Management Discussion and Analysis
Global sugar industry
After two deficit years, world sugar production almost matched world sugar consumptionat 167 million tonnes (MT) in 2010-11 compared with a production of 160.56 MT in 200910.Global fundamentals shifted from a perceived deficit to a short-term surplus due to alarger-than-expected Indian and Thai harvest.
Brazil: Brazil is the world's largest sugar producer, producing 38.7 MT of sugar in2010-11 compared with 28.6 MT in 2009-10. The sugar production in 2011-12 is estimated todip to 37.07 MT, owing to dry weather conditions. In the upcoming harvest season, anincreased amount of sugarcane will be diverted to ethanol production rather than sugarproduction as ethanol will enjoy a strong price momentum in the coming year owing to anadditional two million flexi-fuel cars in Brazil in 2010-11 and ethanol shortage owing toa higher swing towards sugar production.
China: China is the world's second-largest sugar consumer after India. It imports mostof its annual sugar requirement from Brazil - the world's top producer. The country'sproduction declined from 11.4 million tonnes in 2009- 10 to 10.5 million tonnes in 2010-11 as it was affected by drought. In 2011-12, the country is expected to produce around11.5 million tonnes of sugar and import around 2.5 million tonnes of sugar in order tomeet its annual demand of 14-14.5 million tonnes.
Thailand: Thailand is the world's second-largest sugar exporter after Brazil. Itregistered a 40% increase in sugar production from 6.9 million tonnes in 2009-10 to arecord 9.7 million tonnes in 2010-11, owing to better climatic conditions. The country isestimated to produce another bumper sugar crop in 2011-12 at around 10 million tonnes,topping its previous year's output of 9.66 million tonnes, owing to favourable climaticconditions.
Going ahead, world sugar production is estimated to be 175.8 million tonnes for the2011-12 sugar season owing to higher cane acreage and higher production in India andBrazil. The consumption is expected to be low at 164 million tonnes due to a sluggishglobal economy and high prices.
Indian sugar industry
The sugar industry is the second-largest agro-based industry in India next only tocotton textiles, supporting over 50 million sugarcane farmers, dependents and labourersinvolved in cultivation, harvesting and machine manufacture, among others (7.5% of therural population). India possesses 20% of the world's total sugar mills and accounts forabout 15% of the global production (Source: ISMA).
Sugar production and consumption:
India's sugar production during sugar year (SY) 2010-11 was 24.4 million tonnes, a29.10% growth over the previous year's 18.9 million tonnes, driven mainly by improved caneacreage, adequate rainfall and increased productivity. During SY 201112, sugar productionis expected to be 10.16% higher at 26 million tonnes due to higher sowing in SY 2009-10and SY 2010-11. This output is likely to outstrip domestic consumption of 23 milliontonnes by almost 3 million tonnes. However, this surplus is likely to be offset throughexports as the government already allowed 2.0 million tonnes of exports from 2011-12production and have further allowed export under OGL without any quantitative restriction.
Domestic sugar production and consumption (in MT)
| || |
|Opening stock (1st October) ||4.0 ||3.7 ||10.2 ||9.9 ||3.5* ||5.0* ||5.8 |
|Production (Oct-Sept) ||19.3 ||28.3 ||26.3 ||14.6 ||18.9 ||24.4 ||26.0 |
|Imports ||- ||- ||- ||1.3* ||6.0* ||- ||- |
|Total availability ||23.3 ||32.0 ||36.5 ||25.8 ||28.4 ||29.4 ||31.8 |
|Domestic consumption ||18.5 ||20.1 ||21.7 ||22.3 ||23.4 ||21.0 ||23.0 |
|Exports ||1.1 ||1.7 ||4.9 ||0.0 ||0 ||2.6 ||3.0 |
|Closing Stock as on Sept. 30 ||3.7 ||10.2 ||9.9 ||3.5* ||5.0* ||5.8 ||5.8 |
|Closing Stock as Months of Consumption ||2.3 ||6.1 ||5.5 ||2.7 ||2.6 ||2.9 ||2.9 |
* Import figure/CS for SY 2008-09 excludes 2.0 million of unprocessed raw sugar lyingwith sugar mills while import figures/CS for SY 2009-10 includes the processing of theaforesaid raw sugar
Cane prices: Cane prices increased across India. The state-advised prices (SAP) in UPincreased 17-19% from Rs. 205 - Rs. 210 per tonne of cane in 2010-11 to Rs. 240 - Rs. 250per tonne of cane in 2011-12, encouraging farmers to plant more sugarcane, leading tohigher sugar production, making the country a net exporter of sugar.
