to be sold in SS 2007-08 with the balance being sold in SS 2008-09. 2.9 million tonnes as against 1.400 1. International prices too have moved up in the past 3 months on expectation of a global deficit in SS 2008-09.000 per quintal. The free sale quota for August 2008 was initially set at 0. Prices spiked on the news of the lower quota and in an effort to contain the price rise the government hiked the free sale quota from 0. We expect prices to fall from current levels in the short term.850 – Rs 2. Considering that sugar from the buffer stock would be available in the market. The government had created a buffer stock of 5 million tonnes for supporting the industry when sugar prices were low. Tightness of sugar supply. in the physical market despite a high level of inventory.700 and Rs 1.1 million tonnes.200 1.800 1. the lower release order and fewer sales from the buffer stock caused tightness in the physical market.200 2.900 per quintal. prices shot up by 20 per cent from their levels of July 2008 and were at Rs 1.3.600 1. Prices in SS 2009-10 are expected to remain between Rs 1. It has been discerned that mills have been selling less sugar from the buffer stock on expectations of better prices going forward.000 1.
1 7.2 5.6 18.1 26.651 4.7 1.0 17. leads to the conclusion that fundamentals support present levels of international prices. in sugar. has declined presently.2 20. As of 26th August 2008.0 5.2 22. despite lower speculative involvement.5 9.8 5.1 3.5 12.9 6.7 0.5 13.890 11.7 10.0 4.7 14.5 12.8 1.0 2. Figure 2: Open interest and net non commercial long positions in sugar (million contracts) 1.5 14. higher prices.3 21.9 per cent of world trade.1 4. ISMA. However.5 0.7 2.642 8.1 4.879 10.Table 1: Domestic demand-supply situation to tighten (million tonnes) Opening stock Production Imports Consumption (CRISIL) Exports Closing stock Closing stock as months offtake Closing stock as months consumption Sugar prices . witnessed peak levels in March 2008 with net non commercial long positions accounting for 23.Aug 07 Source: CRISIL Research.5 0.0 17. prices were at $323 per tonne but net non commercial long positions had declined to 16.9 19.9 20.3 1.7 0.7 Note: Prices for 2007-08 are average prices from Oct 07 .3 19.2 18. in sugar.8 3. Thus.3 20.Mumbai S-30 (Rs / tonne) 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 E 2008-09 F 2009-10 F 10.1 0.2 3.5 12. speculative activity.7 11.7 28.0 0.4 per cent of world trade and raw sugar prices being about $318 / tonne.4 8.1 11.5 16.0 21.5 5.2 1.474 12. NFCSF & Bloomberg Speculative activity Speculative activity.4 1.1 0.2 7.2 8.7 3.9 0.3 11.4 22.4 17.9 2.7 2.696 3.9 7.5 (thousand contracts) 250 200 150 100 50 0 -50 Sep-06 Sep-07 Jul-06 Jul-07 Jan-06 Jan-07 Nov-06 May-06 May-07 Nov-07 Jan-08 Open interest Net non commercial long position (RHS) Source: CFTC and CRISIL Research A-16 May-08 Mar-06 Mar-07 Mar-08 Jul-08 CRISIL RESEARCH SUGAR ANNUAL REVIEW .5 8.2 9.5 5.0 14.9 5.5 1.1 18.3 1.
