Date:01/11/2005 URL: http://www.thehindubusinessline.com/2005/11/01/stories/2005110101081200.htm

Back World sugar market to remain firm on ethanol demand

G. Chandrashekhar

Mumbai , Oct. 31

DESPITE a rebound in Indian sugar production in 2005-06, global sugar market is expected to continue to remain firm over the next few months due to strong demand-supply fundamentals.

In addition to ethanol prices and fund interest, stocks are projected to shrink for the third year in a row.

Rising demand for ethanol has been a key factor in driving sugar prices up. High prices of energy in recent months have created additional demand for ethanol for blending with gasoline.

Demand has been particularly strong from the world's largest producer of sugar and ethanol, Brazil where flex-fuel cars are popular.

In the last two year, a sharp decline in Indian sugar production had lent a bullish edge to the global prices. A rebound in production this year (2005-06) following higher cane output is expected to cap the upside for the sugar market.

However, there still are doubts about the estimate of India's sugar production. If one went by the cane output estimate of the Government (257 million tonnes (mt) versus 235 mt last year) the increase is sugar production would be 2.5 mt as against the industry's projection of 4.5 mt

Diversion of cane for traditional sweeteners such as gur and khandsari is also not ruled out. All this means that stock in India would be tight and the country may be forced to continue to import raw sugar to meet the supply gap in 2005-06 also.

In Q3, NYBOT sugar prices rose sharply from 9 cents in July to a high of over 11 cents a pound by end-September. The market is expected to continue to remain strong. High international prices open a window of opportunity for some exports from India so as to fulfil export obligation against raw sugar imports in the past.

For 2005-06, global sugar production is projected to be strong at 146.3 mt, up from 142-143 mt of previous two years. Consumption is estimated at142.7 mt (140.6 mt), while global stocks would be down for the third straight year to 34.2 mt

Experts now see sugar more as an energy commodity than as a food product.

Brazil has set the tone for this transformation. Gasoline is doped with ethanol to the extent of 24 per cent.

India's efforts to promote ethanol are still nascent. Cane output will first have to be stabilised at a high level of say 300 mt so as to be able to divert a sizeable part of the crop for ethanol production.

India is the world's second largest producer of sugar but the largest consumer.