Cane production: With higher cane i prices, farmers increased the area under canecultivation by 15.35% from 44.15 lakh hectares in 2008-09 to 50.93 lakh hectares in2011-12 throughout the country and the farmers in UP increased cane acreage 8.06% from20.84 lakh hectares to 22.52 lakh hectares respectively in the same period. With highercane acreage, the total cane production is estimated to increase 9.82% to 380 milliontonnes in 2011-12 as compared with 346 million tonnes in 2010-11.The outlook for caneproduction remains positive because cane returns continue to be higher than alternativecrops.
Area under sugarcane cultivation
| || |
Area covered (pan-India) (lakh hectares)
Area covered (UP) (lakh hectares)
Cane production (pan-India) (MT)
|2008-09 ||44.15 ||20.84 ||289 |
|2009-10 || ||19.77 || |
|2010-11 ||49.44 ||21.25 ||346 |
|2011-12 ||50.93 ||22.52 ||380 |
Sugar prices: Domestic free sugar prices remained subdued between Rs. 28 and Rs. 30 perkg 2011-12 mainly because of a domestic sugar surplus. Sugar prices declined to a low ofRs. 28 per kg in August 2011 on account of lower-than-expected exports, together with ayear-on-year rise in free sugar releases and anticipation of production increases. Butafter remaining below the production cost for a long time, prices improved to Rs. 30 perkg during September-November 2011 due to an increased sugar demand in the festive season,and allowance of 1 million tonnes of sugar exports under OGL. Domestic sugar pricesstarted softening from December 2011 onwards because of fresh sugar production andsoftening international prices (which offset the positive impact of the governmentallowing an additional 1 million tonne of exports). Going ahead, outlook is likely to bedriven by expectations of domestic sugar production for SY 2012-13, performance ofinternational crude oil prices which will determine raw sugar: ethanol mix in Brazil andthe
Government of India's policies regarding sugar exports and import duties.
Exports: Indian sugar production (24.5 million tonnes) surpassed consumption (22million tonnes) in 2010-11, making India a net exporter of sugar in SY 2010-11. On accountof higher production, the government allowed the export of 2 million tonnes of sugar from2011-12 sugar production and thereafter allowed export under OGL without any quantitativerestriction. The delay in harvesting in Brazil has given an opportunity to India to enterthe international market and reduce domestic oversupply.
Low per capita consumption: India is one of the world's largest sugar consumerswith the lowest per capita sugar consumption at 21 kgs (Brazil's per capita sugarconsumption is 58 kgs).
Surging population: India's sugar consumption is likely to be driven bypopulation growth. India's population of 1.21 billion is expected to reach 1.53 billion by2030.
Growing per capita income: The increase in India's per capita income from Rs.10,574 in 1993-94 to Rs. 60,972 in 2011-12 resulted in higher sugar off take, a trend thatis expected to continue.
Going ahead, the cyclical nature of production and cane arrears could affect sugarproduction in the days to come. India's sugar production is expected to be at the samelevel of 26 million tonnes in SY 2012-13, but comfortable enough to meet domestic demandand address exports.
Sugar is a cyclical industry, marked by 3-5 years of a production up cycle and 2-3years of a down cycle. The industry down cycle usually starts with oversupply implyinglower sugar prices, leading to lower profitability for millers, cane arrears, farmerswitch to alternative crops, lower sugarcane harvest and lower sugar production. This downcycle lasts for 2-3 years.