Figure 4: Indexed raw sugar prices in USD and BRL 130 120 110 100 90 80 70 60 J an-06 M ar-06 M ay-06 Nov -06 Mar-07 May -07 Jul-07 M ar-08 M ay -08 50 Jul-06 S ep-06 Jan-07 Sep-07 Nov-07 J an-08 May -08 Nov -06 Jan-08 Jul-08 Jul -08 I ndexed raw sugar pric es in BRL Jul-07 Index ed raw sugar pric es in US D Source: Bloomberg and CRISIL Research CRISIL RESEARCH SUGAR ANNUAL REVIEW A-17 . Despite the increase in dollar prices since June 2008.Figure 3: Net non commercial long positions and sugar prices (USD/ ton ne) 425 375 325 275 225 175 (tho usand con tracts) 250 200 150 100 50 0 -50 M ar-06 M ay-07 Mar-08 Jul-06 Mar-07 S ep-07 May -06 Sep-06 J an-07 J an-06 Nov-07 Raw sugar prices Net non com merc ial l ong pos itions (RHS) Source: CFTC. prices in Real terms have actually remained flat. The appreciation of the Real against the dollar has pushed up prices in dollar terms. Bloomberg and CRISIL Research Currency movements The appreciation of the Brazilian Real against the US Dollar has caused earnings for Brazilian firms in Real terms to decline.
6 Mar-06 M ay-06 Mar-07 M ay -07 Mar-08 M ay-08 Nov -06 Nov -07 S ep-06 Jul-07 1.2 2.5 Jan-06 S ep-07 Jul-06 Jan-07 Jan-08 Jul-08 BRLvi s-a-vi s the US D Source: Bloomberg and CRISIL Research A-18 May -08 Nov -06 Jan-08 Jul-08 Jul-07 CRISIL RESEARCH SUGAR ANNUAL REVIEW .8 1.1 2.9 1.4 2.7 1.0 1.Figure 5: Raw sugar prices in USD and BRL (USD / tonne) 450 400 350 300 250 200 150 (BRL / ton ne) 950 850 750 650 550 450 350 M ar-06 M ay-07 Mar-08 Jul-06 Mar-07 S ep-07 May -06 Sep-06 J an-07 J an-06 Nov-07 Raw sugar pric es in USD Raw sugar prices in BRL (RHS) Source: Bloomberg and CRISIL Research Figure 6: Appreciation of BRL against the USD 2.3 2.
0 6. the SAP (State Advised Price) for sugar cane was hiked by 9 per cent to Rs 125 per quintal. Maha) (Per cent) 25 20 15 10 3. Figure 1: Profitability of sugar companies in North India (UP. Sugar prices.cane price gap (RHS) Source: Prowess and CRISIL Research CRISIL RESEARCH SUGAR ANNUAL REVIEW A-19 .0 5 0 Sep-00 -5 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 2.0 Profitability CRISIL Research expects profitability of sugar companies to improve over the next 2 sugar season’s on account of the expected rise in sugar prices.0 0.0 2. Kar. significantly eroded the profitability of Indian sugar companies (especially in Uttar Pradesh). witnessed in SS 2007-08.0 4.0 1.0 (Rs) 6. fell by about 20 per cent to Rs 1.0 OPM NPM ROCE Sugar . The situation was even worse for sugar companies in Uttar Pradesh where in addition to the 20 per cent decline in prices.0 5.488 per quintal.0 OPM NPM ROCE Sugar .4. in SS 2006-07.cane price gap (RHS) Source: Prowess and CRISIL Research Figure 2: Profitability of sugar companies in South India (TN. The fall in sugar prices.0 5.0 10 5 0 Sep-00 -5 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 0.0 4.0 1. Bihar) (Per cent) 30 25 20 15 3.0 (Rs) 7.
