Industry observers say as the government has a focus on the ethanol blending programme, more relaxation is likely if sugar surplus is in line with the estimates after the crushing season ends in the first quarter of FY25.

 

Khushbu Lakhotia, Director, India Ratings & Research, says: “While the government has now allowed ethanol production through both cane juice and B- heavy (a category based on sucrose content) molasses, the sugar diversion has been capped at 1.7 million tonnes (MT), which is around 60% lower than the last season and similar to the diversion without cane juice under the order passed on December 7. Even under the revised order, India’s sugar production could increase by 2-2.5 MT to around 31 MT. In comparison, India consumes around 28 MT sugar annually and the move could increase closing stocks from the multi-year low of last season.”

 

The government had on December 16 issued an order reversing the ban on the use of sugarcane juice to make ethanol. The food ministry also allowed utilisation of the juice as well as B heavy molasses to produce the green fuel in the 2023-24 supply year. The revised order comes days after the government’s December 7 order banning use of sugarcane juice and sugar syrup for the 2023-24 supply year (November-October) to ensure adequate sugar supply in the domestic market and check prices.

 

The government has estimated sugar production to fall to 32.3-33 MT in the 2023-24 season (October-September) compared to 37.3 MT in the last season.

 

India’s sugar production has been down 11% in the current season thus far. There is some uncertainty over the production over the next 3-4 months in Maharashtra and Karnataka, adds Lakhotia.

 

As on August 31 of the 2022-23 ethanol supply year, ethanol blending with petrol (EBP) stood at 11.76% against the annual target of 12%. The target for 2023-24 is 15% and for 2024-25 is 20%. The 2022-23 target of 10% blending was achieved by June 2022, much ahead of the target date of November 2022.

 

A NITI Aayog report of 2021 said the country would need to make 13.5 billion litres of ethanol by 2025, a sixfold increase from the 2.7 billion litres in 2021.

 

Uppal Shah, Co-founder and CEO, AgriMandi.live Research, says: “Shortly after banning sugar mills from producing ethanol from sugarcane juice/syrup, the government amended its order to allow OMCs to revise allocation from sugarcane juice/syrup and B heavy molasses, however capping the total sugar diversion towards ethanol to 17 LMT. This restricts ethanol production from sugarcane juice and B heavy molasses to a total of around 130-135 crore litres, with some additional quantity added from C heavy molasses. The total ethanol bid of 562 crore litres for 2023-2024 will reduce to 430-440 crore litres.”

 

Shah also says that the government should immediately lift the ban on Food Corporation of India (FCI) rice from being used to produce ethanol as surplus stock is available to ensure 12% ethanol blending in the current season and to make up for the shortfall of ethanol production from sugarcane juice/syrup. “The grain-based distillery units should be allowed to produce ethanol from FCI rice,” adds Shah.

 

‘Government’s revised move should help sugar mills’

Industry stakeholders say the government appears to be moving towards creating a level playing field and aims to have a single price for ethanol from either of the feedstock syrups, B-heavy or C-heavy.

 

“This should help the sugar mills to chalk out their own strategy to decide on the diversion of sugar to ethanol and align it with the prevailing prices of sugar, without any need for capping at 17 lakh tonnes of sugar diversion, as is being proposed,” says Gaurav Kedia, Chairman, Indian Biogas Association (IBA).

 

Will the revised move help sugar mills?

Lakhotia thinks that the sales and profitability of sugar companies will be affected over the next 6-12 months owing to the fall in ethanol production, with EBITDA likely to be 5-15% lower than earlier forecasts for FY24 and FY25, notwithstanding some benefit from strong sugar prices.

 

“The companies would also witness an increase in inventory levels given the lower diversion of cane towards ethanol. The initial notification banning cane juice as feedstock mostly affected the companies that had a higher order book of ethanol through cane juice. However, with the ban on cane juice lifted, such companies will not be hit as hard and the impact of restriction would be more evenly spread across the industry though more clarity will emerge after the finalisation of mill-wise ethanol quota from various feedstocks by OMCs,” says Lakhotia.

 

Kedia also agrees and says that the current change in ethanol policy may have an impact on the profitability of sugar companies in the short term but will work as a wakeup call to the sugar industry to aim for flexibility in the diversion of various sugar house products (feedstocks) for backend ethanol production.

 

“It is needless to say that food will always prevail over fuel. It is time now to link sugarcane pricing with the integrated price of sugar and alcohol vis-à-vis grain to ensure food security. The above will ensure a stable EBP without the need for frequent changes in policy,” he adds.

 

Kishan Karunakaran, Founder & CEO, Buyofuel, says if the government had not reversed the ban, a lower amount of ethanol would have been available in the market and India would have faced a significant shortfall in its ethanol blending targets. “With the reversal, there’s a chance for improvement. However, the government should consider investing in technology to secure a stable supply of 2G bioethanol,” he adds.