A sudden drop in sugar production leads to higher sugar prices leading to better millprofitability, higher sugarcane prices, increased planting, higher sugar production andlower sugar prices. For the ensuing production cycle, following the down cycle of SY09period, an up cycle started during SY10 and is likely to peak in SY12.
In the present scenario marked by a shortage of fossil fuels, cogeneration faces apromising future. In a sugar mill, bagasse (a fibrous residue of crushed sugarcane) isincinerated to create high pressure steam in boilers to rotate the turbo generator bladesto produce an electric current. The process is called cogeneration, which essentiallyimplies the production of two forms of energy (electricity and heat). The power generatedis used to meet sugar mill requirements; the surplus is fed into the grid.
India's 527 working sugar mills crush around 240 million tonnes of cane per year andgenerate 80 million tonnes of wet bagasse (50% moisture), of which they consume around 70million tonnes to meet captive requirements of power and steam. Thus, electricityproduction through cogeneration in sugar mills in India provides low cost,non-conventional power. Under the Eleventh Plan period (2007-2012), the government aims toadd 1,700 MW of power generation capacities through biomass and bagasse cogeneration invarious states (Maharashtra, Uttar Pradesh, Tamil Nadu and Karnataka). The targetcomprises 500 MW from biomass projects and 1,200 MW from projects based on utilisingbagasse as a source of bioenergy. At present, a capacity of around 1854 MW of surpluspower generation has been commissioned in 170 sugar mills in Andhra Pradesh, Bihar,Haryana, Karnataka, Maharashtra, Punjab, Tamil Nadu, Uttar Pradesh and Uttarakhand. Morethan 200 MW of projects in about 20 private sector sugar mills are under construction.
Low per capita consumption: India's per capita power consumption of 704 units per annumis miniscule compared with the power consumption of many developed countries, indicatingthe sector's high growth potential. The National Electricity Policy envisages a rise inper capita power consumption to 1,000 units by 2012.
Substantial investments: As per the Power Ministry, the earmarked transmission anddistribution investment for the 11th and 12th Plan is Rs. 1,400 billion and Rs. 2,400billion respectively.
Investments in power transmission and distribution
Private sector role: Currently, central and state utilities enjoy a dominant share inthe country's overall generation capacity. Going ahead, there will be a paradigm shift inthe participation of private sector players in power generation, catalysed by the
Electricity Act 2003 and National Tariff Policy 2006. The private sector, whichcontributed a mere 11% to installed capacity in FY10, which is expected to account foraround 55% of the total capacity addition planned over FY10-15E. Private sectorparticipation increased on account of attractive returns, increased flexibility, fundingoptions and high merchant power rates. Installed capacity is set to increase from 159,398MW in FY10 to 270,929 MW in FY15E.
Power capacity addition (FY 10-15E)
| || |
|Central sector (MW) ||53,953 ||4,652 ||7,530 ||7,480 ||7,312 ||5,380 |
|State sector (MW) ||73,984 ||6,413 ||3,723 ||3,500 ||3,500 ||3,500 |
|Private sector (MW) ||31,461 ||5,336 ||10,323 ||12,210 ||16,040 ||14,632 |
|Total addition (MW) ||1,59,398 ||16,401 ||21,576 ||23,190 ||26,852 ||23,512 |
|Total capacity (MW) ||1,59,398 ||175,799 ||1,97,375 ||2,20,565 ||2,47,417 ||2,70,929 |
(Source: CEA, Karvy research)
Coal deficit: Coal-based plants account for 60% of India's power generation capacity.The power sector will require additional coal of around 446 MT over five years at a 10.2%CAGR, while coal production is expected to increase by only 7.2% CAGR. This provides ampleopportunities to sugar companies to provide bagasse-based power to the state grid.
