INDIA: Switch to ethanol less likely as sugar drops
Published: 07/02/2009, 4:16:22 PM
Despite rising crude oil prices, Indian refiners may not be able to switch to increased use of ethanol because of a plunge in sugar output to a four-year low, according to Dow Jones.
Refined sugar prices in the country have risen almost 70% in the current crop year that began Oct. 1 as output fell to 14.7 million metric tonnes compared with the record of 28.5 million tonnes clocked in 2006/07. Production next year may be lower than an industry estimate of 20 million tonnes.
In contrast, ethanol prices are fixed by the government, giving millers little scope to earn margins that they are currently enjoying on sugar. The scenario is unlikely to improve soon because the fall in output this year may deplete the country's stocks, keeping the sweetener's prices high and, dashing attempts by the government and oil companies to curb consumption of regular gasoline at a time when crude oil costs rise.
"Even if you see a marginal improvement in production next season, sugar prices are not going to come down as the carry over stocks will be lower and millers will prefer to produce more sugar than ethanol," said Sridhar Chandrasekhar, head of CRISIL Research, a unit of Standard & Poor's.
The country has a capacity to produce about 2,200 million litres a year of ethanol, according to the Indian Sugar Mills Association.
Of the total, the chemical industry consumes around 650 million litres, the liquor industry another 750 million litres while demand for ethanol is about 800 million litres.
So far, Indian refining companies weren't too keen on using ethanol as oil prices had fell more than US$100 a barrel, but the situation has changed now, said Sanjay Tapriya, director of finance, Simbhaoli Sugar Mills Ltd.
Ethanol usage becomes profitable if the oil prices rise above US$55-US$60, he added.
Recovering crude oil prices prompted Hindustan Petroleum Corp., one of the nation's biggest state-run refiners, to plan restarting two of its closed sugar mills in eastern India at a cost of INR6.14 billion to produce ethanol.
Crude oil prices have increased about 60% to US$71 since January. India, Asia's third-largest oil consumer, imports about 75% of its requirement oil, and spends billions of dollars in subsidies to keep retail rates affordable.
"If you look at crude oil, it's again posing a threat. People will againstart moving towards alternative fuels," said Harish Galipelli, head of research at Karvy Comtrade Ltd.
Demand for ethanol will again revive if oil prices continue to rise, Galipelli said.