ICRA: High Sugar Stocks Continue To Weigh Down On Sugar Prices; Despite Expectations Of Significant Fall In Sugar Production In SY2020
Post drought-like conditions resulting in lower cane acreage and hence lower cane production in Maharashtra and Karnataka, the recent floods in the key sugar-producing districts are expected to further lower the expected sugar production. As per ICRA, despite the expected decline, pressure is likely to continue on the sugar prices and the consequent operating margins in FY2020 given the expectation of continued sugar surplus scenario. Given the above context, India’s ability to export sugar and continued policy support by govt to divert sugarcane production towards ethanol manufacture will remain a key to sustaining the health of the sugar industry.
Mr Sabyasachi Majumdar, Senior Vice President & Group Head, ICRA Ratings, said: “We expect domestic sugar production in SY2020 to decline by 14% Y-o-Y to around 28.2 million MT from 32.9 million MT in SY2019. This will be driven by the lower production in the key sugar-producing states like Maharashtra and Karnataka. In these states, the cane area has declined due to lower rainfall, resulting in lower sugar production in SY2020 on a Y-o-Y basis. In Maharashtra, the production is estimated to decline by 35% Y-o-Y to 7 million MT and in Karnataka by 20% to 3.5 million MT. The production in Uttar Pradesh is likely to remain healthy in SY2020 at 12.0 million MT, largely similar to that of the previous year. On the other hand, ICRA expects sugar consumption to increase to 26.5 million MT in SY2020 and the production is likely to outstrip consumption by around 1.7 million MT. However, high closing stocks of around 14.5 million MT in SY2019 would result in surplus availability of sugar in SY2020.”
In July 2019, the Cabinet Committee on Economic Affairs (CCEA) has approved creation of 4 million MT of sugar buffer stock for one year. The estimated maximum expenditure for the creation of buffer stock is around Rs. 1,674 crore. The reimbursement under the scheme would be met on quarterly basis to sugar mills which would be directly credited into farmers’ account on behalf of mills against cane price dues and subsequent balance, if any, would be credited to the mill’s account.
“The buffer stock creation would improve the demand-supply situation in the domestic market and the direct impact of the carrying cost alone would translate into a higher PBT margin by 1.5%-1.8%. In addition, the industry would benefit through some hardening of the sugar prices, although the quantum of the increase cannot be ascertained. However, the operating margins and debt coverage metrics of mills are likely to remain under pressure given the sugar surplus situation and the recent leverage the mills have undergone in the form of various soft and interest subvention loans. The government support in the form of remunerative ethanol prices, subsidies for exports and MSP for sugar are likely to continue for the forthcoming season in order to prevent the piling up of cane arrears,” Mr Majumdar added.