Indian Sugar Mills Look To Emulate Brazilian Peers In Switch To Ethanol

The distillery businesses of Indian sugar mills, according to exchange filings, grew between 11% and 75% over a year earlier in the quarter ended June. Commentary by companies for the first quarter indicate that the trend will sustain.

Balrampur Chini Mills Ltd. expects to increase ethanol sales in the ongoing ethanol year (December 2019-November 2020) by nearly 23% year-on-year to 15-16 crore litres, according to Pramod Patwari, its chief financial officer. Its target for the next ethanol year (December 2020 to November 2021) is 17-18 crore litres.

In 1975, the Brazilian government launched the National Alcohol Programme (Pro-Alcool) to widen use of ethanol as a substitute for gasoline. It gradually increased targets for percentage of ethanol to be blended with gasoline, giving producers and consumers time to adapt. As ethanol production was tied to the sugar industry, producers could respond to fluctuating market prices by switching between the two commodities.

Indian sugar mills have managed to supply a little under a billion litres of ethanol to oil marketers during the ongoing ethanol supply year. “Ethanol supply contracts for 170 crore litres have been entered into between ethanol manufacturers/sugar mills and oil marketing companies for the current ethanol supply year (Dec-Nov) 2019-20,” the industry body ISMA said. “Against this, 92.5 crore litres of ethanol have already been supplied to oil marketers between Dec. 1, 2019, and June 22, 2020, achieving an average all-India blending of 5.09% with petrol till then.”

This offers a huge scope of growth for Indian sugar producers, considering that the average ethanol blending in Brazil stands at excess of 40%.

The Government of India, as part of its National Policy on Biofuels-2018, aims to achieve a 20% blending of ethanol in petrol and 5% blending of bio-diesel in diesel by 2030. In September 2018, the government for the first time allowed sugar mills to produce ethanol from B-Heavy molasses and directly from sugarcane juice.

Sugar companies have been focusing more on ethanol but emphasis could be even greater as the pandemic hurt demand for sugar. “Industrial demand for sugar, which accounts for 60% of total domestic consumption, is expected to fall 8-9% in the ongoing sugar season due to hotels, restaurants and cafes remaining shut and people avoiding crowded places.” Crisil said in its latest report, adding that household consumption is expected to slip by 2-3%.

But demand for ethanol in the oil market has steadily increased.

Earlier this month, Bharat Petroleum Corp. Ltd., Hindustan Petroleum Corp. Ltd. and Indian Oil Corp. Ltd. issued a five-year ethanol tender along with an indicative quantity of the alcohol they intend to procure in each year. That, according to Elara Capital, is a major positive for the sugar industry as it provides them with long-term demand visibility. “Until last year, oil marketers issued tenders valid only for one year,” the brokerage said in a report.

Realisations, however, will be subject to procurement price fixed by the government at the start of the year. But even at prevailing prices, producing ethanol is lucrative for the industry.

The Economics Of Sugar

Typically, a litre of ethanol is produced from 1.6 kilograms of sugarcane. This is also known as the conversion rate. The price of ethanol produced from a kilogram of cane is realisation.

Sugar is typically extracted in three stages: the residue from the first stage is processed further to extract sugar. The resultant residue, known as B-heavy molasses, has higher sucrose content, which can be further processed to extract sugar. This leaves behind a residue known as C-heavy molasses that can be processed to sugar as well.

Ethanol is a relatively stable business as the government fixes its procurement price before every sugar season. Producing more ethanol will result in higher cash flows for mills with distillery, which in turn would curb the issue of cane arrears, according to Stewart and Mackertich.

Still, clarity in procurement prices would be key for India to develop a robust ethanol economy, according to Tarun Sawhney, vice chairman and managing director of Triveni Engineering & Industries Ltd., said during a post-earnings call with analysts for the first quarter. “The bigger decision is to set up large capacities to process sugarcane juice, which will be many times the size of distilleries that exist today, similar to Brazil, and will be considered only when we have a long-term pricing and supply policy in place.”

Sawhney said this is on the government’s agenda. “There have been committees set up and it has been looked at very closely because of two key reasons,” he said. “Firstly, ethanol is a perfect fit under the Atmanirbhar Bharat programme, and secondly from an energy security point, it’s very crucial.”

In order to tackle falling realisation for sugar mills, the government announced a minimum support price for sugar for the first time in 2018 at Rs 29 per kg which was revised to Rs 31 per kg a year later. It may hike that to Rs 33 a kg soon, boosting profitability of sugar mills in the second half of ongoing fiscal, India Ratings & Research said, citing media reports. “It also has a potential to increase the cash flows of sugar mills by around Rs 50 billion.”