MANAGEMENT DISCUSSION AND ANALYSIS REPORT
During the 2011-12 period the domestic sugar industry continued to struggle with highcane cost and low sugar prices due to surplus production. Cane price for the last twoseasons were highly remunerative to farmers. Lower yields and low sugar recovery remain amajor concern in Western UP.
The Government of India (GOI) has taken various steps to manage the surplus productionby allowing export under open general license (OGL) from December 2010 onwards byintroducing mill wise quota for OGL exports but dismantled this facility in May 2012. Thiswas then replaced by Registration Certificate to be issued by Directorate General ofForeign Trade (DGFT).
The year 2011-12 world sugar recorded a second consecutive year of surplus productiondespite a decrease in production in Brazil. India, Australia and China are amongst othermajor sugar producing countries which surpassed their production of season 2010-11.However the fall in Brazil sugar production provided an opportunity to Indian companies toexport sugar and with regular exports, the sugar closing stocks in the country haveremained steady. Indian exports for 2011-12 stood at 35LMT. The levy sugar obligationcontinues at 10% for the season 2011-12. Quarterly release mechanism has been introducedin place of monthly release from April 2012 for non levy sugar.
The Government has constituted an expert committee for deregulation of the Sugar sectorunder the chairmanship of Dr. C. Rangarajan. The committee in its draft report hasrecommended complete liberalisation of the sugar industry, abolition of levy sugar,dismantling the release mechanism and freeing the export / import of sugar. The committeehas also suggested that the Fair and Remunerative price (FRP) be taken as base forsugarcane throughout the country with profit sharing mechanism for farmers.
Indian sugar outlook for season 2012-13 looks promising. Though the cane area hasincreased by 4%, sugar production will take a hit due to drought in Maharashtra &Karnataka and insufficient rain in other sugar producing states in South India. The allIndia sugar production is expected to be 23.5 to 24 Million MT, enough to meet thedomestic demand. There could be some threat of sugar imports. The GOI has imposed 10%custom duty on raw sugar and white sugar imports. Industry has represented not to reducecustom duty on raw sugar and increase duty on white sugar from 10% to 20%.
The Ethanol program is moving forward and the price of ethanol are expected to improvein view of increasing petroleum and cane prices. The fixation of revised ethanol price bypetroleum companies is awaited.
CHLOR ALKALI DIVISION
Industry Structure and Development
The Chlor-Alkali is a basic heavy Chemical Industry comprising products such as Causticsoda, Chlorine, Hydrogen and Hydrochloric acid. These products are basic building blocksin the Chemical processing industry and are used in diverse industrial sectors, either asraw materials or intermediate or auxiliary chemicals. Some of the major industries wherethe Chlor-Alkali products used are as under:
|Chlor Alkali Products ||Product Usage Industries |
|Caustic Soda ||Aluminium, Pulp & Paper, Textile, Soap, Edible Oil Refineries, Dyes & Chemicals, Drugs & Drug Intermediates, Thermal Power Plants etc. |
|Chlorine ||PVC, CPW, Pulp & Paper, Pesticides, Chloromethanes, Refrigerant Gases, Water purification, Stable Bleaching Powder, Aluminium Chloride, Chlorinated Solvents etc. |
|Hydrochloric Acid ||Steel Pickling, Water Treatment, Effluent Treatment in Chemical Process industries, Thermal Power Plants |
|Hydrogen ||Hydrogenated Vegetable Oils, Sorbitol, Stearic Acid, Pesticides, Filament Lamps, Picture tubes, Steel units, Power Plants ( in Turbo cooling), etc. |
The Chlor-Alkali sector plays an important role in the overall development of theeconomy. It contributes immensely to the manufacturing sector and to the external trade ofthe country. The Chlor-Alkali industry is thus a sector providing inputs to a large numberof other end user industries and the demand of its products is linked to the performanceof the end user products of these industries.
B) Industry Size
In India, during the year 2011-12, there were a total of 34 Caustic Soda plants inoperation. The installed capacity of Caustic Soda industry in the Country was 3.25 MillionMT in 2010-11, which declined during 2011-12 by about 1.20 Lac MT i.e. 3.7% mainly becauseof deletion of idle capacities lying closed
During the year, the domestic production was 2.56 Million MT Caustic Soda representing82% utilization of the installed capacity. The industry recorded a production growth of 4%during the year 2011-12. The total demand of Caustic Soda was 2.70 Million MT, which grewby 4.9% over the previous year. The growth in demand for Caustic soda and Chlorine islinked to GDP growth. The growth in Chlorine has been slow compared to Caustic soda.
