Sweet pill for sugar mills in higher ethanol blending cap

Written by fe Bureau | New Delhi | Updated: Dec 12 2013, 21:27pm hrs
Cash-starved sugar mills stand to gain an annual Rs 7,500 crore if an informal group of ministers recommendation to double the mandatory blending of ethanol with petrol to a 10:90 ratio were to be implemented. This assumes that raising the blending limit will stir competition among industrial consumers, paving the way for the diversion of some molasses, even with sucrose content, towards the bio-fuel production and drive up prices of ethanol and sugar by 10% each.

Considering that the country needs 244 million tonnes of cane with an average recovery rate of 10% to produce the predicted sugar output level of 24.4 million tonnes for 2013-14, this benefit, albeit indirect, will translate into roughly R31 per quintal of cane.

However, there would still be a viability gap for sugar mills, especially those in Uttar Pradesh where the state-advised price (SAP) of R280/quintal for cane is way above the viable price of R225 as per the formula mooted by the C Rangarajan panel.

It is another matter though that considering the experience so far, 10% ethanol blending is an idea easier proposed than implemented. Ethanol content in petrol in India is projected to be just 2% this fiscal, even though 5% blending was first approved a decade ago.

Factoring in a direct benefit of R2.25 per quintal on interest-free loans recently announced by the Centre as well as an additional R11.03 per quintal incentive provided by the UP government in the form of a waiver of entry tax, purchase tax and society commission, the supposed indirect benefit of R31 per quintal from the 10% blending programme could significantly bridge the gap between the current viable price and SAP in the state.

Once endorsed by the Cabinet, the suggestion of the panel led by agriculture minister Sharad Pawar could provide sugar mills R7,050 crore more a year on a consumption level of 23.5 million tonnes if prices of the sweetener move up by 10% from the current R3,000 per quintal. Moreover, mills may get an additional R441 crore even on a supply of 105 crore litres for the current 5% blending limit if ethanol prices rise 10% from the average rate of R42 per litre, as offered against the last tender finalised by oil marketing companies (OMCs) in August.

However, the price of ethanol for the additional supplies of 105 crore litres to realise the 10% blending target will have to rise significantly to make it viable for mills, said Abinash Verma, director-general of the Indian Sugar Mills Association (ISMA). This is because to generate the additional quantity while keeping supplies steady for other consuming sectors including chemical and potable alcohol industries the mills have to produce ethanol from even B-heavy molasses, which also contain some sugar content. Currently, mills produce ethanol from C-heavy molasses after extracting the optimum amount of sucrose content.

The diversion of B-heavy molasses into ethanol production for an additional 105 crore litres will result in a reduction of sugar production by 1.7 million tonnes, according to sugar analysts.

To offset mills against the reduction of sugar stocks, OMCs have to offer at least Rs 50 per litre of ethanol, one of them said.

However, reducing sugar production by 1.7 million tonnes will have an indirect benefit for the industry in the form of cutting the current glut in supplies and preventing a sharp downward spiral in prices. It will generate up to Rs 5,500 crore of cash from ethanol sales for the industry, which has been marred by a liquidity crunch due to excess stocks and low realisations from sugar sales as demand stays steady while raw material costs remain elevated. Of course, it would save some interest costs for mills over and above the benefits mentioned above.

However, senior industry executives, while hailing the governments move to raise the blending limit, have expressed doubts over the actual implementation of the progamme any time soon. This has also cast serious doubts over the governments target of 20% mandatory blending by 2017.

While OMCs blame lack of adequate supplies for their inability to implement the programme, producers say the slow and delayed action by OMCs in floating and finalising tenders are to be blamed for this. The governments latest deadline of June 30, 2014, for the strict implementation of the 5% blending has already expired, making deadlines irrelevant.