Trading your export quota has become an industry in itself: Narendra Murkumbi

Interview with MD, Shree Renuka Sugars

The government has restored the “equitable and transparent” system of sugar export quota allocation, in which all mills would get some share in the overall figure, instead of its earlier proposal of “first come, first served”, criticised by some for giving large mills an advantage in registrations. Edited excerpts of a critique of the process by Narendra Murkumbi, managing director, Shree Renuka Sugars Ltd, the largest refiner in the country, in an interview with Dilip Kumar Jha:

How do you weigh the restoration in the export quota allocation system?
Looking at the history up to 2010, exports were allowed freely for all. Most of the time, exports were done at a loss. Many times, the government persuaded the industry for export through subsidy so that cane arrears were cleared and the financial health of the industry maintained. Now, in 2011, global sugar prices were very high. So, the government opened export with a quota of only 500,000 tonnes against the industry’s demand of much more. Then the industry and the government deliberated for all mills to have a proportional quota, based on the past three years of average output. So far, the practice was very fair. But, the quota was made tradable. As a result, some mills that got allocation did not export even a single grain in the last three years. Every time they get an allocation, they sell it to some traders.

The fact about coastal and hinterland mills is a myth. Railway freight, through which most sugar exports move, is telescopic. If a mill wants to export sugar from, say, Punjab or the hinterland of Uttar Pradesh through Kandla, versus mills in the coastal region of the same port, the difference works out to hardly two per cent i.e. Rs 500 a tonne. It is not a dramatic difference between mills from the hinterland and the coastal area. In fact, the daily price volatility in the world market stands at Rs 500 a tonne.

So, the issue is whether you want to really push sugar out or not. Currently, the ex-mill price for export is Rs 28,000 a tonne. If you really execute orders, the FOB price works out to Rs 28,000–29,000 a tonne after all costs. In the last five OGLs, quota was allocated in proportion. As against that, smaller mills sold export quota to traders or large players at Rs 2,000-3,000 a tonne, realising thereby a couple of lakhs of rupees. Nobody wants to corner exports and the government is also not allowing it. Either you directly export, or let others do so. Now, trading our quota has become an industry in itself.

How has the quota system worked evenly for the industry?
The export quota has been allocated on the basis of the last three years’ production. During this period, total production was around 60 million tonnes. So, producers on an average got hardly 1.6 per cent of their three years’ output, or only four per cent of this year’s annual production, for export out of the latest one million tonnes of quota. The quota is very small, not even equal to a month of quota release for domestic consumption.

Last year, the scenario was different. Prices were abnormally high due to lower production in India. The government did not want global skyhigh prices to be transmitted to the local market by allowing export. The systems worked well. Everybody got a fair share of it. In contrast (today), global prices are low. Physical demand is much more sluggish. In reality, out of a total of 1.5 mt of export quantity allowed last year, only a million tonnes had been executed till September 2011. The remaining 500,000 tonnes was shipped this sugar year. Now, two million tonnes were allowed (a million each in November and February) this year. As of March 31, the actual shipment is only 600,000 tonnes. The remaining 1.4 mt of exportable surplus still exists in the country. There is something wrong in the system, holding a large quantity still in the country.

What is the problem?
You need to purchase a licence for exporting sugar. Your net realisation is below the price in the domestic market. Therefore, mills are not keen on export. If the government throws the market open, nobody would stop mills in the hinterland from export. But, the export realisation has to be higher than the prevailing price in the domestic market. In the past, even smaller mills have exported. Even now, because of fractionating, quota mills are getting allocations in 500 tonnes, 300 tonnes of actual allocation. The minimum economic logistical sense for exports is one rake load, equivalent to 2,600 tonnes of sugar, which fits in perfectly into 100 containers.

A mill can move a minimum quantity of 2,600 tonnes comfortably from the factory to the port, stock there and export. This is the minimum economic size. Most mills in Maharashtra got an allocation of 100–200 tonnes. Hence, the smaller size of allocation is a real problem, not whom to export and when. Instead of being more concerned with Rs 2,000-3,000 per tonne of premium, we should consider evacuating space for the next season by optimum exports.