Demand and supply for coal
| || |
|Demand (MTPA) ||401 ||437 ||481 ||529 ||587 ||652 |
|Domestic supply (MTPA) ||366 ||384 ||413 ||445 ||480 ||518 |
|Imports (MTPA) ||35 ||53 ||68 ||84 ||107 ||134 |
|Imports (%) ||9 ||12 ||14 ||16 ||18 ||21 |
(Source: CEA, Karvy research)
Rising power demand: During the mid-nineties, industry and agriculture were the largestconsumers of electricity, accounting for 70% of India's consumption. However, afterimplementing the Electricity Act in 2003, consumption by industry and agriculture reducedand domestic (residential) consumption grew.
Increased consumption: Power consumption is expected to increase from 668 billion unitsin 2010-11 to 1,100 billion units by the end of the Twelfth Plan. During the Twelfth Plan,capacities are expected to grow at a CAGR of 5.89%, leading to a 6.2% CAGR in generation.Consumption is expected to grow by a CAGR of 8% during the Twelfth Plan, primarily drivenby a higher growth of 9.5% in the commercial segment, 9.25% growth in the domestic(residential) segment, a healthy 8.5% CAGR in the industrial segment and 4% CAGR inagriculture. By 2017, these sectors are estimated to account for around 93% of totalconsumption in the country. Given the huge capacities expected to be commissioned invarious sectors in the economy, it is expected that around 50,000 MW capacities will beadded in the Eleventh Plan and around 75,000 MW in the Twelfth Plan. Road ahead Goingahead, the Central Electricity Regulatory Commission will undertake cogeneration measureslike generic tariff norms for cogeneration projects, norms and pricing framework forrenewable energy certificates (RECs) and amendment of grid code provisions. The StateElectricity Regulatory Commissions took proactive measures like increased cogenerationtariffs, permitting third-party sales, allowing coal use in the off-season and powerofftake at preferential rates.
As part of its National Action Plan for Climate Control, the Government of India setthe share of renewable energy in the overall energy procurement of utilities at 10%(minimum) by 2015 and 15% (minimum) by 2020. Even under the conservative assumption thatthe mandatory renewable energy portfolio obligation for utilities accounts for 6% of theiroverall energy requirement by 2014-15 and that cogeneration contributes to its currentshare (8%) of the total renewable energy available, the additional cogeneration capacityrequirement increases from 1,854 MW as on January 2012 to 3175 MW in 2014-15.
Indian ethanol sector
India is the world's fourth-largest petroleum consumer; 80% of the country's oilconsumption is addressed through petroleum and petroleum product imports. In order toenhance the country's energy security, the government mandated the blending of 5% ethanolwith petrol in nine states and four Union Territories in 2003 and subsequently mandated 5%ethanol blending with petrol in 20 states and eight Union Territories in November 2006 onan all-India basis (except a few North-East states and Jammu & Kashmir). TheGovernment of India approved the National Policy on Biofuels on December 24, 2009, whichproposed a target of 20% blending of biofuel for bio-diesel and bio-ethanol by 2017.
India has 330 distilleries, which produce over 4 billion litres of rectified spirit(alcohol) a year. Of the total distilleries, about 120 distilleries have the capacity todistillate 1.8 billion litres (an additional annual ethanol production capacity of 365million litres was built up in the last three years) of conventional ethanol per year andmeet the demand for 5% blending with petrol.
Presently, the Ministry of Petroleum and Natural Gas has not been able to implementcompulsory blending of 5% ethanol in petrol (gasoline) due to a disagreement betweendifferent ministries over the compulsory 5% ethanol blending programme in addition to adisagreement over the EBP and interests of potable liquor and chemical makers.
