Export duty unlikely to have any significant negative impact on prices and profitability of sugar mills in the near term: ICRA
June 21, 2016: In ICRA’s view export duty is unlikely to have any significant negative impact on the prices or profitability of sugar mills in the near-term, says ICRA in its latest release.
The Food and Consumer affairs (FCA) ministry has implemented a 20 per cent duty on exports with an aim of checking the rise in domestic sugar prices by discouraging exports and thus maintaining adequate domestic sugar supplies.
According to Mr. Sabyasachi Majumdar, Sr.VP, Co-head, Corporate Sector Ratings, “Currently, domestic sugar realisations (at around Rs. 35,000 per MT in Northern India and Rs. 33,000 per MT in Southern and Western India) are already higher as compared to current export realisations (estimated at around Rs. 32,000 per MT for shore based players at a current international sugar prices of USD 500 per MT), even without the impact of export duty. Further, with domestic consumption (at around 25.5 million MT) likely to be higher than the domestic production (25.2 million MT) for SY2016, marketability of domestic sugar is also unlikely to be a challenge. Thus, it is unlikely that domestic sugar mills would have been exporting any significant quantities of sugar even without this additional duty. However, this imposition may dampen prospects of further price rise, first by discouraging additional exports (which can result in price rise in a tight market scenario) and second, by demonstrating government intent to restrain price rise.”
Consecutive years of surplus domestic sugar production since SY2013 had caused a surplus in the domestic sugar market, with stocks increasing to ~9.5 million MT by September 2015 (around 4.6 months of consumption), as against a preferred norm of 3-4 months stock position. This coupled with the international sugar surplus scenario and muted international sugar prices had led to sugar price reaching a three-year low of Rs. 23,000/MT in July 2015. This in turn had resulted to significant losses for most sugar mills which in turn resulted in stagnation in cane prices and build up of cane dues to farmers.
Against this backdrop, in December 2015, the union government fixed a mandatory sugar export quota for all the sugar mills in the country for SY2016 season, linking it with availing a subsidy of Rs. 45/MT for payment of sugarcane, in order to relieve the sugar industry from the distress scenario. In the initial months following the notification of this scheme, the sugar mills started exporting sugar to avail of this aforementioned benefit as well as relieve themselves of the excess stock. Thus, by May 2016, the country had exported almost 1.6 million MT sugar. This was also helped by the fact that during the aforementioned period, the international sugar prices were on an upswing with the international white sugar prices increasing from USD 410/MT to USD 480/MT in the same period. It is noteworthy that with unfavourable weather leading to erosion in sugar production in recent months across major suppliers (primarily Brazil, India and Thailand), and the resultant expectations of a global deficit in 2015-16 after five consecutive years of sugar surplus, there was been a rebound in international sugar prices during January 2016 after a period of over five years. After a marginal decline in February, the price uptrend continued during the months of March and April, following expectations of decline in sugar output for 2016 from all the leading producers. There has also been a significant rise in international prices in May and June 2016.
Parallelly, however, there was also a significant upswing in domestic sugar prices from Rs. 27000/MT to Rs. 34000/MT in the same period. This price rise was driven mainly by expectations of substantial stock correction during SY2016, which itself was driven by both drought induced lower production; as well as the aforementioned exports themselves. Thus, by the month of March 2016, the domestic sugar realisations had reached a level which was higher than the export realisations and the resultant export benefits. Thus, sugar exports had dwindled to a trickle by May 2016 itself. Further, the GoI itself revoked the Rs. 45/MT cane incentive during May 2016.
At the current level of domestic and international sugar prices, exports are uncompetitive vis-a-vis domestic sales for most sugar mills, especially for those based in Northern India, which have an additional freight disadvantage of Rs. 1000-1500/MT vis-a-vis mills located closer to the shore in Southern and Western India. For instance, for Western and Southern Indian mills ex-mill realisation based on current prices even without export duty is Rs. 32,400/MT, while domestic sugar realisation for these mills is Rs. 33,500/MT and for UP based mills ex-mill realization without export duty is Rs. 31,000/MT vis-a-vis domestic sugar realization at Rs. 35,000/MT.
