Three of the leading sugar companies have lost 50% of their value since the beginning of 2020 and that is the situation across the board. Of course, part of this fall can be attributed to the COVID-19 pandemic hitting consumption but clearly there is more to it than meets the eye. So, what exactly is pressuring the sugar stocks in calendar year 2020?
Sugar glut continues to hit sugar prices
Over the last two years, the Indian sugar mills have tried to grapple with record stockpiles but with little success. Consider these numbers. In the current sugar cycle (October to September), the output is down by 20% due to weak monsoons and the late floods in Maharashtra hitting the sugar crop. Despite the sharp fall in output, the sugar prices continued to drop as the industry was already carrying stockpiles of 14.5 million tonnes from the previous year. Till the overhang of the stockpiles remains, the supply will continue to be a dampener on the price.
Although the supply and demand are estimated to be evenly matched in the current sugar cycle of 2019-20, the problem is the legacy stockpiles of sugar that has been brought forward. For example, the last two years alone generated a surplus of over 14 million tonnes of sugar. This glut of supply has led to sugar prices falling by nearly 30% since the beginning of the year.
The supply glut has also been driven by weak demand. For example, in March and April 2020, the sugar sales were lower on a YOY basis by nearly 1 million tonnes. That only exacerbates the problem of supply glut if the demand fails to keep pace and puts further pressure on prices. The sugar industry derives 65% of its total sales from the institutional segment, with beverage and FMCG companies being the largest consumers. However, both these segments were forced to either shut down or operate at below 50% capacity due to the logistical constraints. These combined to put pressure on institutional demand for sugar and that may take to recover.
Exports are yet to make a mark
Last year the government announced an export subsidy program worth $1 billion to encourage the export of sugar to other countries. However, despite the best efforts, the sugar exports are expected to grow from 4 million tonnes to around 6 million tonnes in the current sugar cycle. India is already the highest cost producer of sugar in the world and major sugar producers like Brazil and Thailand have protested against India’s sugar subsidy at the WTO. Also, one of the biggest applications of sugar globally is for production of ethanol. However, with global crude prices at around $25/bbl, there is little incentive for ethanol production.
COVID-19 could lead to credit deterioration for sugar mills
Institutional demand for sugar is likely to see the lag effect of COVID-19. Key sugar consumers like companies manufacturing beverages, soft drinks, confectioneries, bakeries, hotels etc are either shut or operating at low capacities. The COVID-19 is expected to hit domestic demand for sugar by up to 2 million tonnes in the current sugar cycle alone. Most OMCs have already hinted at lower ethanol off-take due to lower fuel demand in the last few months. Sugar companies carry debt of over Rs.11,000 crore and the demand compression is expected to enhance the financial risk in their balance sheets. As the funds crunch gets tighter, that could be the real worry for the sugar mills.