The Caustic soda production and capacity utilization for last five years is as follows:
|Year ||2007-08 ||2008-09 ||2009-10 ||2010-11 ||2011-12 |
|Capacity Utilisation % ||83.3 ||76.7 ||74.3 ||75.7 ||81.8 |
|Production (Million MT) ||2.16 ||2.20 ||2.33 ||2.46 ||2.56 |
C) Market Scenario and Outlook
During the year 2011-12, with recession in the global economy looming once again, thedemand of Chlorine in the Vinyl and PVC segments in US and Europe has been sluggishcausing the prices of Chlorine derivatives to decline sharply in the internationalmarkets. The lower demand in Chlorine compared to Caustic Soda has led to production cutsof Chlor Alkali Units, thus affecting supplies of Caustic Soda, resulting in its pricesgetting firmed up.. On the other hand Chlorine prices have gone down to abysmally lowlevels. It is likely that Caustic prices will remain at the same levels due to no signs ofrecovery in Chlorine derivatives market.
In the year 2012-13, the domestic consumption of Caustic Soda is expected to reach28.35 Lacs MT. Overall Production would be largely governed by the demand growth inChlorine. The limitation in lower demand of Chlorine compared to Caustic Soda wouldrequire Caustic Soda requirement to be met through imports.
The coming year on Indian market looks to be strong as prices of Caustic Soda arelikely to sustain due to lower demand of Chlorine in the domestic market. The demand forCaustic will be driven by higher consumption from the key consuming industries such asAluminium, Paper and Pulp, Fibre, Soaps etc. Due to low prices of EDC in the internationalmarkets, PVC manufacturers in the country prefer to import EDC rather than manufacturingEDC by sourcing Chlorine from the domestic markets. The Chlorine markets are thus likelyto remain depressed because of lack of support from the EDC / PVC manufacturers
D) Risks and Concerns
The increasing energy cost will remain cause of concern for the industry in the comingyear, which shall increase the cost of production. In addition, increase in Power WheelingCharges, increasing demand of the industries to draw power through open access, expansionof installed capacities in the domestic caustic industry, cheaper imports of Caustic Soda,installation of Caustic Soda Recovery Plants in the Paper Units, replacement of Chlorinewith Chlorine dioxide / ECF bleaching process and increase in Logistics costs shall beother areas of concern in the coming year. Chlorine prices in the North will remain underpressure, as demand is limited, with CPW and Paper as the only major segments utilizingChlorine.
E) SWOT ANALYSIS
Sugar units located in sugarcane rich belt of Western U.P.
Important contributor to Indias socio-economic growth
Integrated sugar plants producing industrial alcohol, ethanol and supplyingelectricity to state grid
Product offering multiple varieties of specialty sugar including pharmaceuticalgrade sugar.
Industry de-regulation, which could led to balanced sugar production and caneprices;
Maintaining cane quality by varietal change, cane development program and multicropping.
Flexibility in facilities produces sugar from raw sugar in case sugarcaneavailability is low.
Facilities can offer high quality specialty as per the specific qualityrequirements of high end consumers and exports
Cyclical nature of sugar industry
Industry highly regulated by Government
Deterioration of cane quality in Western UP has resulted in lower recoveries.
Unfavourable climatic conditions have impacts on sugarcane growth and theiravailability
Lower cane availability in the event of farmers shifting their preferencetowards planting other crops;
Unfavourable Government regulations towards cane pricing, levy purchase andexports.
International markets impact domestic operations
INTERNAL CONTROL SYSTEM AND THEIR ADEQUACY
Commensurate with the size and nature of its business, your company has proper systemsof internal controls which ensure acceptable utilization of resources and reliablefinancial reporting. Your company has a well defined comprehensive organization structure,authority levels and internal rules and regulations.
Extensive use of SAP and other software systems have also resulted in strengthening theinternal controls and accurate reporting of operational and financial data.
The H R vision of your company is committed to organizational excellence by inspiringand developing the potential of people and providing them opportunities for growth.Training and learning initiatives aim at upgrading the competencies and fostering aclimate of creativity and innovation. Your company continuously evolves policies andprocesses to attract and retain its pool of technical and management resources through afriendly work environment that encourages individual and learn initiatives.
Relations between the employees and management have remained cordial during the periodof the report.