The government’s recent decision to allow production of ethanol by reconverting sugar is a welcome step, but it remains to be seen how far the move will help address the immediate issue of burgeoning stocks of the sweetener in the 2019-20 season. This is because mills could take quite some time to make the necessary financial investments for conversion.
The 2019-20 sugar season starts next month and peak crushing will happen in the first five or six months.
Officials say only after peak crushing is over, will mills that are saddled with surplus sugar be in a position to consider reconverting it into ethanol, for which they have to bear a conversion cost.
And, given the not-so-impressive financial position of sugar factories, it remains to be seen how many of them will be able to spend the sum.
"Lets see how things move from here onwards. But at least with a higher price fixed for ethanol produced from sugarcane juice/syrup and sugar in comparison to that produced from C- and B-heavy molasses, a direction has been given to the industry, which it now needs to follow," a senior industry official said.
According to rating agency Icra, the revenues of most sugar mills declined in FY2019, due to lower sugar realisations on a YoY basis.
It said while the sugar division’s profitability continues to be adversely impacted by high cane cost and subdued sugar realisations in FY2019, the overall operating margins of most UP-based mills reported an improvement on the back of a better performance by the distillery division.
“This was due to higher distillery sales volumes along with improvement in the realisations in FY2019 on a YoY basis. For most UP-based mills, the improvement in operating profitability resulted in higher interest coverage in FY2019 on a YoY basis, although the increase in the total debt owing to low-cost soft loans has resulted in deterioration of Total Debt/OPBIDTA,” the agency said.
The 2019-20 sugar season (October to September) is expected to start with an all-time high opening inventory of over 14 million tonnes of sugar, which is way beyond the required inventory.
“Ideally, the procurement price of ethanol produced from sugar and sugarcane juice should have been Rs 65 per litre as against the newly announced price of Rs 59.48, because then mills would have made some profit, while at the current rate they will barely cover their conversion cost,” a senior official said.
He said despite this, there is a chance more mills will come forward and make ethanol from sugarcane juice and sugar, as the price offered is competitive.
In the current sugar season (2018-19), officials said that of the 173 sugar mills that supplied ethanol to Oil Marketing Companies (OMCs), around 48 (28 per cent) produced it from B-heavy molasses, just one made it from sugarcane juice and the rest made it from the old process of C-heavy molasses or final molasses.
Ethanol is a by-product of sugar.
In the first and second manufacturing processes, significant quantities of sugar are not produced, while in the third, that is from C-heavy or final molasses, there isn’t any such saving.
Industry players say one reason why several sugar mills did not produce ethanol from B-heavy molasses and sugarcane juice in 2018-19 is that permission came quite late, though the separate price fixed for such a product was attractive enough.
Despite all the bottlenecks, officials say still sugar output was lower by 0.4-0.5 million tonnes because of the production of ethanol from B-heavy molasses and sugarcane juice, which is expected to go up to 1.0-1.2 million tonnes in 2019-20 season as more mills start producing ethanol from intermediary molasses.
While the price announced by the Centre for the 2019-20 sugar season, for ethanol produced through all methods is quite attractive, it is the shaky financial position of sugar mills that could deter them from undertaking any large-scale additional investment.
On its part, the Centre has sanctioned a soft loan of over Rs 15,000 crore in March 2019 to enable sugar mills to expand their ethanol capacities, and has so far approved 245 projects.
However, some industry officials say that much of these extra investments have got stuck at the banks, because of the poor financial position of the mills.
The cost of ethanol produced from B-heavy molasses is Rs 51-53 a litre depending upon the quality of molasses, while the procurement price fixed for OMC for the 2019-20 is Rs 54.27 per litre. The cost of production from C-heavy molasses is Rs 41.50-43 a litre, while the procurement price fixed is Rs 43.75 a litre.
Officials say that for mandatory 10 per cent blending, around 3.3 billion litres of ethanol are required, while contracts for 2 billion litres were signed in 2018-19, and 1.75 billion litres have been supplied so far.
In 2019-20, the government expects around 2.6 nillion litres of ethanol to be produced in the ethanol purchase season that starts this December.