Ethanol production and distribution (million litres)
| || |
|Opening stock || ||747 ||1,396 ||1,673 ||1,283 ||1,085 ||999 |
|Production ||1,488938 ||2,398 ||2,150 ||1,073 ||1,435 ||1,934 ||2,130 |
|Imports || ||15 ||70 ||320 ||150 ||50 ||100 |
|Total supply ||2,410 ||3,160 ||3,616 ||3,066 ||2,868 ||3,069 ||3,229 |
|Exports || || || || || ||10 ||10 |
|Consumption: || || || || || || || |
| Industrial use || ||650 ||700 ||700 ||720 ||750 ||775 |
| Potable liquor || ||800 ||850 ||880 || ||950 ||1,010 |
| Blended petrol || ||200 ||280 ||100 ||50 ||250 ||300 |
| Other use || || || || || ||110 ||110 |
|Total consumption ||1,639 ||1,750 ||1,940 ||1,780 ||1,780 ||2,060 ||2,195 |
|Ending stocks || ||1,396 ||1,673 ||1,283 ||1,085 ||999 ||1,024 |
|Total distribution ||2,410 ||3,160 ||3,616 ||3,066 ||2,868 ||3,069 ||3,229 |
(Source: FAS/New Delhi)
Production: Total ethanol production increased from 1,435 million litres in 2009- 10 to1,934 million litres in 2010- 11 on account of higher sugarcane and sugar production. In2009-10, short supplies of sugar molasses constrained ethanol production and consequenthigher prices made it unviable to supply ethanol to petroleum companies at negotiatedprices. But with higher sugarcane and sugar production in 2011- 12, the estimated ethanolproduction is pegged at 2,130 million litres and the government is likely to renew itsfocus and strongly implement mandatory 5% ethanol blending in petrol. It is expected thatthe government will raise ethanol prices from Rs. 27 per litre, which could providesupplementary income to distilleries and ensure farmers a better sugarcane price.
Consumption: Ethanol consumption increased from 1,780 million litres in 2009- 10 to2,010 million litres in 2010- 11, owing to improved molasses supply and steady ethanoldemand from competing industries. During 2009-10, better ethanol market prices wereattractive for suppliers to divert their supplies from the government-mandated ethanolblending programme. With improving ethanol demand across the chemical, potable liquor andEBP segments, total ethanol consumption is expected to rise to more than 2,095 millionlitres in 201112. The oil manufacturing companies floated tenders to purchase 1,010million litres of ethanol in 2011-12 from the sugar industry for blending, whereas sugarmillers agreed to supply 600 million litres, providing room for more growth.
Ethanol blending programme - Fact file
|OCTOBER 2002 ||Government decides on petrol-ethanol blending but does not make it mandatory |
|OCTOBER 2007 ||Government makes blending of 5% ethanol in petrol mandatory at Rs. 21.50 a litre ex-factory which leads to a protest by petroleum and chemicals ministry |
|NOVEMBER 2009 ||Government fixes procurement price of ethanol at Rs. 27 per litre |
|AUGUST 2010 ||Cabinet committee on Economic Affairs appoints panel of experts under Chaudhuri Committee, Planning Commission for price revision of ethanol |
|MARCH 2011 ||Chaudhuri Committee gives its report, suggesting a formula linking the ethanol price with prevailing petrol prices. The recommendations are added in National Bio-Fuel Policy; sugar mills offer 610 million litres of ethanol but supply finalised for only 580 million litres and OMCs finally contract for 470 million litres |
|JANUARY 2012 ||OMCs float tenders for 1,010 million litres, but the industry agreed to supply only 600 million litres and demands an ethanol price revision |
(Source: Business Standard, 30 March, 2012)
Why India must push for ethanol-blended petrol
Petroleum is a precious natural resource; India and China will account for 45%of the increase in global primary energy demand by 2030
India's expenditure on import of petroleum products in 2010-11 is estimated atover US$ 110 billion, almost five times the value in 2003-04
India meets 80% of its total oil consumption through imports as a result ofwhich its petroleum consumption has gone up from 91 MT in 1998-99 to an estimated 142 MTin 2010-11
India is the world's fourth-largest ethanol producer; its production couldpotentially leave sugar prices unaffected
As per a report by Institute of Defence Studies and Analysis, around 80 millionlitres of petrol could be saved annually by blending petrol with 10% biofuel
The on-road vehicle population in India in the last five years increased from 49million to 65 million vehicles in 2009 and is expected to cross 120 million by 2015, whichwill propel the consumption of oil and petroleum