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| Sugar sector: Tasting bitter realities |
| Priya Kansara Pandya & Akash Joshi / Mumbai May 07, 2010, 00:49 IST |
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Even the imposition of import duty and increasing consumption will not help sugar stocks.
 The news of government bringing back 15 per cent duty on imported sugar and talks of a possible decontrol of sugar have failed to spur sugar stocks. The BS Sugar Index has retreated by around 36 per cent, as against a 3.2 per cent fall in the Sensex and a 22 per cent fall in sugar prices since January 2010. Analysts reckon that things could turn sour for the sugar industry,as prices of imported as well as domestic sugar have slid, while cost of sugarcane is expected to remain the same, if not rise.
The landed cost of white sugar is now Rs 27,960 a tonne, as compared to Rs 29,350 a tonne in the domestic market. Hence, imposition of import duty will have limited impact on the industry. Moreover, with production cost estimated to be between Rs 29,000 and Rs 32,000 a tonne at current price levels, there is almost no operating profit. In a strong price scenario in 2009-10, sugar mills paid around Rs 26,000 a tonne for cane. Prices have eased since then, but are not expected to go below Rs 20,000 a tonne. Sugar supply is set to rise to 23 million tonnes in 2010-11 from the 18-million-tonne level of the previous year. Brazil, another major producer, will also see a 12 per cent rise in production, as crushing was higher 50 per cent on year till April.
The major sugar players have already seen lower net earnings growth. The sector has been an underperformer with net earnings growing at 8.7 per cent, as against 28 per cent recorded by the corporate sector (sample of 1,000 companies). Triggers now are expected to be an appreciation of the rupee, expensive imports and changes in the quota release mechanism that may allow bulk users to increase their stock holding from 10 to 15 days. International prices may improve if the Brazilian government increase its mandatory ethanol blending norms to 25 per cent from the current 20 per cent.
Till then, sugar sector stocks are expected to battle bitter realities.
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