Why shares of sugar mills have been plumbing the depths and seem destined to remain there and what can bring cheer to the depressed sugar sector
The sugar industry may have got some additional concessions from the government but it may be all in vain. A larger-than-expected output, with next year’s harvest expected to be good, puts more pressure on prices. Shares of sugar mills have been plumbing the depths and seem destined to remain there.
The latest forecast of lobby group Indian Sugar Mills Association estimates output at 28 million tonnes (mt), exceeding its initial estimates by as much as 2mt. Higher sugar yields are one reason but such large variations dent the credibility of these estimates.
The excess could have been exported but the world market has enough of the sweetener. Unexpectedly good harvests in large producing countries such as Brazil and higher exports due to the depreciation of the Brazilian real have combined to pull down world prices.
The fallout is that global raw sugar prices have declined by 13.7% in 2015 and by 31% from a year ago. Domestic sugar prices have fallen by 9% in 2015 till date and by 23% from a year ago.
What about cane prices for sugar mills? They have remained the same or increased as they are fixed by the government. As the season draws to a close, the sugar business of mills will have bad news for investors. Still, mills have held on to arrears of Rs.20,099 crore on 31 March. It gives them some relief as delaying payments aids working capital management, although it puts them in conflict with farmers and the government.
One positive factor is that higher cane crushed signals a much better showing likely in the distillery and co-generation segments for integrated sugar mills. These divisions’ volume depend on by-products from the crushing process. Therefore, profits in these segments should, to an extent, offset losses incurred in making sugar.
With the current season drawing to a close, the next draws into view. The initial picture seems worrying. A Reutersnews report says cane farmers are unlikely to divert to other crops even though mills have withheld payments. A report by the US department of agriculture’s food and agricultural service says area under sugarcane in India may even increase a bit in the new season. It lists reasons as cane being a sturdy crop and yields returns that are better compared with rice and cotton. Also, the recent damage to the winter crop may see diversion to cane to recoup those losses.
The end to the problem of plenty for mills is just not in sight. The only hope for them is if the government in Uttar Pradesh, the largest cane-growing state, accepts their demand to tie the procurement price for sugarcane to the price of sugar and its by-products. That or a sharp and sustained rebound in prices are the only two events that can bring cheer to the depressed sugar sector.