Sugar-Can it help to somewhat relieve India

Sugar – Can it help to somewhat relieve India’s energy security concerns

India spends close to $30 bn yearly in importing crude oil, which amounts roughly to 30 percent of its total annual imports. With crude prices having doubled over the past two years and presently hovering at around $70 per barrel, a sustained rally could lead to higher inflation and a possible slowdown in industrial growth across most sectors of the Indian economy. Presently crude oil prices are at an all time high, whereas raw sugar is close to 40 percent of its all time high. Ethanol, which is produced from sugarcane is much cheaper than most petroleum products and can easily be mixed with petrol as a fuel in automobiles & other industrial applications. Back during the last oil crisis in the 1970’s Brazil introduced a program to use ethanol in automobiles to decrease crude oil imports. At present 100 percent ethanol is used in roughly 40 percent of the cars in Brazil, with the remaining using ethanol blended with gasoline.

Apart from ethanol, another by-product of sugarcane called bagasse can be used for generating power and at present close to 700 MW of power is produced by Indian sugar mills, whereas the industry potential is approximately 3500 MW. In this era of spiraling crude prices and deficient power generation capacity, India should sincerely consider sugar as an alternative energy source to meet its long term GDP growth target of above 8 percent.

By using ethanol in India’s petroleum industry, a stable and alternate source of raw material can be ensured unlike crude oil whose price fluctuates by atleast 10-15 percent on a monthly basis. The Indian Government has mandated the sale of 5 percent ethanol blended with petrol in 9 states and 4 union territories and in June 2005 the sugar mills coming under the Indian Sugar Mills Association (ISMA) agreed to supply ethanol at Rs18.75 per litre to oil companies. This ‘Gasohol Program’ of mixing 5 percent ethanol in petrol would lessen the impact of spiraling crude prices once the blending percentage is increased beyond 10 percent in coming years. In Brazil about 20-25 percent ethanol is blended with gasoline and the government plans to increase this percentage going ahead.

Where producing a barrel of ethanol costs $32 v/s current crude prices that trade in a $60-70 price band, it seems higher ethanol demand is here to stay and be a future driver for sugar prices. The benefits of using ethanol as a fuel is being recognized worldwide and one can expect to see a significant diversion of sugarcane from sugar to ethanol production. Sugar is primarily a cyclical commodity and when prices drop the sugar mill’s bottomline is directly impacted. To have de-risked revenue streams and to move away from this cyclical nature larger Indian sugar mills such as Balrampur Chinni, Bajaj Hindustan etc are rapidly building ethanol capacities for supplying to petroleum companies. The State Governments of major sugar producing states and the delegates of sugar industry have confirmed the availability of ethanol capacity. Worldwide at present there is about 37 billion litres of ethanol production capacity whereas the demand is only close to 28 billion litres, resulting in surplus global capacity, which is the main reason why ethanol prices have not moved up in line with crude oil. As the demand-supply scenario reverses in the coming years due to increased demand for cheaper and environment friendly fuels such as ethanol, sugar and crude prices would then move in sync with each other.

Cleaner fuel
Ethanol can be used as an automobile fuel by itself and can also be mixed with gasoline to give ‘gasohol’, the blending percent of which may vary from 10 to 85 percent. To reduce global warming issues, the quantity of carbon dioxide produced while burning fossil fuels such as petroleum has to be minimized. From an environmental perspective ethanol has many advantages – ethanol has 35 percent oxygen that enables the fuel to get completely burned in the engine leading to fewer emissions and is also considered as a renewable fuel. Ethanol also reduces particulate emissions that cause health disorders. Strict emission standards prescribed under the Kyoto protocol is leading to more demand for biofuels such as ethanol blended gasoline and ethanol blended diesel to further lower emission levels. Many nations worldwide have already initiated different programs such as subsidies on capital expenditure for biofuel plants, tax concessions etc, which is likely to result in greater demand for environment friendly fuels over the next 10 years. It is found that starches extracted from wheat, corn, potatoes and some other plants can also be used to produce ethanol by a process called fermentation. Nevertheless on a commercial platform ethanol production from sugarcane is the most successful instance.

Countries such as Brazil and Sweden are using large amounts of ethanol as a fuel, whereas other countries are providing incentives to build up ethanol capacity and use. In France unlike from sugarcane, ethanol is produced from grapes that are of poor quality for wine production. Due to rising crude prices Sweden began using ethanol in chemical production for many years and has been able to cut its crude oil consumption by 50 percent since 1980.

Of all the nations Brazil is the most successful and has learned how to arbitrage cleverly between sugar and crude oil. Before its rise to be the king of the sugar market, Brazil grew sugar mainly for domestic consumption but the previous oil crisis of the 1970’s forced Brazil to divert almost 33 percent of its sugar into ethanol. During the 1980’s however crude prices came off their highs, also there was a bear market in sugar simultaneously and the Brazilian drivers found no incentive to purchase gasohol, which was priced closely to gasoline. But the inevitable happened in 2004 when crude prices kept hitting all time highs. Brazil’s choice was quite clear and with gasohol prices about 35 percent cheaper than gasoline the Government increased the levels of ethanol to be blended with gasoline. At present majority of cars manufactured in Brazil by Fiat, Volkswagen and General Motors run on gasohol. In fact most of these cars have flexi fuel engines, which can run on different blends of ethanol missed with gasoline and is one of the key drivers for more sugarcane going into ethanol production. With excess ethanol capacity in Brazil it exports to the US, South Korea, Japan, Sweden etc – the future of sugar undoubtedly belongs to Brazil.

