[T.S.R:14800] Sector Update - Sugar

 

SECTOR UPDATE: Sugar

Ujjval Jauhari/Mumbai 30 Jun 10 | 01:30 PM

 

The news of an increase in sugar production has had a sweet impact on consumers, though the returns for investors in sugar stocks seem limited in the near-term. According to reports, Uttar Pradesh (UP), the second largest sugar producing state after Maharashtra, is likely produce 5.95 MT of sugar in Sugar Year 10-11 (October-September), as against 5.16 MT estimated earlier. Even Karnataka is likely to increase production 3 MT sugar production as against 2.5 MT estimated earlier. News from Maharashtra the largest sugar producer and taking care of 40% of countries demand has also been encouraging. The output is likely to be to touch 8.5-8.6 MT in SY10-11 against 7.1-7.2 MT in SY 09-10.

All this is being estimated in the backdrop of revised crushing estimates. The officials in UP are said to have estimated increased crushing this year (65MT in SY 10-11 against 56.6 MT estimated earlier). In Karnataka cane output estimates have increased from 22.7 MT to 27 MT for the year. Both states owe this increase to renewed interest of farmers in sugarcane crop with good prices paid last year. Uttar Pradesh paid around Rs 250-290/quintal last year.

The demand-supply equation seems to be in equilibrium with analysts expecting the total sugar production to touch 23-25 Million Metric Tonne in this season, as against a demand of 24.6 million MT.  This is expected to keep supporting the current prices of Rs 28-29 at wholesale levels. White sugar inventories at the domestic sugar mills are at Rs 25-27/ kg cost of production. Thus, current prices are almost at par with the cost and a fall can have negative bearing, which is unlikely given the government support.

Some recent events too have augured well for the industry. The government had increased provisional levy sugar prices by Rs4/kg to Rs 17.84/kg a few days back. These prices had remained unchanged since 2003-04, and with fall in production the government had increased levy quota to 20% of production in SY10 compared to 10% in SY09. (Levy sugar relates to obligation by sugar mills to sell a certain percentage of net sugar output to central government for PDS).

This increase in Levy prices was imperative looking at governments' directive for millers to pay Fair Remunerative Price (FRP) of Rs139.14/quintal for SY10-11 and Rs129/quintal for cane during SY10 as against SMP of Rs 81.8 per quintal in SY10.

On the policy front, the government deferred import duty on refined sugar imports in the wake of high food inflation, which touched 16.9% on 12 June. Going ahead, analysts feel that the government may provide some respite to by imposing 15% import duty as inflation softens. They also expect the government to reduce levy quota to 16% on the back increased production, which will be adequate to take care of PDS.

Globally, an Edelweiss report suggests, Brazil – the largest manufacturer of sugar – will have to limit its raw sugar exports supporting international prices. Higher ethanol demand in the country due to a steady demand for ethanol and flex fuel-based vehicles is also expected to keep exports under check, adds the Edelweiss report.

Things are not looking good for Thailand too. The world's second largest exporter saw a reduction in crop projection in March 2010 taking into account a negative impact on cane by a drought in the northern part of the country. As a result, sugar exports are expected to dip to around 4.7 million tonnes for the season, down from 5.1 million tonnes in 2008-09.

Overall, while we may not see lower sugar prices for now, they will remain capped on the upside too. Analysts feel that price volatility in sugar in India will continue for some time with volatility in international sugar prices and government interventions. Looking at current wholesale prices around Rs 28-29 per kg and cost of production for manufacturers at Rs 27/ kg, profitability remains sharply affected. Also, the government will not allow much upside on pricing looking at inflationary pressures. Analysts suggest that though overall scenario for sugar companies looks promising, a significant upside is not possible in the near-term.

http://www.smartinvestor.in/market/story-33515-storydet-SECTOR_UPDATE_Sugar.htm

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