Sugar Prices Likely To Go Up As Output Under Stress – JM Financial

Favorable seasonal and production factors that are expected to boost sugar prices in coming days, said JM Financial Institutional Securities in a report titled “Turning Sweeter”.

The primary reasons for the bullish outlook on sugar prices has to do with international prices and India’s own buffer stock situation.

The upcoming festival season in India, which includes Diwali, is likely to increase sugar demand and prices, noted JM Financial.

The festivals usually lead to higher sugar consumption through sweets and other food items. With inventory levels already low, the seasonal uptick in demand may stretch the supply, it said.

The report estimates India’s closing inventory on September 30, 2023 to be around 6 million metric tons, sufficient for only 2 months of consumption during the festival months. The delicate supply situation has already led to a spike in local sugar prices over the past 3 weeks to record highs.

Apart from festivals, the delay in start of cane crushing season to end-November compared to usual mid-October will help optimize recovery levels. Mills are likely to take advantage of the delayed start to maximize output efficiency.

Lower Crop Output Expectations

The second factor boosting positive sentiment is growing concerns over India’s sugar production in the upcoming SS24 season starting October 2023.

Early industry estimates had pegged SS24 production at 31.7 million metric tons, but dry weather in August has raised doubts. The key sugarcane growing states of Maharashtra and Karnataka faced drought-like conditions in August, posing downside risks to crop output.

JM Financial estimates SS24 production could be around 30 million metric tons, 9% lower year-on-year. This is higher than the domestic consumption estimate of 28-28.5 million metric tons. So while not alarming, the projections indicate a delicate demand-supply balance.

The report notes that Uttar Pradesh, the top sugarcane state, is relatively insulated from monsoon rains due to extensive irrigation from river networks. So, production there may hold up better.

Firm Domestic Prices, But Muted Export Potential

The concerns over lower output have led domestic wholesale sugar prices to spike over 20% in the last 3 weeks to all-time highs. However, JM Financial expects the government will step in to contain any sharp surge in domestic rates.

With impending state elections in Gujarat and Himachal Pradesh, the government has an incentive to limit food inflation. Sugar accounts for nearly 2% of India’s consumer price index.

Global sugar prices have also rallied to 12-year highs in anticipation of negligible exports from India. But the report downplays the correlation between global and domestic prices, given India’s ban on sugar imports and the government’s monthly regulated release mechanism.

Ethanol Capacity Additions on Track

The ethanol blending programme continues to progress well, touching 11.8% blending on an ethanol supply year basis in 2022-23. This is the highest achieved historically.

While the 20% blending target for 2025 now appears delayed by 1-2 years, JM Financial believes the current capacity of 12 billion liters is sufficient to achieve 15% blending in the next couple of years.

With a strategic goal to diversify feedstock beyond sugarcane, future capacity additions are likely to tilt towards grain-based distilleries. The report sees scope for a 25% incremental capacity addition over the medium term, largely based on grains instead of sugarcane.

Positive Outlook for Efficient Producers

In summary, JM Financial maintains its positive view on the sugar sector underpinned by strong regulation tailwinds and upside risks to prices. The brokerage is bullish on efficient sugar producers like Balrampur Chini.

It has a BUY rating on Balrampur Chini with a June 2024 target price of Rs 490, representing an upside of over 25% from current levels.

India Sugar Sector Developments Over the Past Year

The past 12 months have seen a dramatic turnaround in fortunes for the Indian sugar sector, which had been reeling under the impact of surplus production and low prices for the past few years.

The policy interventions since 2018 to divert sugar into ethanol have started bearing fruit, helping correct the imbalanced market and leading to a price recovery.

Sugar production in the October 2021-September 2022 season rose 16% year-on-year to 35.8 million metric tons as per ISMA data. The higher output was driven by higher cane acreage and yields, especially in Uttar Pradesh.

While 2021-22 production was higher, the diversion of roughly 3.4 million tons of sugar into ethanol manufacture turned the domestic market into a deficit.

Sugar Production in 2022-23 SS season has been on the lower side. Due to diversion of cane juice and sugar for ethanol, sugar production in 2022-23 season is estimated at around 33 million tons as of September 2022, nearly 9% lower than last year.

Moreover, to boost ethanol usage and cane income, the government has advanced the 20% ethanol blending target to 2025 from 2030 earlier. Demand for ethanol remains robust.