Sugar manufacturers reeling under a supply glut breathed a sigh of relief after the government announced long-awaited incentives for sugar exports. Some disappointment remains on the quantum of incentives. Nevertheless, exports of up to 6 million tonnes (mt) as a result of the sops can meaningfully reduce sugar surplus in India.
The second successive year of good monsoons in the country has meant an improvement in sugarcane acreage. This, in turn, is expected to drive sugar production in the country. India’s sugar production is pegged at 31.4 mt during the current sugar year 2021 (SY21), growing 14% year-on-year.
The sugar year starts on 1 October and ends on 30 September.
With domestic sugar demand at 26 mt, and an opening inventory of sugar at 10.8 mt (being carried forward from the previous year), there is a substantial sugar surplus. The exports, therefore, are necessary for reducing sugar inventories and taking care of the surplus. The exporting mills would also save on interest and storage costs, to the extent of sugar exported.
Rating agency ICRA Ltd says, “Export volumes will relieve the pressure on domestic sugar stocks and thus support domestic sugar realizations to a certain extent. The continuation of the export policy supports the credit profile of the sugar industry.”
It should be noted that the Centre-announced ₹3,500 crore subsidy translates to roughly about ₹6 per kg incentive for exports to take care of costs pertaining to exports. This announced subsidy, however, is about 44% lower than the ₹10.4 a kg support provided in the previous year. While the subsidy reduction may have taken into consideration higher international raw sugar prices, some concerns remain. Any correction in international prices, as Indian supplies hit the markets, can make exports less viable.
Abinash Verma, director general, Indian Sugar Mills Association, feels that the ₹6 support is decent as long as international sugar prices hold.
Nevertheless, export continuation is not the only factor being looked at to support the profits of sugar manufacturers. A decision on increasing the minimum support price (MSP) of sugar (currently at ₹31/kg) is also being awaited.
This is crucial for supporting sugar prices when supplies are outpacing demand. The expectations are on the government increasing the sugar MSP to ₹33/kg. Further, the decision by the Uttar Pradesh government on state advised price (SAP) for sugarcane procurement for the current season is still pending. Analysts at JM Financial maintain their cautious view on the industry due to the structural oversupply scenario; their estimates factor in ₹10/quintal increase in SAP.
The rise in SAP will increase the cost of sugarcane procurement, putting pressure on the profits of sugar manufacturers. Note that mills cannot pass higher costs in an over-supply environment.