Government steps in to boost India’s ethanol capacities during sugar surplus

A government decision to approve Rs. 2790 crore interest subvention for extending loan amount of around Rs. 12,900 crore by banks to India’s sugar mills for augmentation of ethanol distillery capacities is a positive given the oversupply conditions, ratings agency ICRA said.

The move is likely to address the current supply-demand imbalance over the medium term and thus improve the cash generation and liquidity of mills over the medium term while also helping meet the 10% blending target under the Ethanol Blending Programme (EBP).

“Higher ethanol manufacture remains critically dependent upon continuation of existing govt support to the industry in form of price support to ethanol, especially those manufactured from B molasses and sugarcane juice,” said Sabyasachi Majumdar, Senior Vice President & Group Head, ICRA Ratings.

This is because these sales are inherently less remunerative than sale of sugar in the domestic market. In this scenario, the diversion of sugarcane to manufacture of ethanol remains critical from the perspective of maintaining the profitability, liquidity and capital structure of sugar mills by correcting the supply-demand imbalance in the industry, he added.

ICRA positively notes that several large sugar mills have already announced plans to substantially enhance their ethanol manufacturing capacities. Also, ICRA estimates that in the current season itself around 0.5 million MT of reduction in sugar production is likely to be achieved by way of diversion of sugarcane juice and B-heavy molasses for sugar production.

As per the latest estimates, the domestic sugar production for SY 2018-19 is likely to be 30.7 million MT as against the earlier estimates of 31.5 million tonnes. This is after considering the diversion of ‘B’ heavy molasses and sugarcane juice from sugar into ethanol.

Notwithstanding this and estimates of growth in domestic sugar consumption by 2-3% to around 25.8 million tonnes in SY2019, the production would still be higher by at least 4.5 million tonnes than the estimated consumption.

The closing stocks are likely to remain high around 12 million tonnes given the high opening stocks of around 10.8 million tonnes from the previous season. Given the prevailing oversupply situation, the domestic sugar prices have also remained under pressure.

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