Sugar mills look at power, alcohol to buffer margins

Faced with a severe squeeze on margins, sugar mills are looking at alternatives, largely in potable alcohol and energy. The government’s decision to set the benchmark ethanol price at Rs 27 per litre has given a push to this.

With rising raw material and labour costs and stagnant realisation from sugar sales, many mills are not even breaking even. The situation is grim, said an industry official. Any rise in sugar prices isnt always followed by a demand to pay a higher cane price to farmers.

“Unless mills diversify to other remunerative avenues, survival will become difficult, as the core business i.e. sugar, is becoming more and more non-remunerative,” said Sanjay Tapriya, Director-Finance, Simbhaoli Sugars Ltd (SSL).

A 750 ml mid-end alocoholic drink bottle, with no more than 45 per cent of alcohol, costs Rs 250-400. Therefore, sugar mills find enormous opportunity to compensate the deficit in the core business through subsidiary areas like potable alcohol and power, said Deepak Desai, an analyst with Ethanol Association.

Power is another area where mills are focusing more; all mills can produce power by burning cane residue, termed co-generation. Most mills have contracted with state grids for additional power supply, for which realisation goes as high as Rs 4 per unit.

With the Uttar Pradesh government raising its state advised price for cane by Rs 40 a quintal, to Rs 205 per qtl, the raw material has become costlier by nearly 20 per cent this season. Increasing inflation and alternative job avenues like the National Rural Employment Guarantee Scheme of the central government has raised the cost of labour by 10 per cent this season.

The ex-factory price of sugar is currently between Rs 2,830-2,850 per quintal, marginally higher than the cost of production. Hence, sugar mills have decided to expand branded alcohol production in association with local partners.

SSL has a detailed business plan to launch new brands of potable alcohol in Uttar Pradesh, Bihar and West Bengal. This is in addition to its existing 15 local brands in eight states. About four per cent of the crushed cane comes as molasses, converted by fermentation into rectified spirit (RS), which is 94.68 per cent alcohol. This can be directly used to make potable liquor like rum. To get superior grade alcohol from the RS (price Rs 25-26 per litre) impurities like aldehydes and ketones are taken out to get extra-neutral alcohol (ENA), which sells at a premium over RS. The price of ENA is Rs 28-29 per litre.

Then, mixing RS with denaturants to make it non-potable enables industrial grade alcohol, to produce chemicals such as ethyl acetate, acetic acid, etc. The price of industrial alcohol, also known as SDS (special denaturant spirit), is Rs 22.50 to 23 per litre. Rectified spirit can also be converted into industrial alcohol like ethyl acetate or sulphuric acid for use in the paint industry.

Rectified spirit is currently priced at Rs 25-26 per litre, while higher grade alcohol is sold between Rs 28-30 per litre. Companies with adequate distillation capacity buy molasses to convert into rectified spirit and then potable alcohol. Mills with no distillation facility sell rectified spirit to nearby distilleries.