NEW DELHI – To deal with the excess sugar in the domestic market, the government has come out with an ingenious solution. It has allowed mills to convert sugar into ethanol, which would then be purchased by oil marketing companies at 59.48 rupees a ltr.
While this would allow mills to liquidate the sugar stock, quite literally, in practice, it may not be that attractive for mills to sell ethanol at the levels announced by the government.
Converting sugar that has already incurred a large production cost into ethanol will require additional expenditure, and it would not be viable, unless it is old or damaged stock, the director of a large mill in Uttar Pradesh said.
"Converting sugar to ethanol will depend on how much mills are distressed and on their financial condition…It is a purely economics game," Abinash Verma, director general of Indian Sugar Mills Association, said.
The average cost of sugar produced this season works out to about 34,000 rupees a tn, according to industry estimates. Each tonne of sugar can produce about 600 ltr of ethanol, which results in a direct cost of 56.67 rupees per ltr of ethanol.
To convert sugar into ethanol, millers would need to convert sugar into slurry by adding water and introduce yeast as well as impurities such C-heavy molasses to start the fermentation process. Post fermentation, the alcohol mix needs to be purified. Add to this the overhead charges such as maintenance and labour cost, and the total expenditure on conversion works out to about 5-7 rupees a ltr.
This is at least a rupee higher than converting molasses into ethanol.
Taking all this expenditure into account, the total cost for converting sugar to ethanol would work out to 61.67-63.67 rupees a ltr, which is higher than the government-set sale price of 59.48 rupees, the official said.
"The incidental expenses on finance, depreciation and margin will not be covered within the 59.48 rupees a ltr," said Prakash Naiknaware, managing director of National Federation of Cooperative Sugar factories.
If the government-set minimum sale price of sugar of 31,000 rupees per tn is taken as the base instead of the actual production cost, the cost of ethanol derived from sugar would be around 56.67-58.67 rupees a ltr, which leaves mills with a thin margin.
Returns to mills are far higher if they convert final molasses, which is called C-heavy molasses, or intermediary molasses, called B-heavy molasses, to ethanol.
Though the total fermentable sugar in B-heavy and C-heavy molasses is lower than that of sugar, at 40% and 60%, respectively, the returns are much better, as there is some sugar produced as well.
"B-heavy molasses gives the best returns in terms of revenue," said Rahil Shaikh, managing director of Meir Commodities India.
An official with an Uttar Pradesh-based mill, which has an average recovery of 12.44% of sugar, broke down the numbers. At the minimum sale price of 3,100 rupees per 100 kg for sugar, his mill gets revenue of 385.68 rupees on each 100 kg of cane crushed. The recovery of C-heavy molasses at the mill for each 100 kg of cane crushed is 39.38 rupees, taking total revenue on this model to 425.06 rupees.
If the mill makes B-heavy molasses, sugar recovery drops to 10.70%. The revenue on sugar for each 100 kg of cane crushed drops to 331.70 rupees, but that from molasses increases to 105.83 rupees as B-heavy molasses has a higher percentage of fermentable sugar, and also fetches a higher price. Total revenue using this model is 437.53 rupees.
Prima facie, the revenue from converting sugar to ethanol is quite high. Sugar made from 100 kg cane would produce 7.58 ltr of ethanol. This would translate to revenue of 450.86 rupees a ltr from ethanol. Add to this the revenue of 39.38 rupees a ltr already realised from C-heavy molasses that would have been produced as a by-product. This takes the total revenue from the conversion to 490.24 rupees a ltr.
While the topline looks quite attractive in this case, the margins are lower compared with ethanol derived from C-heavy or B-heavy molasses, if the conversion cost from cane to sugar, carrying cost, and the cost of converting sugar to ethanol are taken into account, the mill official said.
"If a mill has saleable sugar now, it makes more sense to keep it and sell it as sugar. The next season is only a few months away. A better option would be to tweak the production mix next season to produce B-heavy molasses, and then convert it to ethanol," a miller from Maharashtra said.
It was cooperative mills in Maharashtra that had initially floated the idea of converting old sugar to ethanol.
Some cooperative mills in state have sugar stock that was damaged due to the recent floods. With the policy of converting sugar to ethanol in place, it is that stock that can be utilised better, the miller said.
The damaged stock, however, is miniscule, and would not have much impact on overall sugar or ethanol supply in the country, he said.
The higher prices announced for B-heavy and C-heavy ethanol, as well as the success a few mills had this season, should encourage more mills to use B-heavy molasses this year, an official with a multinational trade firm said.
"If this materialises, the sugar production could fall by 1.2-1.3 mln tn next season, compared to about 500,000 tn this season," the official said.
This too could help in reducing the glut in the domestic sugar market to a small extent.
According to estimates released by Indian Sugar Mills Association, India would have a record carry-over stock of 14.5 mln tn sugar at the end of the season on Sep 30. With production so far estimated at 28.2 mln tn, the total sugar supply in the country would be at 42.7 mln tn, much higher than the estimated consumption of 25-26 mln tn.
Even a small reduction in next year's glut would be helpful for the sugar mills.
"National benefits of unblocking capital, saving on interest and making space for storing new sugar for the next season will be important gains," Naiknaware said.