Sugar Outlook: Fresh buying to push up prices

Things started to move for the sugar industry when government notified its decision to abolish levy (one-tenth produce at subsidised rate) and non-levy (regulated release mechanism) quota on May 2. Under the existing arrangement, state governments were allowed to sell sugar through the public distribution system at Rs 13.5 a kg considering the open market purchase price at Rs 32 a kg and the difference to be granted as subsidy by central government.

However, pricing, cane reservation area and minimum distance between two mills were left to the state governments. After implementation of this measure, everyone in this cash 'starved' sugar industry felt relief but this proved too short-lived. It would be interesting to analyse why the industry is not able to utilise the benefits of the sweetener offered by the government or how the sugar prices are headed in the upcoming new marketing season.

In the post-control period, prices of the sweetener have remained range-bound with a bearish bias both domestically and globally because of abundant supplies. In the interim, prices have broadly moved in the range of Rs 29.50-30.50 a kg with limited upside, the reasons being panic selling by debt-ridden sugar millers to make payments of huge cane arrears amounting to Rs 11,000 crore and cheaper imports from Pakistan. India has imported 0.6 million tonnes compared to 1.5 million tonnes of exports done in this sugar year so far (for sugar industry, year ending is September).

Substantially high production in Brazil brought down the international prices to two-year low. To make it worse, UP government gave millers a deadline to clear the payment or else recovery certificates would be issued (right to recover cane dues by auctioning their stocks). However, prices got some support after government hiked the import duty to 15 per cent from 10 per cent and the rupee started falling sharply (28 per cent since April).

India is the second largest producer of sugar in the world after Brazil but it is also the largest consumer. It contributes 15-17 per cent of the total global production. According to Indian Sugar Mills Association data, sugar production is expected at 25 million tonnes in 2012-13 compared with a local demand of around 23 million tonnes and for 2013-14, the production is expected at 23.7 million tonnes amid last year's delayed monsoon. With a 10 per cent above average monsoon from June 1 to August 31 expect better cane acreage in this Kharif season. However, continued incessant rains since last 20 days have brought the fears of some crop damage while the figures will be clear only by the end of sowing season.

Sugar prices are expected to remain range-bound with limited downside movement till September, as fresh crushing is due in next one month and before that millers will want to get rid of old stocks from their storages. After September prices are expected to rise amid coming festive season. Based on seasonality pattern, we witness that normally price tends to increase from June onwards (mills wind up their crushing operation) with peak consumption demand during the period of September to November.

Bulk purchasers like confectionary, sweet makers are to enter the market during that period. To conserve foreign exchange in the oil sector, government is pushing the oil marketing companies to execute the five per cent mandatory ethanol blending program that will provide further positive sentiments to the sugar industry amid diversion of sugar affecting the demand-supply dynamics. Besides, with depreciated rupee our export parity is likely to be feasible compared to other competitors. The bottom line is that we are hopeful that entries of fresh buyers in between Rs 29 to Rs 29.50 levels are expected to push prices up to our targets of Rs 32 to Rs 33 a kg in the remaining part of the year.

The author is co-head retail, Emkay Global Financial Services Limited