Need to produce less sugar, more ethanol: Experts

Keeping focus on ethanol right now SP Tulsian of sptulsian.com and M Manickam, MD of Sakthi Sugars, who suggests that we need to produce less sugar and produce more alcohol. Tulsian estimates that the season of 2008-09 will have a sugar production of 21 million tonne. That will give a production of about 200 crore litre of ethanol.

Excerpts from CNBC-TV18's exclusive interview with SP Tulsian and M Manickam:

Q: A question on demand-supply scenario on account of this increase in ethanol blending. The government has mandated about 10% by October 2008, 20% ethanol blending by about 2011, sugar supplies are expected to come under pressure in 2009. Are you going to see a major demand-supply mismatch in cane production now on account of this ethanol demand?

Tulsian: Definitely. Just a quick recap - 2007-08 the season, which will end this September, will have sugar production of about 26 million tonne. That will give ethanol production of about maybe 250 crore litre. Since we have about 80 crore litre of ethanol required for industrial purposes, 90 crore litre required for potable - for drinking purposes, so this season we have 80 crore litre of ethanol available for blending with petrol. The annual consumption of petrol in the country is about 1,600 crore litre, 5% of that is required of about 80 crore. That means 80 crore surplus of ethanol for this season will take care probably of my blending of 5% in petrol.

But season of 2008-09 is estimated to have a sugar production of 21 million tonne. That will give a production of about 200 crore litre of ethanol, which will definitely not be sufficient even to meet the 5% blending norm because no one can sacrifice for the industrial and drinking category that will be requiring about 170 crore litre. What we will be left with is 30-40 crore litre while 5% blending alone will require about 80 crore litre.

So suppose if I go for 10% blending, which is contemplated by the government from October 2008, that will require about 150 crore litre of ethanol. Where do you have that kind of ethanol because farmers have been moving away from sugarcane crop to other crop as sugarcane is a one-year crop, while they are moving to other crop, which can have two crops in a year. In fact there is a strong mismatch. You will not be having matching sugarcane production, which even will be sufficient for you to go for 5% blending from October 2008.

Q: Has the government even moved towards implementing the October 2008 deadline of lifting ethanol and blending? Do you see enough progress in that direction at least?

Manickam: I think almost all the states have implemented it except Tamil Nadu where we have a problem of supply. But most states where 5% is being blended and is being used at this point of time, I don’t see an issue on 10% either because what you need to do is produce less sugar and produce more alcohol which is we have to reduce the sugar production by 2 million and we have surplus sugar anyway. So I think we can reduce the sugar and produce more alcohol.

Q: Do you see any direction or any moves towards giving ethanol declared goods status?

Manickam: Not yet. It has been talked about but we have not heard anything on that count yet.

Q: But if that does happen do you see a material improvement in ethanol usage?

Manickam: To a certain extent there will be a good movement of stocks. In fact we have surplus stock available in Karnataka and possibly in Maharashtra, which can move across the country. We also have surplus distillation capacity available. I think if they have molasses moving, they will be able distill molasses wherever they can.

Q: There are three factors that have probably come to a head in 2009 according to what Mr. Tulsian has been saying. There could probably be less cane grown in the country, there would perhaps be an upward movement in international and domestic sugar prices and if crude prices continue the way they are or even remain where they are, the demand for ethanol could also increase. Do you see 2009 as an excellent sugar year? What kind of margins do you think you would be able to notch up compared to 2008?

Manickam: 2009 should be a good year, but I am scared to say that lest the government is listening to it and puts a dampener on the whole thing. But it should be a good year because of ethanol prices and oil prices going up. Internationally also we are finding that sugar prices are likely to firm up. So, it is looking like it is going to be a good year.

Q: As a stock picker, how would this issue pan out and what would you recommend?

Tulsian: My call is that probably from the season that will be starting from October 2008 and which will effectively last till March 2009 in Maharashtra and UP, probably there will be a lull on sugar stocks till September 2008, because right now for the next six months only the inventory would get sold by all the mills, those who have crushed. Definitely since the government is too keen on controlling inflation, if they see any price rise happening in sugar, there will be a free release mechanism. Right now there is ample stock in the system. You need to liquidate at least 4-5 million tonne from the system to get rid of the excess supply. So, I do not expect anything happening in the sector till October 2008. If somebody really wants to take a call probably the stock picking would only start happening from October to December 2008.




Link to the article: http://www.moneycontrol.com/india/news/business/need-to-produce-less-sugar-more-ethanol-experts/17/19/337330