North India (predominantly UP) has a fixed cane pricing regime which is not linked to the sugar price. is lower for companies in South India.2 72.9 13. Companies in North India (UP) have profited to a large extent on account of lower cane prices. Table 3: Profitability of North Indian companies in 9M SS 2007-08 Parameter Net sales Change in stock Raw materials. when sugar prices come down.9 10.8 11.0 6.9 As can be seen from the above tables.6 0.4 122. has improved. the volatility in operating margins. This is on account of the differing regulatory regimes in North and South India. Companies in South India have limited flexibility with regards to cane prices.9 19. companies have benefited from higher sugar prices.0 80.3 2.2 Average 15. for both companies in North and South India. When sugar prices rise.Table 1: North India – Key financial ratios Parameter OPM NPM ROCE Sugar & cane price gap Source: Prowess and CRISIL Research Unit Per cent Per cent Per cent Rs Max 23.0 2007-08 9M 100 -9.0 3.4 14.2 A-20 CRISIL RESEARCH SUGAR ANNUAL REVIEW .6 4.3 Table 2: South India – Key financial ratios Parameter OPM NPM ROCE Sugar & cane price gap Source: Prowess and CRISIL Research Unit Per cent Per cent Per cent Rs Max 19.6 12. in the first 3 quarters of SS 2007-08.8 4.9 Min 12.7 20.8 4.7 8.4 -3.3 Range 19. they pay higher prices to cane growers and.6 5.1 Table 4: Profitability of South Indian companies in 9M SS 2007-08 Parameter Net sales Change in stock Raw materials.6 25. Profitability.4 5. net margins and RoCE.7 95. they are able to pay less to cane growers.5 Min 4.1 91.9 20.3 111.1 Average 16. of sugar companies.6 9.2 20.0 6.9 4. stores & spares Salaries and wages Other expenses Total operating expenses OPBDIT Source: Prowess and CRISIL Research 2006-07 9M 100 -9.3 21.8 71.1 -1.8 Range 7.4 11.9 11.5 15.1 4. subsequently. stores & spares Salaries and wages Other expenses Total operating expenses OPBDIT Source: Prowess and CRISIL Research 2006-07 9M 100 -44.8 2.6 3.3 3.6 88.0 4.0 9.7 8.2 2007-08 9M 100 -53.
Variable concessions: Exemption of 1) cane purchase tax 2) entry tax on sugar 3) administrative charge on molasses and 4) trade tax on molasses.508 1.496 1.644 1. CRISIL RESEARCH SUGAR ANNUAL REVIEW A-21 . Mills in Uttar Pradesh have contested..357 1.780 1.538 1. the outlook for sugar companies in Uttar Pradesh is uncertain and will be clear only when the outcome of the court cases.747 1. for the state government’s methodology in fixing sugar cane prices.374 1. However. 2004: • • • Fixed concessions: A 10 per cent subsidy on capital invested and a remission in stamp duty and registration charges on land purchase.335 1. Profitability will decline from stated levels if the matter in the courts goes against the UP-based sugar companies and they are ordered to pay higher than Rs 110 per quintal. The matter is presently sub judice.900 NA Difference -403 -385 -287 -118 -64 12 47 152 154 211 565 Low sugarcane prices in Uttar Pradesh are one of the key reasons for higher profitability of North Indian sugar companies. It is clear that removing the scheme will negatively impact the profitability of sugar companies in the state. 2007.407 1. The outcome of court cases relating to withdrawal of the UP Sugar Industry Promotion Policy. in the Supreme Court. The following are the main features of the Sugar Industry Promotion Policy.471 1.377 1.481 1.484 1. are based on a sugar cane price of Rs 110 per quintal. the benefit of the variable component of the subsidy worked out to Rs 1 per kg of sugar produced.499 1.585 1.329 1. is known. On June 1. 2004’ with immediate effect. According to industry sources.331 1. 2004 is another concern for UP-based sugar companies. the new state government in Uttar Pradesh withdrew the state’s ‘Sugar Industry Promotion Policy. The quarterly results. relating to the withdrawal of the Sugar Industry Promotion Policy. There would also be re-imbursement of the following expenses: 1) Cane transport expenses 2) sugar transport expenses 3) cane society commission. announced by sugar companies..Table 5: Comparative sugar prices – Mumbai S-30 Month October November December January February March April May June July August September Source: Bloomberg and CRISIL Research SS 2006-07 1.362 1. The Uttar Pradesh state government had announced the SAP for sugar cane at Rs 125 per quintal for SS 2007-08 (unchanged from its levels of SS 2006-07).420 1.360 SS 2007-08 1.451 1.
