Sugar mills are passing through challenging times due to demand destruction of core products and byproducts following the closure of cold drink units, ice cream fattories and sweet shops due to the seven-week lockdown.
Demand of sugar byproducts such as rectified spirit, molasses and extra neutral alcohol (ENA) has evaporated as factories making potable alcohol remain shut. Shutdown of paper mills has pared tge demand for bagasse. Unfortunately, oil marketing companies (OMCs) have reduced offtake of ethanol for blending with petrol, saying fewer petrol pumps remained operational during the Covid-19 induced lockdown period, resulting in lower consumption of fuel.
This has resulted in piling up inventory of both sugar and its byproducts at sugar plants. The mills are holding on to their inventory amid expectations of a resurgence in demand once the lockdown ends and market resumes in phases.
"Sugar mills are passing through challenging times due to demand destruction of both the sweetener and its byproducts," said Atul Chaturvedi, Chairman, Shree Renuka Sugars Ltd.
Sugar mills in Maharashtra are comparatively better placed than their counterparts in Uttar Pradesh. Units in Maharashtra, which saw a 30 per cent decline in cane output, reported a proportionate drop in sugar output this year. As a consequence, they are sitting on low inventories of both sugar and byproducts.
Mills in Uttar Pradesh, on the other hand, are struggling to manage sugar and byproduct stocks due to bumper cane.
"With working capital finance at most sugar mills already under pressure, managing inventory levels has become a challenge. There are no price quotes of molasses, ENA or bagasse due to closure of consumer factories. It will certainly put pressure on both, our top lines and
bottom lines of during the June and September quarters of the current year," said a top official of one of the largest mills in Uttar Pradesh.
Sugar plants fear that falling crude oil prices may hurt the demand for ethanol as well, as OMCs may not come out with next tender for green fuel procurement. While the government would try to save money from all possible sources to part compensate the economic loss suffered during the lockdown, lifting of ethanol may remain lower.
In the meantime, mills have diverted a part of ethanol output for making sanitisers, but the quantity would be insufficient to cover the loss anticipated from slow lifting by OMCs.
Chaturvedi forecast India's sugar consumption to decline by 1.5-2 million tonnes this year due to closure of ice cream and cold drink factories, and sweet retailers.
Of the 25 million tonnes of sugar consumption estimated last year, industrial consumption (ice creams, cold drinks and sweets) accounted for 15 million tonnes, while households accounted for the remaining 10 million tonnes.
This year, however, peak summer season demand for ice creams and cold drinks has taken a beating due to nationwide lockdown which began on March 25 for 21 days and was extended later by 19 days. A further two-week extension dashed hopes for a revival in sugar demand.
"There is a lot of uncertainty about opening the market and a revival in demand for sugar and its byproducts," said another official.
Sugar exports, however, continued with re-allocation of quantities that weren't picked up under the previous allocation.
India would have very small quantities of last year's carry-over stock of 14 million tonnes, but a very high inventory of about 13 million tonnes of sugar for the next crushing season beginning October 2020.