OMCs cancel ethanol procurement tender

Seek a cut in agreed price due to steep fall in oil, Isma seeks petroleum ministry's intervention

Falling crude oil price is bad news for  India’s sugar mills, as oil marketing companies (OMCs) have cancelled 1,200-million-litre ethanol procurement tender, seeking a cut in accepted price of the green fuel.

OMCs floated the tender in July, seeking ethanol supply of 1,560 million litres from sugar mills. Mills offered to 620 million litres. Interestingly, OMCs accepted to lift 350 million litres at Rs 47.5 a litre. The deal was made when crude oil price was hovering at about $114 a barrel. Since then, the crude oil price has fallen by 37 per cent to current price of $72 a barrel. OMCs now want to re-negotiate the price. Since the terms had already been finalised for 350 million litres, OMCs cannot change them.

“We urged OMCs to come out with an expression of interest (EOI) for procurement of the balance 1,200 million litres. EOI was scheduled to open on November 11 this year, which got cancelled on verbal communication to sugar mills that if they are willing to cut ethanol price to Rs 37-38 a litre, then OMCs might consider procurement,” said a senior industry official.

During this period, molasses price has declined 31 per cent to Rs 3,800 a tonne from Rs 5,500 a tonne in July. Prices of extra neutral alcohol (ENA) has also fallen by Rs 4-5 a litre to Rs 39 a litre and industrial alcohol similarly to Rs 31-32 a litre. That means, further dehydrating will cost sugar mills Rs 1.50 a litre extra over and above 5.23 per cent of volume loss. Thus, the overall cost of production of ethanol will work out to Rs 34-35 a litre, higher than the OMC’s offer of Rs 32-33 a litre.

“Thus, selling industrial alcohol is more profitable than converting it into ethanol and then supplying OMCs for lower realisation,” said the industry official. Earlier, sugar mills were asking for Rs 42-43 a litre of ethanol. “How will anyone supply ethanol to OMCs to incur a loss when other avenues are available,” asked V N Raina, director-general, All India Distillers’ Association. “Sugar mills have lost price negotiating power due to a steep fall in crude oil prices.”

In January 2013, the government mandated 5 per cent ethanol blending with petrol across the country for which 1,050 million litres of the green fuel are required. But, the government allowed 10 per cent blending with petrol in six states, including Delhi, Uttar Pradesh, Haryana, Punjab, Karnataka and Goa- taking the total requirement of ethanol to 1,560 million litres.

“The impact of crude oil price fall should have been in 2015-16, as the terms agreed by secretaries to ministries of petroleum, agriculture and finance in the meeting held before implementation of the blending scheme. There was no mention of change in terms in between if crude oil price falls,” said Abinash Verma, director-general of Indian Sugar Mills Association (Isma).

According to Makrand Nene, director, Indian Oil Corporation, “OMCs have been scouting for ethanol for the past three months but have not been able to procure much. Only 1.33 per cent blending has been done so far.”

In a letter to the ministry of petroleum, Isma urged the govt to revive the EOI and accept the quantity offered by sugar mills.