Higher import duty on sugar will not sweeten prospects

Sugarcane procurement prices need to be linked with market price of sugar

The government’s decision to raise import duty on sugar to 40 per cent from 25 per cent to help prop falling local prices is too little to provide immediate relief to the sector. Not surprisingly, though the stock price of sugar companies rose immediately after the news broke, most of the gains have been given up.

Balrampur Chini hit a 52-week low on April 30, closing at Rs 45.30, while Shree Renuka Sugars and Bajaj Hindusthan continued trading weak closing at Rs 12.37 and Rs 17.19, respectively.

According to Abinash Verma, director-general, Indian Sugar Mills Association (ISMA), although the decision of the government is welcome, it is to accrue benefits in the long term when sugar prices in the court move up. Currently, the sugar price dynamics in India is such that there is hardly any threat from imports, but the higher duties will help curb imports only when prices move up. The chances for the same are grim in the near term.

Notably, the bigger issues are not yet addressed. The sugar sector has been long reeling under pressure due to over-supply. The sector is likely to end the sugar year ending September 30, 2015 (SY15) with about 27 million tonnes (mt) production compared to estimated demand of 24.8 mt. Thus, the sugar surplus will rise to Rs 9.5 mt against the mandated 6 mt. The only way to curb falling prices, according to Verma, is that the government should buy sugar stocks.

On the other hand, costs remain elevated. UP-centred sugar players such as Balrampur Chini and Bajaj Hindusthan are feeling more heat on profitability as the UP government has maintained the SAP (state administered price). For SY15, too, millers will have to buy sugarcane from famers at Rs 280 a quintal, way higher compared to central government’s fair and remunerative price (FRP) of Rs 220 a quintal. The cost of production for UP-based players is close to Rs 33 a kg, according to Verma, whereas the selling price is Rs 26-26.50 a kg. Clearly, the millers are seeing the losses widening. In the December 2014 quarter, Balrampur Chini reported losses of Rs 65.7 crore, while it was Rs 281 crore for Bajaj Hindusthan. These might widen in the March 2015 quarter as sugar prices plummeted further, say analysts.

The situation is not good either for Maharashtra-based players such as Shree Renuka Sugars in the state that follows FRP-based sugarcane procurement prices. The cost of production in Maharashtra at Rs 29 a kg, though lower than UP, is still higher than the selling price. Shree Renuka Sugar had seen losses of Rs 90 crore in the December quarter.

The government also removed the excise duty on ethanol, which will provide some relief. However, experts say a better solution to the problems of sugar millers would be if the government decides the SAP and FRP according to the prevalent sugar prices in the market. This will benefit farmers, too, as currently, sugarcane arrears are also rising as payments from millers are getting delayed on the back of losses.