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we have assumed sugar sales realisation of Rs 16. This could be referred to as the sugar-molasses-power model.000 per tonne. but it will also have the facilities for processing molasses into alcohol/ethanol and bagasse into power.500-18. alcohol/ethanol and power.5. We have made product pricing and cost assumptions for each of these three scenarios. that is. molasses prices of Rs 1. there are four possible business models for a sugar company. that is. It may opt not to forward integrate into the manufacture of power. This is the sugarmolasses-bagasse model. molasses prices would vary between Rs 500-3. It is to be noted that the prices and costs we have assumed are indicative in nature. that is. At present. It may continue to sell a certain quantum of molasses and bagasse in the open market. This is called the sugar-ethanol-bagasse model. Returns from alternative business models Sugar companies have been diversifying their business models and derisking their revenue streams by setting up facilities for producing alcohol/ethanol (from molasses) and for co-generating power (utilising bagasse). and bagasse prices of Rs 400 per tonne.200 per tonne.2 per unit. CRISIL RESEARCH SUGAR ANNUAL REVIEW A-23 . This could be termed the sugar-ethanol-power model. manufacture sugar and sell the by-products (molasses and bagasse) obtained in the course of manufacture without any value addition.000 per kilo litre.500 per tonne. while bagasse prices would be Rs 100-800 per tonne. • • • A company can convert molasses into alcohol and further process the same into ethanol. A company may opt to forward integrate into complete value addition of by-products. We have assumed that realisations earned on the sale of sugar would be at Rs 13.0 Business model analysis Four possible business models for a sugar company Sugar companies are increasingly diversifying and de-risking their revenue streams by manufacturing ethanol from molasses and co-generating power from bagasse. average alcohol prices of Rs 21. and a cyclical downturn in the industry. and the price of sugarcane has been assumed at Rs 1.500 per tonne. sugar supply is low and prices are high. We have analysed the incremental profitability and returns from alternative business models in three possible scenarios —an upward cycle in the industry. These are as follows: • A company can be a plain vanilla sugar manufacturer. produce sugar. The realisation per unit of power sold has been taken as Rs 3. alcohol/ethanol sales realisations would be at Rs 18. In a normal scenario. After conducting a detailed analysis of the four possible business models a sugar company can follow.500 per tonne.500 per tonne. but decide not to convert molasses into alcohol/ethanol. CRISIL Research concludes that forward integration into power and ethanol enables mills to generate higher average profits over the length of the sugar cycle.500-24. that is. A company can go in for bagasse-based cogeneration of power. a normal scenario of moderate supply and prices. Actual figures would vary from region to region and from company to company. supply is high and prices are low.
since power cogeneration plants produce renewable energy through the non-carbon route. the downcycle mills will crush 8 per cent more cane as compared to the normal scenario. as mills have to obtain several approvals before they are eligible to receive CERs. where a mill produces not only sugar but also alcohol. The price of ethanol sold to oil-marketing companies. Actuals may vary. average profits are higher (over a complete cycle) and variation in profits is also lower than that of a plain vanilla sugar mill producing sugar. Recovery and other input-output ratios have been considered at standard industry norms.SMP: Sugar-molasses-power. we have assumed that a plant with a capacity to crush 5. Further. This is because earnings from the sale of alcohol/ethanol and power are relatively stable and are non-cyclical compared to the core sugar business (power prices are not volatile since they are decided on the basis of long-term agreements. ethanol and power. is fixed on the basis of quantity-based tenders). crushing a total of 702.000 tcd). We can conclude the following from the above table: • It makes sound business sense to opt for an integrated business model. for the ethanol-blending programme.In addition. Normal (1 year). molasses and bagasse. will operate for 156 days at 90 per cent capacity utilisation. sugar mills are entitled to receive tradable carbon credits (certified emission reductions (CERs)) under the clean development mechanism of the Kyoto Protocol. Downcycle (2 years) Source: Industry and CRISIL Research 15% 5% -6% 5% 15% 8% 0% 7% 13% 8% 2% 7% 13% 10% 5% 9% 18% 7% -9% 5% 20% 12% -1% 10% 20% 14% 4% 12% 22% 18% 10% 16% SEB SMP SEP SMB: Sugar-molasses-bagasse. Table 1: Integrated model has higher returns over the complete cycle SMB PBIT Margins Upcycle Normal Downcycle Average margin (weighted) Return on capital employed Upcycle Normal Downcycle Average RoCE (weighted) SEP: Sugar-ethanol-power Note: This is a hypothetical example. In the normal scenario. we have assumed that the upcycle mills will crush 8 per cent more as compared to the normal scenario.SEB: Sugar-ethanol-bagasse. Further. we have assumed that a mill forward integrating into the manufacture of alcohol/ethanol and/or power will process 100 per cent of its molasses production into alcohol/ethanol and 100 per cent of its bagasse output into power. We have not considered this in our calculations. Weights for calculating average: Upcycle (2 years).000 tonnes of sugarcane per day (5.000 tonnes of sugarcane. A-24 CRISIL RESEARCH SUGAR ANNUAL REVIEW .
