A bitter pill for mills

The name of the game is survival. If a sugar mill manages to survive the test of times, it is sure to reap rich dividends by capitalising on any future demand-supply gap. The unfolding opportunity in the area of ethanol-gasoline blended fuel is seen as a potential gold mine for those who manage to survive, says K. T. Jagannathan

Cane unloading at a sugar factory.

COULD INDIA become a net importer of sugar by 2007? Anyone with even a cursory knowledge of the state of the sugar industry in India will dismiss this question with a laugh. However, unthinkable at present given the current sugar scenario, such a possibility is reportedly engaging the minds of the powers-that-be in New Delhi, according to sources. The reasons are not far to seek. Already, this possibility finds mention in a confidential World Bank report.

However, as things stand today, the Indian sugar industry is plagued by a problem of plenty and is struggling for a solution. There are around 493 sugar mills across the country with an aggregate installed capacity of 16.2 million tonnes. These are sitting on a mountain of inventory — 10 months consumption as closing stocks, to be precise. A combination of factors emanating primarily from unfavourable policies — some are there for long and some others have come in recently — has ensured that the industry has lost the confidence of all the major stakeholders such as investors, banks, financial institutions and farmers.

This has led the industry from one crisis to another. The resultant rush by mills, especially from the North and the West, to scuttle the sugar release mechanism by moving the courts has sent not only prices but the industry as well hurtling downhill. The present cost structure is such that the mills could never be profitable exporters. Not surprisingly, they are caught in a pincer-like situation — caught between mounting stocks and unviable operations. The moot question is: how many will survive by the time they see light at the end of the tunnel?

A peep into the regulatory regime for the industry will put its predicament in perspective. Sugar comes under the Essential Commodities Act. Ipso facto, there has been control on all facets of the sugar trade. The licensing regime that regulates the installed capacity, the minimum support price for cane, the reservation of cane area for mills and the control over price and movement of sugar as well its by-product molasses, have all triggered a situation totally out of sync with market realities. The dual pricing policy pursued by the Government — where a fixed percentage of regulated periodical releases is sold to the Government at a pre-determined price for sale through ration shops and the balance allowed for sale in the open market regularly — has only meant that the industry's hands are tied and it has to contend with one too many imponderables at any given point of time.

Deregulation moves

It is against this backdrop that the Government has come out with major policy changes. The freedom to set up downstream molasses-based activities, removal of curbs on capacity expansion or setting up new mills, freedom to export sugar, placement of sugar import under OGL (open general licence), reduction in levy obligation to 10 per cent from a high of 65 per cent in the early 1980s, the proposal for futures exchanges for the commodity (as a prelude to withdrawal of the release mechanism and move towards decontrol) and the like have all come apparently at an inappropriate time for the industry.

How well the mills cope with the changing environment will largely determine their survival. The challenge lies in keeping a tight lid on the cost of production. This is easier said than done. Cane prices, statutorily fixed, account for 65 to 70 per cent of the cost of sugar. These have proved inflexible, thanks to considerations other than economic. Retail prices for sugar, on the other hand, have tumbled to six-year lows.

The prices of downstream products like alcohol, too, have nose-dived. Further, the policy initiatives on the alcohol front vary from State to State are largely not helpful. So is the case with co-generation of power. Given these handicaps, many inefficient mills may soon go into the pages of history. With banks and financial institutions turning wary on funding acquisitions, closure of weak mills remains a distant possibility. This is bound to lead to a reduction in installed capacity over a period.

Even as the sugar tastes bitter for the mill owners, a view is gathering ground that may lend weight to the World Bank's prediction that India could be a net importer of sugar by 2007. Studies have found that sugar consumption increases in tandem with economic growth. The per capita consumption of sugar in India is predicted to grow faster than at the current five per cent rate. This, it is expected, will trigger demand-side pressures. With the supply side shrinking (following possible closures), there is a real possibility of India importing sugar though at a distant date.

Opportunities in ethanol

Thus, the name of the game is survival. If a mill manages to survive the test of times, it is sure to reap rich dividends by capitalising on any future demand-supply gap. The unfolding opportunity in the area of ethanol-gasoline blended fuel is seen as a potential gold mine for those who manage to survive. The ethanol programme is bound to bring an assured market at a better price than what they get from alcohol. The blended fuel is being introduced in nine States and four Union territories. It is widely anticipated that the Government will move in line with happenings in markets like Brazil. It is quite possible that it may increase the quantum of ethanol mix in petrol from the current five per cent to 10 per cent.

Co-generation is a not yet an attractive proposition given the current policy cobwebs. The restructuring of the State electricity boards, however, is bound to change the situation in sugar mills' favour in the years to come. With the Green Movement gaining momentum across the country, there will come a stage when power utilities also will want to source green power. And, co-generation can prove an ideal choice then.

In the near-term, however, the industry will come under microscopic scrutiny. How will it reshape? Industry watchers predict hectic M&A (mergers and acquisitions) activity. Soon, one can find the conventional average capacity of 2500-tonne crushing capacity per day consigned to the pages of history, giving way to an economical size of 10,000 TCD, triggering a host of size-linked benefits.

Given this scenario, one expects the much-anticipated futures exchanges to provide some solution to the problem of falling prices. A lot, however, will need to be done in terms of the right regulatory framework, infrastructure and the like. More importantly, sugar futures as a concept will have to be accepted by all concerned in the trade. In the end, the Great Sugar Journey in India may prove bitter for the weak and sweet for the strong. The winner is... you have guessed rightly.

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