Sugar prices may rise Rs 2/kg in short term

To benefit mills provided they execute raw sugar exports in full

Sugar is likely to rise by Rs 2 a kg in the near term, following the central government’s decision to extend a subsidy on export of the raw product.

The ex-factory price has fallen by Rs 4-5 a kg so far this crushing season (it began in October 2014) to trade at Rs 26.50 a kg (in Maharashtra) and Rs 23.50 a kg (in Uttar Pradesh). The sweetener, says the trade, is being sold at around 25 per cent less than its cost of production.

The Centre on Thursday announced a subsidy of Rs 4,000 a tonne for export of 1.4 million tonnes (mt) of raw sugar, which the industry is confident of doing by the end of the current crushing season, with a little over six weeks left.

“If the surplus sugar is contracted for export with the help of this incentive, the domestic price will surely improve (go up),” said Narendra Murkumbi, managing director of Shree Renuka Sugars.

To make raw sugar export viable, however, its price should be over 15 cents a pound in the international market. On the benchmark Inter Continental Exchange, sugar traded at 14.7 cents/lb from its previous close of cents 14.8.

In a separate move, the Union food minister urged states to liberalise their restriction on ethanol movement and deregulate that of molasses across their boundaries, beside withdrawing various levies on it. The central subsidy comes with a rider on a portion of a mill's output being earmarked for the ethanol-petrol blending programme.

Experts believe sugar mills in Maharashtra have produced so far 6.5 mt of white sugar against the state’s estimated production for the year of 9.2 mt. Which means mills here can easily produce one mt of raw sugar. Those in Gujarat, Karnataka and Tamil Nadu will similarly be able to export 400,000 tonnes, if the price becomes viable.

“The initial reaction of the price fall in the international markets is not going to last long, as India’s export subsidy extension was in talks for quite some time. Hence, India’s potential export of 1.4 mt of raw sugar has already been factored in. So, with the government’s help, the fall in sugar price will certainly be arrested,” said Abinash Verma, director-general, Indian Sugar Mills Association.

Share prices of sugar mills opened strongly on Friday but fell towards the end of the day.

Achal Lohade, an analyst with JM Financial, said: “Stocks were moving up in anticipation of export subsidy. In the past few months, stocks moved up 15-17 per cent. Friday’s fall was only two to three per cent. So, overall sentiment is up. How, long it remains up depends upon Indian exporters’ ability to execute export orders.”

As against 24.2 mt of consumption, total sugar production was estimated at 26 mt this year over and above the 7.5 mt of carryover stocks.

Girish Jain, Executive Director of KJMC Capital said that the government's measures would have long term impact being sugar mills' financials remained stressed severely for the last several quarters.