be viewed in the light of the following: • The decision of a sugar mill to opt for an integrated business model or to remain a standalone plain vanilla sugar mill is often a function of its long-term strategy and vision. • Past experiences or future expectations also govern decisions. • Opting for a sugar-molasses-power or sugar-alcohol-power model would generate higher profits for sugar companies over a cycle. However. when the sugar business was doing badly. For example. There is also a fear among some mills that realisations on power sales may drop in the coming years. During this period. several mills are hesitant to opt for power co-generation in view of the unpleasant experiences that some of them had in the form of delay in receiving payments from state electricity boards against supply of power. Our conclusions must. sugar prices fell sharply due to oversupply in the market. however. For example. several sugar mills were finding the sale of molasses and bagasse more profitable than the sale of alcohol or power. but alcohol and power prices were relatively stable. which are taken with a long-term view. during a period sugar shortage in 2004-05. given the lesser variation in profits. For instance. could generate lower returns on incremental capital employed (compared to a standalone sugar mill) when the industry is in an upturn. opting for value addition of bagasse and molasses. The business risk in opting for these models is also lower. due to the lower capital expenditure requirement for establishing a distillery unit. to some extent. in 2006-07. in protecting revenues and improving profitability during periods of downturn in the core sugar business. these products contributed heavily to profitability. sugar mills could prefer to set up a distillery unit first rather than a co-generation plant.• Processing molasses into alcohol/ethanol and undertaking bagasse-based co-generation of power helps. Prices and costs at particular point of time do not necessarily influence business decisions. CRISIL RESEARCH SUGAR ANNUAL REVIEW A-25 . • However.
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cannot succeed on account of the following factors: • • • • Attractiveness of ethanol vis-à-vis other alcohols Cyclical feedstock availability Alternative feedstock’s unprofitable Pricing and tendering system Box 1: Background The ethanol-blending programme started in October 2003. However. costing less to produce. the programme was revived and a national programme to blend 5 per cent ethanol with petrol had been implemented from November 1. Under this. blended with 5 per cent ethanol. Dadra & Nagar Haveli. Gujarat. Punjab. However. It is our opinion that the ethanol-blending programme. due to the decline in molasses and alcohol availability (following the steep fall in sugarcane output) and the inability of sugar mills and oil marketing companies to arrive at a consensus on economic pricing for ethanol. they are selling ethanol at Rs 21. However. Currently.5 per litre when they could sell rectified spirit in the open market at Rs 26 – 27 per litre. mills would rather sell rectified spirit as compared to ethanol. in the current environment. as per our understanding. Haryana. Jammu & Kashmir. mandatory in nine states (Andhra Pradesh. 5 per cent blending was made mandatory with immediate effect.5 per litre. The programme was extended to the entire country except states in the Northeast. 5 per cent ethanol blending is mandatory. However. The programme had come to an abrupt halt in October 2004. Goa. the government had not made the programme mandatory. Pondicherry and Chandigarh). at a fixed price of Rs 21. Karnataka. and oil companies had been given the freedom to protect their commercial interests for arriving at a viable pricing for ethanol. This is because prices of lower grades of alcohol such as rectified spirit. CRISIL RESEARCH SUGAR ANNUAL REVIEW A-27 . the price of Rs 21. Thus. in its present form. the Central government had made the sale of petrol.6.0 Ethanol-blending programme Blending programme not to succeed in the present form Mandatory 10 per cent ethanol blending is scheduled to come into effect from 1st October 2008. are selling at Rs 26 – 27 per litre. as they are locked into tenders. the actual level of blending is between 2 – 3 per cent. 2006.5 is unacceptable to sugar companies. Presently. Tamil Nadu. Uttar Pradesh) and four union territories (Daman & Diu. The price was acceptable to sugar companies when the tenders were made. Attractiveness of ethanol vis-à-vis other alcohols At present. Lakshadweep and Andaman and Nicobar Islands. In October 2007. Maharashtra. mills have contracted tenders from the OMCs for supplying ethanol for a 3-year period.
