Sugar mills in a fix over OMCs move on ethanol pricing

Written by fe Bureau | New Delhi | Updated: Feb 22 2014, 08:58am hrs
Sugar mills ability to improve cash flow through higher ethanol sales to the oil marketing companies (OMCs) for the mandatory blending with petrol continues to be under severe strain. The OMCs have set an internal benchmark price for the biofuel and are rejecting price bids beyond that level, according to senior sugar industry executives.

They said the OMCs have set an internal price for ethanol at Rs 44 per litre, which resulted in a rejection of as much as 37 crore litres of the biofuel offered by producers in a tender floated in July but finalised recently. Against the offered volume of 62 crore litres in the tender, the OMCs have placed an order for only 25 crore litres, said Indian Sugar Mills Association director-general Abinash Verma.

This, despite a decision by the Cabinet Committee on Economic Affairs (CCEA) in November 2012 to offer producers, primarily sugar mills, market prices for ethanol supplies for the mandatory blending with petrol at a 5:95 ratio, they said.

According to calculations by Isma, the OMCs won't make any loss even if they purchase ethanol at Rs 55 a litre as petrol prices are much higher than the ethanol rate. Had the OMCs decided to accept ethanol up to Rs 55 per litre, they would have got as much as 56 crore litres out of the 62 that had been offered, Verma said. "The OMCs shouldn't reject ethanol supplies as long as they are not losing anything," he added.

Producers complain that the OMCs shouldn't reject supplies until the price of ethanol exceeds that of petrol's cost of production, especially when they inordinately delay the finalisation of tenders and add to inventory costs of sugar mills. Only two tenders have been finalised since January last year and delivery orders for 65 crore litres have been placed, compared to the annual requirement of around 105 crore litres to achieve the 5% mandatory blending programme.

In December, a ministerial panel, chaired by agriculture minister Sharad Pawar, suggested the blending limit to be doubled to help cash-starved sugar mills improve their cash flow. Sugar mills, however, are sceptical about its implemntation any time soon.

This is because even a decade after the 5% blending programme was first first approved and endorsed at various stages, the country had achieved only 2% blending at the start of the current fiscal. This has also cast serious doubt over achieving the government's target of 20% mandatory blending of ethanol with petrol by 2017.

While OMCs blame lack of adequate supplies for their inability to implement the blending programme, producers say the "slow and delayed" action by OMCs in floating and finalising tenders, and the low benchmark prices for purchases when competing industries are offering higher rates, are to be blamed for this. The government's deadline of June 30 for the strict implementation of the 5% blending has already expired, making all such deadlines irrelevant and absurd.