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ICRA believes that exporting sugar will not be a remunerative one for millers in India. Its contention is that the prices of sugar have hit a low at the international level. The industry seeks government support if the targeted level of support exports should be met. The country has witnessed tremendous production growth in the sector, and the government is keen to promote exports. As a result, there is a threat of excess stock thus affecting the cash flow.
Higher Than Expected Production
Sugar prices have faced downside correction currently, according to Economic Times report. This is primarily because of a significantly higher than expected production in the domestic circuit for the sugar year 2018. The price of sugar has hit a low of Rs.28,500 a metric tonne in the current month. The government has allowed millers in March to export sugars to the tune of two million MT in the current year. This is under the government’s Minimum Indicative Export Quota (MIEQ) scheme. The government fixes this target based on the average production of the past two years and until February.
ICRA SVP and Group Head, Sabyasachi Majumdar, elaborated, “Domestic sugar production for SY2018 is set to cross 30 million MT, an increase of around 45% – 50%, from 20.3 million MT in the previous year. This has been driven principally by a recovery in production in Maharashtra, North Karnataka and Uttar Pradesh (UP). ICRA expects domestic sugar consumption to increase to around 25.0 million MT in SY2018 from 24.5 million MT in SY2017.”
Therefore, the ICRA thinks that the expected sugar production growth in SY2018 higher by a minimum of 5 million MT than the projected consumption. The rating agency thinks that sugar industry needs export incentives for successful implementation of MIEQ scheme. The SVP pointed out an export subsidy of Rs.4 a kg provided in the previous years like SY2015. Similarly, the millers were given a production subsidy of Rs.4.5 a kg in SY2016.
The rating agency pointed out that sugar prices in the international market are around $350 per MT. After providing for adjustments to transportation expenditures, sugar exports would fetch approximately Rs.18,000 – Rs.19,000 per MT. This is sharply lower than approximately Rs.9,000 – Rs.10,000 per MT in the current domestic market. As a result, sugar mills have refrained from exporting sugar fearing upfront losses.
Duty-Free Import Authorisation
The central government has allowed millers to export white sugar until September under a scheme of Duty-Free Import Authorization (DFIA). The scheme empowers exporters to import sugar within three-year period at zero duty. However, this does appear to be convincing the millers and want additional subsidies.
On the other hand, Majumdar pointed out the subsidy scheme that the Maharashtra government is planning to implement. According to it, the state establishment will offer a subsidy of Rs.5 a kg to export sugar. Another point is that even if the government target is met on sugar exports, there will still be excess sugar stock of about 1.5 – 2.0 million MT. However, the normative sugar stock is about 5.5 – 6.0 million MT. Therefore, ICRA thinks that sugar prices could witness improvement if MIEQ is implemented successfully.