Small mills selling sugar export licences at premium

Export licences have become a tradable commodity in the sugar industry, as small mills in Uttar Pradesh are selling export allocation certificates to their large counterparts.

Large mills like Shree Renuka Sugars, Shakti Sugars and Rajshree Sugars or multinational traders like Cargill and Sucden are acting as aggregators by buying export licences from small mills at a premium, generally equivalent to the surface transport cost, which works out to around Rs 2,000 per tonne.

“It is better to get something rather than nothing from the natural movement of sugar and allied products. Hence, most small sugar mills in Uttar Pradesh are selling export licences to export units in Maharashtra, Gujarat, Karnataka and Andhra Pradesh,” said G S C Rao, executive director of Simbhaoli Sugar Mills Ltd.

With the variation in sugar prices in the overseas market, the value of export certificates also changes. In this process, however, the buyer of the export licences takes the entire responsibility until the sugar is delivered to the importer.

This was anticipated when the government announced the first Open General License (OGL) in March 2011. Since export quota is distributed evenly among sugar companies, depending on the annual sugar output, small sugar mills sometimes get 5-10 tonnes of export allocation. This is too small a quantity for exports. Even overseas buyers hesitate giving orders to such small traders, said an analyst.

Small sugar mills in the hinterland cannot afford direct shipment of such small quantities of the sweetener. Hence, they sell the export licences to aggregators or large export houses. This helps the sugar mills save on the road transportation cost of between Rs 1,800 and Rs 2,000 a tonne besides pocketing an income of around Rs 2,000 per tonne for exchange of the certificates.

At the current prevailing ex-factory price of between Rs 2,900 and Rs 3,000 a quintal in Uttar Pradesh, the crushing mills have been incurring minimum loss of Rs 300–400 a quintal on massive increase in cane prices. At the current cane price of Rs 240-250 a quintal, the cost of manufacturing works out to between Rs 3,300-3,400 a quintal, according to data compiled by the Indian Sugar Mills Association (ISMA).

“This is a win-win situation for both parties. Since, large exporters dispatch a minimum container load of 2,500 tonnes, shipment becomes easy for them,” said an industry source.

According to Rao, setting up sugar mills in the hinterland – away from the coastal belt – has its inherent disadvantages.

For the current sugar year (October 2011–September 2012), the government has allowed two million tonnes of exports in anticipation of 26 million tonnes of domestic production.