In the event of 10 per cent ethanol blending. for other than blending purposes.037 1.A . required for blending purposes.8 billion litres during 2007-08 to about 2.609 1.700 million litres of alcohol/ethanol will be required to meet the demand.093 17.220 1.0 billion by 2008-09.642 12.B -E -569 -1311 -1534 -1002 -336 -756 -1389 -1678 Source: CRISIL Research As can be observed from the table above.458 2.506 1. Industrial alcohol-based chemical manufacturers and potable alcohol manufacturers also use the alcohol/ethanol made by sugar mills as a raw material. We estimate that the total demand for alcohol. A-28 CRISIL RESEARCH SUGAR ANNUAL REVIEW . post 2007-08. if the blending programme is to be successful.1 1. in 2007-08.096 2.164 1.216 2. This is on account of the fact that sugar cane and consequently sugar and molasses production is expected to decline in the 2008-09 and 2009-10 SSs.201 14. Thus. around 2.114 1.043 Excess/Deficit @ 5 per cent blending H=G-F -35 -754 -952 -392 365 -3 -584 -817 Excess/Deficit @ 10 per cent blending I = G . the quantum of ethanol. by 2008-09.900 million litres of alcohol/ethanol will be required for meeting the demand for 5 per cent blending and for industrial.910 2.302 2.143 11.020 15.056 16. As can be seen from the table.224 Potable alcohol B 747 775 832 868 911 972 1.722 Total demand F=B+C+D 2.722 2.588 2.824 2.859 Alcohol production from molasses G 1.05 534 557 582 610 701 753 805 861 Year (mn litres) 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08E 2008-09F 2009-10F Ethanol demand at 10% E = A*0.263 1. will shoot up to 861 million litres. potable and other purposes.584 2. is expected to increase from 1.682 11.Cyclical feedstock availability Table 1: Alcohol surplus/(deficit) situation Year (mn litres) 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08E 2008-09F 2009-10F Cane crushed (mn tonnes) 194 133 125 189 279 255 211 202 Unblended petrol demand A 10. By 2008-09. Thus. At 10 per cent blending level.068 1. the demand for ethanol for blending will double.002 2.402 1.137 2.968 1.342 1. around 3. around 753 million litres of ethanol are needed to blend petrol with 5 per cent ethanol. alternative feedstocks will need to be used to meet ethanol demand. the estimated alcohol production will not be enough to meet total alcohol demand even at 5 per cent blending.100 Industrial and other uses C 722 764 802 824 846 863 880 898 Ethanol demand at 5% D = A*0.
