Tight sugar supply keeps prices firm, ethanol margins under pressure: Ind-Ra
Sugar prices in India are expected to stay firm due to tight inventories, according to India Ratings and Research. However, ethanol producers face margin pressure from oversupply and stagnant prices, with slower demand growth and rising cane costs creating challenges, especially for cane-based distilleries despite improved outlook for grain-based producers.
Pune: Sugar prices are likely to remain strong in the coming months due to limited stock levels, while ethanol producers may continue to face financial pressure because of excess supply, according to a report by rating agency Ind-Ra, The Economic Times reported.
The agency said that India’s sugar sector is moving into a phase where lower inventories, despite a slight improvement in production, are expected to support prices. However, ethanol producers are dealing with shrinking returns as supply continues to outpace demand. Even with some recovery, sugar output has not met earlier expectations, and the ethanol sector is facing an imbalance between rising production capacity and slower demand growth.
The report noted that sugar producers are under strain as cane costs rise but sugar prices have not increased at the same pace. It added that clear government policy on ethanol will be important for the sector’s stability. Although ethanol prices are not directly linked to crude oil, higher global oil prices could still make ethanol more important as an alternative fuel.
Exports are also expected to remain below the allowed limit of 2 million tonnes due to weak global prices and limited domestic supply. As a result, closing stock levels are likely to stay near 5 million tonnes, slightly below normal levels, which may continue to support domestic prices.
Higher cane prices are expected to increase sugar production costs in the coming seasons, but firm sugar prices and improved recovery rates may partly offset this impact. The report also pointed out that if crude oil prices remain high due to tensions in the Middle East, mills in Brazil may divert more cane toward ethanol production, which could support global sugar prices. However, exporters may face higher transport costs and logistical challenges.
On the ethanol side, producers using sugarcane are likely to see continued pressure on margins due to unchanged ethanol prices. In contrast, grain-based distilleries are benefiting from lower raw material costs. Increased production of by-products such as DDGS has provided a cheaper option for animal feed, while a record maize harvest has pushed prices down, improving returns for grain-based producers.
The report highlighted that ethanol demand growth in India is slowing as the country approaches its 20% blending target. At the same time, production capacity, especially in grain-based units, has expanded rapidly, leading to excess supply.
India’s ethanol demand, which grew sharply in recent years, is expected to slow further due to limitations such as vehicle compatibility. The report added that surplus production makes price increases unlikely in the near term. It also noted that imports of DDGS under the India-US trade agreement could add to supply and keep maize prices low, further supporting grain-based distilleries.
Meanwhile, sugarcane-based ethanol producers are expected to remain under pressure, as rising cane costs have not been matched by higher ethanol prices over the past three years. Without clear policy support for higher blending levels or alternative uses, both capacity utilisation and profitability in this segment are unlikely to improve significantly, the agency said.
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Source : Chinimandi
