'Covid-19 outbreak to have adverse impact on sugar consumption, prices'

The Covid-19 outbreak is likely to have an adverse impact on sugar consumption, leading to a decline in prices by 3-4 per cent in the near term, according to a report.

This is notwithstanding the decline in domestic sugar production along with the exports, which is likely to result in closing stocks correction to 10-10.5 million tonnes for sugar season SY 2020, from 14.5 million tonnes in SY 2019, ratings agency Icra said in its report.

"The decline is mainly due to lower sugar production and higher sugar exports. However, if the government continues with the buffer stocks of 4 million tonne in next year too, the net available sugar balance for market would be around 6-6.5 million tonne, which is closer to the normative sugar stock levels," Icra Ratings Senior Vice President and Group Head Sabyasachi Majumdar said.

Domestic sugar production estimates for SY 2020 at 26.5 million tonnes is lower by 19.5 per cent year-on-year, Icra said.

This is primarily due to the decline in cane availability in Maharashtra and Karnataka following the drought last year and heavy rainfall and water logging during the current year (August - September 2019), it added.

Icra expects domestic sugar consumption of around 26 million tonnes in SY2020. In SY2020, as of February 2020, the export contracts have been made for a quantity of over 3.5 million tonnes, out of which about 2.2 million tonnes are shipped.

Considering that the exports are likely to be around 4.5-5.0 million tonnes when compared to the government-approved 6 million tonnes, the closing stocks would be around 10-10.5 million tonnes.

"The decline in domestic sugar production along with the monthly sugar release mechanism and creation of 4 million buffer stock has supported the sugar prices in the recent past. The sugar prices remained range bound between Rs 32-33 per kg during November 2019 - February 2020," Majumdar said.

However, the expected lower sugar offtake in the near term owing to the Covid-19 pandemic impact with lockdown in most states (closure of manufacturing units pertaining to soft drinks, confectioneries among others) is likely to exert some pressure on the sugar prices, he added.

"The global Covid-19 outbreak has also adversely impacted the global sugar prices. However, this phenomenon could be temporary,"he added.

Icra said the long-term prices and profitability of Indian sugar companies would remain cyclical and dependent on domestic and international demand-supply trends.

The latter in turn would hinge on agro-climatic conditions in the major sugar-producing countries and the trends in crude oil prices (which determine the diversion of cane crop to ethanol).

The price trends in the international markets would be one of the key determinants of future profitability.

Within the industry, however, players with high operating efficiencies, forward integration and strong capital structure would be best placed to ride out the cycles, the report added.