The A molasses which is the non-crystalline portion resulting from the first stage. sugar is crystallised from a concentrated juice in three separate crystallisation stages wherein each stage results in the production of a crystallised sugar fraction (called the A sugar.One tonne of B molasses yields CRISIL RESEARCH SUGAR ANNUAL REVIEW A-29 . one tonne of ‘B’ molasses would recover as much as about 350 litres of alcohol due to higher sucrose content remaining in ‘B’ molasses.000 6. Table 2: Comparison of profitability of ethanol production under 'C' vs.250) 3.0 3.500 15. 'B' molasses route Particulars Sugarcane available Cost per tonne Cost of sugarcane Sugar production Cost of conversion of sugarcane into sugar Selling price of sugar Molasses production Ethanol production Cost of processing molasses into ethanol Realisation from sale of ethanol Total cost Total revenue Profit 350 litres of alcohol Note: 1) The above figures are indicative.350 135. The C molasses (also called final molasses) is not refined further and instead used as a stock feed in the fermentation industry.825 881 (2.50 1.5 176. B sugar and C sugar.350 135.000 8.5 per litre.000 4.00 2. it is our opinion that ethanol will not be manufactured from these alternative feedstocks. sugar recovery rate would drop by about 150 basis points to about 8. In case of ‘B’ molasses. the ethanol-blending programme cannot be successful unless alternative feedstocks are used for ethanol production.944) profit K=C+(DxE)+ (H x I) Rs Assumption: We have assumed one tonne of cane yields 6 % 'B' molasses and 8.769 (4. The non-crystalline portion of this stage (the B molasses) is fed into the third crystallisation stage and further crystallisation takes place to give a C sugar fraction and a C molasses.0 21.0 21. as it will be unprofitable at the current ethanol price of Rs 21.075 171.5 3. The C sugar fraction is of relatively low quality and is used as seed crystals to facilitate crystallisation in the first and second crystallisation stages. The alternative feedstocks that can be used for ethanol production are as folows: • • ‘B’ heavy molasses Sugar cane juice However.5 179. is fed into the second crystallisation stage and further crystallisation occurs to form B sugar. as against 225 litres of alcohol produced from one tonne of ‘C’ molasses. Further.000 10. ‘B’ heavy molasses route In sugar factories. respectively) and a non-crystalline fraction or molasses fraction called A molasses.306) 'B' Molasses Incremental Potential 100 1.5 per cent while the ‘B’ molasses recovery goes up by similar amount to about 6 per cent. B molasses and C molasses. Actual figures will vary from company to company Source: CRISIL Research and Industry Calculations A B C= A x B D E F G H= G x 350* I J L M=K-L Units tonnes Rs Rs tonnes Rs per tonne Rs per tonne tonnes litres Rs per litre Rs per litre Rs Rs 'C' Molasses Current position 100 1.100 6.Alternative feedstock’s unprofitable As discussed above.5 % sugar.650 (7.900 172.013 6.800 15.
642 12.433 4.402 1.721 Alcohol production from molasses G 4.2 25. Table 4: Ethanol prices at which 'C' molasses route and 'B' molasses route are equally profitable Sugar price 15.609 1.0 28.5 billion litres.620 3. A-30 CRISIL RESEARCH SUGAR ANNUAL REVIEW .020 15.164 1.537 2.2 billion litres with ethanol capacity being 1.7 However.3 29.143 11.682 11.082 2.2 per litre. new capacities would be required for producing these volumes of alcohol. from ‘B’ heavy molasses.962 5.360 4.Table 3: Surplus/ (deficit) under 'B' Molasses route Year (mn litres) 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08E 2008-09F 2009-10F Cane crushed (mn tonnes) 194 133 125 189 279 255 211 202 Unblended petrol demand A 10.783 2.912 3.341 3. ethanol price will also have to rise for ethanol manufacture.220 1.093 17. to remain profitable.6 27.000 18.526 3.000 per tonne.856 5.000 17. we do not expect any ethanol to be manufactured from ‘B’ molasses in the next two sugar seasons as it is unprofitable. from ‘B’ heavy molasses. to be profitable at sugar realisation of Rs 15. the ethanol price would need to be Rs 24.201 14.000 16.056 16. However.798 2.224 Potable alcohol B 747 775 832 868 911 972 1.506 1. For ethanol production.722 Total demand E=B+C+D 2.037 1.114 1. B molasses will be able to meet requirements of alcohol towards potable and industrial purposes and ethanol requirement for even 10 per cent blending.237 Excess/Deficit @ 10 per cent blending H=G-F 1545 130 -178 1050 2697 2020 906 516 As can be seen from the above table. As sugar prices rise.000 19.159 3. It is our estimate that total alcohol manufacturing capacity in the country is about 3.100 Industrial and other uses C 722 764 802 824 846 863 880 898 Year (mn litres) 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08E 2008-09F 2009-10F Source: CRISIL Research Ethanol demand at 10% D = A*0.068 1.000 Source: CRISIL Research Ethanol price 24.653 2.1 1.
