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Indian sugar industry Industry review: The Indian sugar industry is the second largest agro processing industry

in India, accounting for 15% of the total world consumption. Indias average recovery rate at 10.27% is quite low in comparison with the international average. Uttar Pradesh, Maharashtra, Tamil Nadu, Karnataka, Punjab and Gujarat contribute more than 90% of the total domestic sugarcane production, while U.P. and Maharashtra each contributes 30% to total production. The Indian sugar industry is divided into the organised and unorganised sector with the former accounting for 20% of the total production. Sugar industry is a cyclical industry with two years of deficit followed by two years of surplus, influenced by the production of sugarcane. Stock/consumption ratio: The difference between production and consumption reduces inventory. The 8.1 million tonnes inventory level in sugar year 2008-09 is expected to decline to 3.6 million tonnes in sugar year 2009-10. The stock consumption ratio of around 63% in 2002-03 reduced to 36% in 2008-09 and is expected to decline to 15.7% in 2009-10. Current situation: Indian sugar mills faced a cane shortage in the 2008-09 sugar season (October 2008 to September 2009) and suspended their crushing operation twothree months ahead of schedule. The shortage emerged from farmers switching their crop pattern owing to lower realisations during the previous sugar season and a yield decline from around 40 tonnes per acre to 25-30 tonnes. As a result, Indias sugar production is likely to decline to 16.5 million tonnes while consumption is expected to remain steady at 2223 million tonnes. Indian sugar prices surged to around Rs. 3437 a kg. Owing to a slump in sugar output, the government permitted the duty-free import of raw sugar till September 2009 without any re-export obligation. The result is that India is expected to be a sugar importer to the extent of 2.5 million tonnes. The Union Government re-imposed the release order mechanism for sugar exports and will fix the quantum of sugar that each mill can export similar to controls placed on domestic monthly sales. The move to restrict exports under the open general license comes in the wake of apprehensions of low sugar production in sugar year 2008-09. Contracting sugarcane production Food items Total pulses Total food grains Total oilseeds Sugarcane 2008-09 (in million tonnes) 14.18 229.85 28.13 289.23 2007-08 (in million tonnes) 14.76 230.78 29.75 348.19 Change (in percentage) -3.93 -0.4 -5.45 -16.93

Figures are third advance estimates; Source: Ministry of Consumer Affairs, Food and Public Distribution Favourable demand-supply scenario: The paradigm shift in sugarcane acreage, primarily led by the diversion of sugarcane to more lucrative crops and the concomitant decline in recovery brought about by adverse climatic conditions is projected to reduce sugar production by around 45% to 14.2 million tonnes in 2008-09. With sugar consumption projected at 23 million tonnes, India is passing through a demand-supply mismatch with a corresponding increase in realisations. However, with a rise in sugarcane procurement prices, a rise in cane cultivation is imminent leading to an increase in sugar production of around 18 million tonnes in 2009-10. Indias sugar demand-supply outlook Year ended September Sugarcane production (mn tonnes) Crop acreage (mn ha) Crop yield (tonne/ha) Change in crop yield (tonne/ha) Sugarcane used by non-sugar purpose % of cane used by non- sugar users Sugar cane used by sugar mills Sugar/sugarcane yield (%) Opening stock of sugar (mn tonnes) Sugar production (mn tonnes) Domestic demand (mn tonnes) Export (mn tonnes) Imports (mn tonnes) Closing stock (mn tonnes) Stock/ Consumption FY 03 287 4.52 64 -5.2% 91.28 32% 196.1 10.3% 11.3 20.1 18.4 1.5 0.0 11.6 63.2% FY 04 234 3.94 59 -6.6% 98.78 42% 135.1 10.4% 11.6 14 17.3 0.2 0.4 8.5 49.2% FY 05 237 3.66 65 9.0% 112.91 48% 124.2 10.2% 8.5 12.7 18.5 0.0 2.1 4.8 26.1% FY 06 281 4.20 67 3.4% 91.72 33% 189.4 10.2% 4.0 19.3 18.5 1.1 0.0 3.6 19.7% FY 07 356 4.85 73 9.5% 78.05 22% 277.5 10.2% 3.6 28.3 21 1.7 0.0 9.2 44.0% FY 08 344 5.20 66 - 0.0% 88.39 26% 255.6 10.3% 9.2 26.3 22.5 5.0 0.0 8.1 36.0% FY 09 E 247 4.41 56 -15% 69.15 28% 177.81 9.3% 8.1 16.5 23.0 0.1 2.0 3.6 15.7% FY 10 E 293 4.5 65 16% 81.9 28% 210.6 10.0% 3.6 21.1 23.6 0.0 2.5 3.5 14.9%

Source: Company

Raw sugar imports now viable for UP-based sugar mills: In view of the supply deficit and the concomitant rise in sugar prices, the Central Government undertook impromptu measures like the duty-free import of raw sugar without any re-export obligation until 1st January, 2011, turning India into a net sugar importer. By processing the raw sugar imports and selling it in the domestic market, India will benefit from the prevalent discrepancy between domestic and international sugar prices.

Source: Company, ICICIdirect.com Research By-products Molasses, bagasse and press mud are the primary industry by-products from which ethanol and exportable power are derived. Over the last few years, the Indian Sugar Industry invested extensively in an integrated business model, manifested in distilleries and cogeneration capacities leading to enhanced realisations and lower cyclicality. Industry SCOT analysis Strengths India is the second-largest global sugar producer after Brazil. The population and mass consumption indicate robust domestic potential It provides direct employment including ancillary activities to nearly 0.5 million workers It supports downstream industries by providing raw material It is regulated as it is classified as an essential commodity of mass consumption It is the focal point of rural socio-economic development Challenges Low mill efficiency Low-cost sugarcane procurement Vulnerability to political interests Cyclical nature of the sugar industry Opportunities Potential to enhance sugar production and sugar recovery rate Transition from an adverse sugar cycle to a favourable sugar cycle A growing population (growing at nearly 1.6%) and consumption are poised to graduate India into the worlds largest sugar producer Increasing demand for high-value by-products such as exportable power through bagasse and fuel ethanol Significant technological upgradation will enhance yield and recovery Threats High cane arrears to farmers due to low sugar prices Diversion of sugarcane to gur and khandsari Deteriorating soil quality due to increased use of fertilisers and pesticides