However, with the recent impact of fall in crude oil prices, expectation of Brazil increasing sugar production & due to Covid-19 pandemic, there has been a decline in the global prices as well.
The ongoing COVID-19 pandemic is expected to put pressure on the sugar consumption patterns as there are curbs on social gatherings and outings. The industry is also facing reduced off-take from beverage and other FMCG companies amid the lockdown. This has even led to fall in domestic & international sugar prices recently.
In the current scenario, it is expected that domestic sugar consumption could fall to 25 million tonne as against 26 million tonne expected previously with the possibility that the consumption could be further lower given the extension in the nationwide lockdown. Similarly, owing to lockdown, fall in crude price and the expectation of Brazil increasing its sugar production in this season, global prices are likely to remain muted at the current levels. Hence, the exports are likely to remain at levels of 4 million tonne as against the original target of 6 million tonne.
The export of sugar is also likely to get affected due to fall in international prices and also on account of supply chain disruptions at various ports. The minimum support price (MSP) for sugar and the moratorium allowed by RBI for the debt repayments is certainly giving cushion to the mill owners. However, the increased stock at their ends and delay in receipt of power sales (for integrated sugar mills) from respective state discoms are likely to intensify their working capital requirements and will also result in mounting cane arrears which shall put pressure on their liquidity in the near term, said an analysis done by Care Ratings.
The season started with a balance of 14.58 million tonne in October 2019 and by clubbing the estimated production of 26.5 million tonne in the current season, the total availability of sugar is estimated to be around 40.58 million tonne. Against the availability, the consumption is estimated to be around 25 million tonne. After expected 4 million tonne of exports, India is likely to end with closing stock of over 11.58 million tonne in September 2020, which will be higher than the earlier estimate of 10 million tonne.
As expected, production in the first six months of sugar season which is October 2019–March 2020, there is a degrowth of almost 22% to 23.27 million tonne (as against 29.68 million tonne in the similar period of the last sugar season). Though the operations were continuing in March 2020, the crushing operations, however, have been affected so far in April and it will go till early May on account of labour shortages amid the COVID-19 breakout and some other inputs like lime, sulphur, bags & other packing material which remain affected due to disruptions in transportation. Distillery units of certain sugar mills have started producing hand sanitizers as well.
Further, due to COVID-19, temporary disruptions in the supply chain have been experienced by the millers in the past few weeks and a drop in the consumption levels from the usual of 26 million tonne is expected as there are curbs on social gatherings, celebrations, weddings. People are also avoiding cold drinks and ice-creams to avoid falling sick. The FMCG & beverage companies are either working on reduced capacities or have suspended operations. All this is likely to have an impact on the annual sugar consumption, Care Ratings pointed out.
According to the analysis, what aided the sugar prices in SS19 to stay above cost of production was levy of minimum support prices by the government all throughout & further controlled supply by government. The prices so far from October 2019-February 2020 remained steady at average of Rs 34 per kg in the current season. The prime reasons that supported the stability in sugar prices so far were lower production in the ongoing sugar season, government’s MSP measures (slated to continue) and focus on higher export and diversion of sugarcane towards ethanol. The wholesale domestic prices, however, declined marginally in March 2020 to Rs 32.52 per kg after the COVID-19 breakout.
The global sugar prices were hovering around 14.5 cents per pound since mid-January 2020. However, with the recent impact of fall in crude oil prices, expectation of Brazil increasing sugar production & due to COVID-19 pandemic, there has been a decline in the global prices as well. Raw sugar prices in the international market were down by 20% to 11.8 cent per pound in March 2020 from 14.8 cents per pound in February 2020. Owing to ongoing pandemic & low crude price, CARE Ratings believes it is unlikely that the global sugar prices will bounce back to earlier levels of January of February 2020. This may put some pressure on the exports from India.
It may be recalled the government had earlier announced the Minimum indicative export quota (MIEQ) scheme to encourage export of sugar to reduce surplus in the country. Under MIEQ, the industry was allowed to export 6 million tonne of duty-free sugar in SS19-20. With the uptick in global sugar prices and higher incentive by the government, sugar exports looked promising for Indian producers. As per the industry data, of the allocated quota, sugar mills had cumulatively contracted for around 3.5 million tonne and transported around 2.8 million tonne out of their factories for exports. Due to the lockdown, India’s private ports have declared force majeure & government ports are also operating at lower capacities owing to shortages of labourers; all this has brought the current sugar exports to a standstill. CARE Ratings expects the exports to remain at levels of 4 million tonne against the targeted 6 million tonne.
Further to that, the outbreak of COVID-19 & subsequent lockdown has reduced the demand for petrol & diesel drastically nationwide resulting in lower off-take from OMCs depot which in turn has resulted in reduced procurement by OMCs from sugar millers owing to problems of storages. Further slide in crude prices has also resulted in reduced off-take of ethanol. The reduction in the demand for fuel has impacted the ethanol requirement as well, the rating agency pointed out.
Liquidity pressures could mount on companies which have high repayment obligations in the short to medium term and are holding excess inventory. Cane arrears are also likely to get accumulated in the current scenario. Any further extension in lockdown may put more pressure on the liquidity of the millers, Care Ratings said further.