Sugar mills to benefit from 5% hike in ethanol procurement

The government's decision to increase ethanol price for the procurement season 2017-18 for the oil marketing companies (OMCs) will benefit the integrated sugar mills, according to ICRA.
This rise in ethanol price for the procurement season 2017-18 (starting December 2017) to Rs 40.85 per litre for the OMCs might result in an increase in the total contribution margin by around Rs 200 per tonne of sugar produced for fully integrated sugar mills, an ICRA report said.
The Cabinet Committee on Economic Affairs (CCEA), in a recent announcement, increased the basic price of ethanol by 5 per cent, amounting to Rs 1.88 per litre for the procurement season 2017-18.

"During the crushing season 2017-18, mills are expected to produce around 25 million tonne of sugar, an increase by 20-23 per cent over from to 2016-17.
"Consequently, with a higher quantity of molasses available this year, the mills may achieve a 1.10-million KL of ethanol supply, with Uttar Pradesh mills contributing nearly half of the output," ICRA Senior VP Sabyasachi Majumdar said.
With ethanol contributing nearly 10-15 per cent of the turnover for integrated sugar mills, the upward revision is expected to encourage these entities to enhance the supply of ethanol for blending, thereby augmenting their revenue and improving their ability to pay sugarcane farmers, he added.

The CCEA decision implies that the OMCs will be able to procure ethanol at the price of Rs 40.85 per litre in 2017-18 against Rs 38.97 per litre in 2016-17 for blending with petrol.

The applicable Goods and Services Tax (GST) of 18 per cent and the transport charges would be borne by the OMCs.
The rise in price aims at increasing the participation of the sugar mills by providing remunerative and stable prices to suppliers and reducing the dependence on crude oil imports.
According to ICRA estimates, with the new ethanol prices, the total contribution margin is likely to increase by around Rs 200 per tonne of sugar produced for a fully integrated sugar mill, which translates into a half per cent margin at the operating level.

However, for a partially integrated mill, the increase in margins is likely to be proportionately lower, it said.