8 30. from direct route.350 135.000 18.769 176.8 As manufacture of ethanol from cane juice is unprofitable at current sugar and ethanol prices.5 1. CRISIL RESEARCH SUGAR ANNUAL REVIEW A-31 . primarily due to the lower cost of sugarcane in addition to the low processing cost.094) Incremental profit/(loss) L= C+ (D x G) +( F x J) Rs Table 6: Ethanol prices at which 'C' molasses route and direct route are equally profitable Sugar price 15.000 Source: CRISIL Research Ethanol price 25. Table 5: Comparison of ethanol production via 'C' molasses vs direct route (cane to ethanol) Calculations Sugarcane available Cost per tonne of cane Total cane cost Sugar production Molasses production Ethanol production Cost of conversion of sugarcane into sugar Cost of processing for ethanol Realisation from sale of sugar Realisation from sale of ethanol Total Revenue Total cost Profit /(Loss) Note: 1) The above figures are indicative.000 17.000 19.400 195.725 (28. our study on ethanol production cost comparison between molasses route and sugarcane juice route indicates that the production of ethanol directly from sugarcane juice is not viable at the current realisations.250-1. Brazil enjoys economies of scale benefit for producing ethanol.5 7.000 10 4.369) 19.075 (4. I J K=(D x I) +( F x J) M= K-L Unit tonnes Rs Rs tonnes tonnes litres Rs per tonne Rs per litre Rs per tonne Rs per litre Rs Rs Sugar and C Molasses 100 1.000 21.500 6 15.8 per litre for ethanol production from cane juice to be profitable at sugar realisation of Rs 15. However. ethanol price will also have torise for ethanol manufacture. Ethanol price would need to be Rs 25.5 171. Sugarcane cost is estimated to be about Rs 600 per tonne in Brazil as against Rs 1.8 27. In addition.013 3.Sugar cane juice route (Direct route) The sugarcane juice route yields seven to eight times the alcohol that can be produced from ’C’ molasses.000 per tonne.600 0 8 0 21.000 16.3 31. The direct route has been a feasible alternative for manufacturing ethanol in Brazil.350 135.800 (32. Actual figures will vary from company to company Source: CRISIL Research and Industry A B C=A x B D E F G H. we do not expect ethanol to be manufactured from cane juice over the next two sugar seasons.400) (8.350 per tonne in India.306) Cane to Ethanol 100 1.5 163.3 28. The overall cost of producing one litre of ethanol is about Rs 15 in Brazil as against Rs 26-28 per litre in India. As sugar prices rise.000 0 14. to remain profitable.
It may be noted that cane to juice route would not have any major impact on sugar production and consequently. For example.3 million tonnes. Pricing and tendering system It is our opinion that it is not feasible to fix ethanol prices for a three year period (as is presently done) given that the prices of related products (sugar. rectified spirit and crude oil) are volatile in nature. only about 22. alcohol demand for ethanol blend at 10 per cent would be about 1. A-32 CRISIL RESEARCH SUGAR ANNUAL REVIEW .7 million tonnes of sugarcane is required for satisfying this requirement. either ethanol prices must be market determined or a pricing mechanism must be evolved wherein ethanol prices are periodically reset given the prevailing prices of the related products. There are two possible solutions to this problem.722 million litres in 2009-10. This would result in a loss of sugar production of only 2. on sugar prices.
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