Monday, March 22, 2010

>INDIA SUGAR: Supplies increasing, as predicted… (PRABHUDAS LILLADHER)

Significant fall in both domestic and international sugar prices: International sugar prices, in terms of raw sugar, fell by 33.1% from the level of 29.9cents/pb and 27.8% in terms of white sugar from the level of US$750/tonne since January 2010. Even domestic prices fell by 17.8% from the level of Rs39.5/kg since January 2010 due to anticipated increase in sugar production (both at domestic as well as international level) in SS2011. Early start of crushing in Brazil and raising the expectation of higher domestic production during the current season from 14.6m tonnes to 16.8m tonnes, consequently led to a decrease in sugar prices.

Higher cane price is an incentive for farmers to plant more cane: Farmers received cane prices in the range of Rs185-250/quintal during the crushing period. This was much higher than the Fare and Remunerative price (FRP) which was fixed at Rs129.8 for the current sugar season at 9.5% recovery. This has given enough incentive to them to plant more cane. Estimates for next year’s sugar production are in the range of 21-23m tonnes, which is 25-36% higher than current year’s sugar production.

Profitability of domestic mill owners impacted: Operating profit per kg for the current sugar season has come down to similar levels as last year at Rs6.3/kg. We expect profitability of mill owners from the sugar segment to get affected next year also even though there would be an increase in the volume of sugar sold.

Further change in sugar prices to depend on monsoon and profit parity with ethanol: In the medium term, we expect raw sugar prices to remain in the range of 19-21cents/pb due to profit parity with ethanol. As per the industry sources, with raw sugar prices above 19cents/pb or crude oil price below US$83/bbl, sugar would be more profitable as compared to ethanol in Brazil. However, with expectation of increase in cane production, in both Brazil as well as India, we expect ethanol as well sugar prices to decrease. Going ahead, monsoon would be the key factor to determine overall domestic sugar production and hence, sugar prices for SS2011.

We re-iterate our ‘Reduce’ rating on the Sugar sector (see ‘India Sugar- Not So sweet’ published on February 16, 2010).

To read the full report: INDIA SUGAR