The price of sugar is at a sevenyear high, with both lower output estimates this crushing season and a pick-up in buying from bulk consumers.
At the wholesale market in Navi Mumbai, the benchmark M30 variety closed on Tuesday at ~39.35 a kg, seen earlier in February 2010. On Wednesday, however, it fell marginally, to ~39.25 a kg. The price has risen a little over three per cent in the past 10 days, and 4.4 per cent since the season began on October 1. Sugar mills, however, say the factory gate realisation only covers the effective cost of production. The wholesale price factors in ~1.50 a kg for transportation and ~2 a kg as duty and cess. So, the effective factory gate realisation is ~36 a kg, while the cost of production was ~33 a kg last year, they say. Even more in the northern states, due to higher cane prices.
“The cane State Advised Price has gone up by 10-13 per cent in UP and Haryana. And, mills’ average operational capacity has declined due to shutdown for want of cane in many drought hit areas,” said Abinash Verma, director general, Indian Sugar Mills Association (Isma).
Ex-mill prices had dropped by ~2-3 a kg in the second week of November, after demonetisation. With lack of liquidity, many mills reported a sharp decline in lifting from bulk consumers, such as ice cream and soft drink makers. Now, they seem to have returned to the market, resulting in a sudden increase in demand.
“With a higher cane price announced by governments in Uttar Pradesh, Punjab and Haryana, low sugar recovery in Tamil Nadu and Andhra, and lower capacity utilisation in drought-affected states like Maharashtra, Karnataka and Telangana, the all-India average cost of production in the 2016-17 season will be higher at ~35-36 a kg (~2 a kg more than the previous year’s),” said Isma in a recent report.
Lower output estimates have supported the price sentiment. Isma’s first advance estimate had output at 23.37 million tonnes for 2016-17, compared to 25.1 mt the previous year. Private agencies estimate 22.5-23 mt. Isma is meeting on January 25 to review the situation. It has already revised downward the earlier consumption estimate to 24.8 mt, and says this should be enough argument against cutting the import duty — the government had earlier decided to reduce this in phases to nil from a peak of 40 per cent in 2015. “Reducing the duty to allow import will be disastrous; it will lead to a price fall without any real need for alarm. Falling production, with estimates of lower consumption, will still leave over 5.5 mt for the next season’s opening stock, sufficient for covering more than two months of consumption,” said a south-based mill owner.
Sabyasachi Majumdar, head, corporate ratings, ICRA, said: “Sustained healthy realisations and recovery rates are likely to result in healthy contribution margins for UP-based mills, despite a ~25/quintal increase in the cane price for Sugar Season 2017. With the (Centre) price of cane for 2017 at the same level as the previous year and sugar prices on the higher side, the profitability of mills based in Maharashtra and Karnataka is likely to improve. However, the extent of increase in absolute levels of profits could be moderated with the decline in cane availability.” Most mills have seen a sharp jump in their share price. Half a dozen stocks have hit a 52-week high on expectations of better earnings in the coming quarters.