Restoring RO might not suffice for sugar sector

Under RO mechanism, govt periodically fixes quantity of sugar to be released into open market, mill by mill

As already reported, two years after partial decontrol of the sugar sector, the central government might reverse some of this by restoring its powers over mills through the release order (RO) mechanism.

Under this, the government periodically fixes the quantity of sugar to be released into the open market, mill by mill. If the quantity is not achieved by a majority of mills due to adverse market conditions, the government extends the period. Thus, the RO mechanism controls supplies and prices.

“At the current price, the sugar business is not sustainable. So, the government must do whatever is required to take prices up. Otherwise, the industry will die, resulting also in a loss to the rural heartland because of the involvement of so many cane farmers. The RO mechanism will help increase sugar prices, which is a good thing for the industry,” said Ajit Shriram, deputy managing director, DCM Shriram Consolidated.

The RO mechanism was withdrawn in April 2013. On Tuesday, a senior official in the Union government said it could be restored, and that it might allow creation of a three million tonne buffer stock.

Sanjay Tapriya, chief financial officer of Uttar Pradesh-based Simbhaoli Sugars, says this wouldn’t suffice.

“Bringing back the RO mechanism without adequate financial support, either in terms of easy working capital raising or some other avenues, will not yield the desired result. Like in the past, if the government allows mills to sell their produce in 12-15 months without working capital support, it will not serve any purpose. Working capital has been totally disbanded for sugar mills,” said Tapriya.

With an estimated production this year at 27 million tonnes, against consumption of 23.5 mt, the sugar season next year is set to start with a little over nine mt of carryover stock.

“The government must build reserves as per the need of the market and let the price be determined by market forces,” said Tapriya.

Gaurav Goyal, managing director of Dhampur Sugar Mills said, “The government is looking to find a way as to how to manage prices, as (that of) sugar is free and cane continues to remain controlled.”

Sugar mills are currently selling their produce at Rs 22-23 a kg in UP and Rs 24 in Maharashtra, against a cost of production of Rs 34 a kg. Considering Rs 4 a kg of income from byproducts, sugar mills lose at least Rs 6 a kg. Sugar prices have declined by around 25 per cent since the beginning of the current season in October 2014.

Share prices of sugar companies rose marginally on Wednesday. Balrampur Chini closed at Rs 48, a gain of 1.8 per cent from Tuesday. Industry leader Bajaj Hindusthan closed with a gain of 1.1 per cent to Rs 16.10.