ETHANOL STORY & SUGAR STOCKS

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 ETHANOL STORY & SUGAR STOCKS

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• What is ethanol: Ethanol is a by-product of sugar mills and used to blend with Petrol. This not only makes petrol more environment-friendly, but substantially reduces India’s dependence on crude imports. That’s why the government is interested in it now.
• India’s sugar making companies: In April 2021, ‘Biofuels International’ highlighted how India’s ethanol blending had touched record levels of 7.2% in the first four months of 2021. Then the govt. announced a massive programme of touching 20% blend by 2023 itself, instead of 2025, which itself was pulled back from 2030 declared earlier.
• Ethanol blending policy: For a long time, India was conservative about ethanol blending, since sugar was politically sensitive. But with a global glut of sugar and India producing huge surpluses, exports (need to be subsided) and boosting ethanol blending in petrol are the two choices. India had set a target of 10% ethanol blending by 2022 and it appears to be on target for that. The big boost – a decision to advance the target date for 20% ethanol blending –implies a huge revenue and profit opportunity for sugar stocks which could roll out in the next one year.
• What ethanol blending may achieve: Experts say it can do a lot. It is estimated that ethanol production will facilitate the diversion of excess sugarcane and sugar to ethanol and help sugar mills deal with surplus stocks. Not only will farmers get their outstanding dues, but also a better price due to higher yields on ethanol. India currently depends on imports for 85% of oil needs. Boosting ethanol blending from the current 7% to 20% in next 2 years can reduce crude import dependence and improve trade deficit.
• Key points: CRISIL estimated that the combination of higher sugar exports (thanks to export subsidies) and higher ethanol blending could boost sugar operating margins by 100 bps to 14%.

1. The procurement price of Ethanol has been on a continuous rise due to the fact that it is also a matter of national priority. Hence, sugar mills will benefit from ethanol volumes and realizations. For FY21, the ethanol procurement sourced from molasses and sugarcane juice was up 5-6% yoy on an average.
2. In the current sugar season (Oct-20 to Sep-21) it is estimated that 20 lakh tonnes of sugar production will be diverted to ethanol manufacture. This would keep ethanol prices stable and curtail glut of sugar stocks. Ethanol incentives are set to continue.
3. The dip in Brazilian sugar production is expected to keep the prices of sugar and ethanol elevated globally. That is good news for sugar manufacturers as it ensures healthy profit margins on ethanol blending.
4. India’s ethanol production is 2% of global ethanol production, while its share of global sugar output is 17%. This imbalance needs to be rectified and that is likely to be the big opportunity for sugar companies to tap in the coming quarters.
5. India currently has ethanol capacity of 4.25 billion LPD. By 2022, onstream capacity will touch 5.25 billion LPD, which will enable 10% ethanol blending in fuel. However, to achieve 20% blending will need 10.50 billion LPD, which is a tough ask. {LPD – litres per day}

• OMCs will do the job: With crude at $70/bbl and petrol above Rs.100/litre, it opens a huge window for sugar companies to focus on ethanol. OMCs procured just 38cr litres of ethanol in SY2013-14 which is likely to scale 283cr litres in 2020-21. In value terms, the total ethanol bought by OMCs in SY2020-21 would be worth Rs.15,800cr.
• Fundamentally interesting: Ethanol does not need subsidy and government has to only keep its duty structure lower than sugar. That is logical considering its larger green implications. There is additional ethanol capacity coming onstream from DCM Shriram, Renuka Sugars, Godavari Biorefineries, Balrampur Chini etc. If ethanol blending takes off, it improves cash flows, clears farmer’s dues and improves the economics of sugar. That is the big difference ethanol can make!

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