- Indian sugar industry cycles
- Ethanol production in India
Sugar is one of the major agricultural commodities produced around the world. It is an essential consumer staple and forms a part of the daily dietary intake for consumers around the globe. The overall consumption demand for sugar has a large base and is spread across the world with the average per capita sugar consumption standing at ~24 kg in 2017. The Indian sugar industry is a critical part of the global landscape as the nation is the largest consumer and the second largest producer of sugar. The sugar industry in India has shown a high level of cyclicality during the last decade due to volatile cycles of sugar production.
Indian sugar industry cycles
The Indian sugar production has been volatile over 2008-17 as stated above, which led to periods of supply shortages and gluts in the country. The consumption demand has been growing steadily during the period and stock levels in the country are maintained at a minimum of three months of consumption, in light of the seasonal crushing of sugar. The industry has followed a cyclical pattern due to the yearly fluctuations in sugar cane production. Moreover, prior to the marketing year 2018, the utilisation of sugar cane in India was only permitted for the production of sugar, jaggery and other forms of unprocessed sugar. Other sugar cane derivatives like ethanol could only be produced from the conventional C heavy molasses (C heavy molasses are leftover once all the available sugar has been derived from the cane juice). This forced sugar mills to utilise all of the available sugar cane produced in the country after the allocation towards the other unprocessed sugar forms for the production of sugar, irrespective of the demand-supply balance in the domestic market.
Televisory observed that the volatility in sugar supply has emerged from the fluctuation in sugar cane production. India has been increasing the FRP (Fair and Remunerative Price) for sugar cane every year since the marketing year 2008. This has provided an incentive for farmers to allocate a growing acreage towards sugar cane over the years. A higher level of sugar cane production has also supported in an improvement of sugar cane yield per hectare. One-off years of declining production is mostly linked to the weak rainfall in that particular year. Overall, sugar cane production levels have seen a rising trend during the last decade.
It was due to constraints on sugar mills, periods of high production levels of sugar cane such as 2012-15 that led to an oversupply of sugar in the domestic market, which caused price realizations to decline. Under this environment, the total available domestic supply of sugar exceeded the domestic consumption demand. In such periods, the government permits the export of sugar to reduce the oversupply situation in the country. This tends to reverse during years of weak sugar cane yields which results in a production shortfall. The situation was observed in the marketing year 2016/17, wherein a 10% fall in sugar cane production squeezed the availability of cane for sugar mills and caused a sugar supply shortfall, which led to a fall in the sugar inventory levels in the country. However, the periods of supply shortfalls tend to be short-lived as the recovery in sugar cane production leads to a bounce back in sugar supply. Thus, the growing base of supply of sugar cane in India created a general tendency of burgeoning supply of sugar as mills had no alternative for the utilisation of the excess sugar cane availability.
Ethanol production in India
The demand for ethanol emerges from three major sources that are fuel blending, potable liquor and industrial uses. Indian sugar mills control ~75% of the total ethanol production capacity and ethanol production largely takes place by the use of C heavy molasses. Further, the growing sugar production in India during the period of 2009-17 led to high utilisation levels for the prevalent ethanol capacity due to the robust and growing demand.
The Indian government targeted an ethanol blending rate of 20% with gasoline by 2017, this was through a policy introduced in 2009. However, this was not achieved due to the low base of production capacity and competing ethanol demand from other industries. The blending rates have been growing steadily due to the higher ethanol production but have not been able to cross the 3.5% blending rate since the implementation of the policy.
Our analysis shows that the biggest impetus to achieving the targeted blending rate were the constraints put on sugar mills to use only C heavy molasses for ethanol production as it results in a lower production volume of ethanol.
Structural changes in the Indian sugar industry
The government of India introduced a new National Biofuels Policy in 2018. This policy is expected to lead to a change in the current operating dynamics of the sugar industry. The Indian government has targeted a blending of 20% ethanol with gasoline by 2030. In order to help ensure sufficient supply of ethanol; the policy has allowed for the production of ethanol made directly from raw sugar cane juice and the intermediary B heavy molasses (B heavy molasses are derived once the available sugar has been partially removed from the cane juice and has a higher sugar content than C heavy molasses). The government has also hiked the purchase price of ethanol made from these sources by ~25%. Furthermore, the sugar industry has been provided with a soft loan package with a moratorium on interest for a year to ramp up production capacity of ethanol going forward. Televisory expect this to change the current operating dynamics of the sugar industry.
The total estimated fuel ethanol demand going forward is seen at more than seven billion litres for achieving the target of 20% blending rate on the current base of gasoline/petrol consumption. The demand for ethanol from other industrial uses and potable alcohol is also seen rising in the medium-term. Hence, in order to help achieve this robust potential demand for ethanol, Televisory foresee a large diversion of sugar cane availability in India towards ethanol production, with the use of B heavy molasses and cane juice as the raw material feedstock.
Addedly, using B heavy molasses in place of the conventional C heavy molasses results in decline of sugar production by ~15%, while this boost ethanol production by ~80% due to higher sugar content in B heavy molasses. On the other hand, using cane juice (A heavy molasses) directly increases ethanol production by ~7 times relative to C heavy molasses, while no sugar is generated by the use of this route. The US Department of Agriculture estimates that Indian production of ethanol is to rise by ~52% in 2018 on the back of the changes that have occurred due to this policy.
Televisory expect that this policy will have two significant effects on the sugar industry’s dynamics:
1. Cyclicality in the sugar industry to reduce significantly going forward
This policy is expected to enable sugar mills to plan their production mix of sugar and ethanol based on the demand-supply equations in the market. Mills will be able to reduce their sugar production during the time of excessive sugar cane production while using the available cane supply as these can now transfer cane juice and B heavy molasses directly for ethanol production. Going forward, ethanol capacity additions in line with the new policy will help soak up incremental growth in the sugar cane production. Televisory expect these factors to help build a balance in the Indian sugar market. In the long-term, the new production choice mixes available to sugar mills will help reduce periods of excessive sugar supply in magnitude, thereby, reducing the cyclicality of the Indian sugar industry.
2. Indian sugar production to come in line with the global sugar industry demand-supply dynamics
The Indian sugar industry followed an independent cycle from the global industry as sugar production was dependent on the volume of sugar cane production in a particular year. However, Indian sugar mills will now be able to follow the production planning cycle of the Brazilian sugar industry, which focuses on the global demand-supply dynamics in the sugar industry and plan their sugar and ethanol production mix accordingly. Indian sugar mills can now factor in the relative profitability of the two products while planning their production. In the long-term, global prices are expected to play a key role in determining sugar production levels in India, as the country may be willing to allow sugar imports during periods of global excess in production and low prices, in order to enable higher volumes of ethanol production that will help it to cut down on its rapidly growing crude oil import bill. However, this will depend on the relative pricing dynamics at a juncture in the future. Going forward, we can expect that the Indian sugar industry will keep its sugar production cycle in sync with the global demand-supply dynamics.
In the future, Televisory expect this new policy to lead to a structural change in the Indian sugar industry as sugar mills will now be able to curb sugar supplies during periods of high sugar cane availability, which was not possible in the past. The diversion of sugar cane towards ethanol production will help the industry benefit from the strong growth in the ethanol demand. It is also expected that the industry will plan its sugar production in line with the global demand-supply dynamics, which would result in improved operational profitability and a reduced cyclicality in the Indian sugar industry.