Crushed under export ban, mills see lower realisations

The crushing for sugar year 2006-07 has started. The sugar production is expected to touch 23 million tonne, significantly higher than the 19.1 million tonne last year. The domestic consumption is only 18.5 million tonne.

Apart from lower realisations on sugar, an increase in sugarcane prices this year would burden the companies. Ethanol blending, which is supposed to bring higher revenues to the mills, has not taken off in a big way so far.

The profits and revenues of sugar companies over the next 3-4 quarters are expected to suffer. Balrampur Chini Mills and Dhampur Sugars recently announced declines in quarterly profits.

Payments to the farmers by the mills could also be delayed in the current season as a result of the softening sugar prices. This could impact sugarcane acreage in the coming years.

The ban on sugar exports has created a negative sentiment in the industry. As of now, the ban is in place till March 31. Lifting of the ban may boost sugar prices in the domestic market but the industry has already lost the advantage of higher international sugar prices.

The domestic industry is hopeful of exporting at least 2 million tonne in the 2006-07 season, which is necessary to keep domestic sugar prices stable.

Stocks tumble

The recent poor performance of sugar stocks is indication enough that the sector is not doing well. Shares of companies like Bajaj Hindusthan, Balrampur Chini Mill and Dhampur Sugars, among others, have fallen to their 52-week lows at the Bombay Stock Exchange.

"The sugar industry is set to see a surplus this year. Sugar mills in Uttar Pradesh could feel further pressure on realisations in case the state government declares a higher cane price to please the farmers. Sugar stocks are expected to underperform over the next couple of months. The only breather could be withdrawal of the export ban," says Vikram Suryavanshi of Karvy Stock Broking.

Investment advisers are forecasting a negative year for the sugar sector in the stock market. To them, it is not the right time for investing in sugar shares.

The companies, however, are optimistic and hope things will improve due to additional revenue from areas like ethanol, cogeneration and carbon trading.

Global prices soften

The International Sugar Organisation (ISO) has estimated the 2006-07 sugar production at 158.3 million tonne against a consumption of 152.5 million tonne.

The export availability of sugar is higher than the import demand. Industry sources are keen to export a minimum of 2 million tonne this year.

Internationally, sugar prices have softened over the past five months. The London sugar futures price has declined from $490 per tonne in July, when India banned exports, to $350 per tonne. The price is expected to decline further as the crushing season progresses in the producer nations.

The spectacular rise of world prices at the end of 2005 and the first half of 2006 has encouraged a strong production response in both exporting and importing countries.

For example, in Brazil, more cane has been used to produce sugar at the expense of ethanol. Facing the growing cost of sugar purchases from the world market, a number of key importing countries led by Russia are increasing domestic production and raising the level of self-sufficiency, the ISO says