Need of the hour policies
Blending of 5 percent ethanol with petrol is allowed in the specifications of Bureau of Indian standards for petrol. Initially to help the farmers in the agriculture sector and to bring down pollution levels the Indian Government had launched two ethanol projects in Maharashtra and one in Uttar Pradesh during 2001. These projects supplied 5 percent ethanol blended with petrol through retail outlets, also many R&D studies were carried out to check the financial and operational feasibility of ethanol. The projects and R&D studies were successful, which established usage of 5 percent ethanol blends with petrol. The Society for Indian Automobile Manufacturers (SIAM) has already accepted the use of 5 percent ethanol mixed with petrol in vehicles. The Government has mandated the sale of 5 percent ethanol blended with petrol in 9 states and 4 union territories. This program was supposed to be implemented 3 years back but came to a halt due to unavailability of sugarcane and the inability to arrive at a consensus pricing for ethanol between the sugar mills and petroleum companies. In June 2005 however the sugar mills agreed to supply ethanol to the oil companies at Rs18.75 per litre. With the government intending to increase the blending proportion to 10 percent, the potential for sugar mills to supply ethanol is huge. Apart from India, the EU and Japan have initiated ethanol blending programs upto 5 percent, whereas China, Thailand, SouthAfrica are adopting upto 10 percent blending initiatives and Brazil, USA, Canada, Sweden are pursuing above 10 percent mixing programs.

Sugar Control Order 1966, Sugarcane Control Order 1966 and Levy Sugar Supply Order 1979 govern the Indian sugar industry with powers to regulate very critical activities such as sugar production, movement of sugar, allocation to public distribution system and setting the statutory minimum price (SMP) payable to farmers for sourcing sugarcane. Nevertheless the sugar mills are allowed to sell 90 percent of their production in the free market, but the catch here is sugar production is Government controlled thereby indirectly keeping a check on prices. While cane prices nearly doubled over the past decade, sugar prices increased only by 6 percent, the reason being Government steadily increased the SMP for purchasing cane over the years, whereas excess sugar capacity in the industry led to lower realizations. The demand-supply scenario is reversing now with alternate uses of sugarcane established and most Indian mills are in a phase of expanding capacities – the last 24 months has seen a rally in sugar prices, which could very well be sustained over the next 2-3 years. Infact Japan, which imports 60 percent of its sugar, is looking at India for possible imports of sugar and ethanol as imports from Brazil is falling due to its diversion of more cane towards ethanol production.

To be successful in the global sugar markets Indian policies need to adapt swiftly to key structural changes on an ongoing basis. To cite an example during the late 1990’s crude prices were very low and the Brazilians didn’t find it profitable to buy gasohol, which was almost the same price as gasoline. A continuation of the same would have led to mounting losses for Brazilian ethanol manufacturers. It was at this juncture that the Government removed control over ethanol production and distribution, which allowed private Brazilian companies to export ethanol cheaply and recover their production costs. In India with the sourcing price of cane and selling price of ethanol fixed by the Government, mills would have to operate at high operating efficiencies to make good money. The selling price of ethanol should primarily be linked to crude oil, which would then make Indian mills producing ethanol breathe easy.

Rally in sugar prices
Global sugar prices at present are close to 40 percent of their all time high achieved between 1966 and end 1974 when sugar prices went up more than 45 times. Sugar prices have begun to move up over the past 2 years and the rally is most likely to sustain on account of WTO’s ruling against the EU, strong domestic demand from India & China and increased amount of sugarcane being diverted to produce ethanol.

Sugar production in the EU could drop by 4 million tons over the next 3-4 years. Inspite of being one of the highest cost producers of sugar in the world the EU commands approximately 15 percent share of the entire sugar exports market globally, as it keeps domestic sugar prices approximately three times higher than export prices. In this manner the domestic prices in turn subsidizes sugar exports from the EU. This system was originally launched in the year 1967 under the Common Market Organization for sugar – is based on quotas, minimum guaranteed prices and tariff regulations and remains one of the last unreformed systems under the EU Common Agriculture Policy. In view of this cross-subsidization WTO has recently ruled that the EU would have to cut down subsidies on sugar, which would mean sugar exports from the EU becoming unviable. The EU is a dominant player in the global sugar market and produced approximately 21 million tons of which 8.3 million tons were exported during the year 2004/05. The WTO ruling has suggested price cuts of 43 percent for sugar beets and 39 percent for refined sugar, the volume implications of which could see sugar production in the EU drop by 4 million tons over the next 3-4 years. This decrease in global sugar supply is likely to push up sugar prices further.

High domestic demand in India and China is another factor to drive global sugar prices. The maximum production of sugar in India was during the year 2002-03, which yielded 20.1 million tons. With domestic consumption being close to 20 million tons and growing at a compounded annual rate of approximately 5 percent, sugar inventory levels would be at significant low levels. Whereas China’s per capita sugar consumption is one of the lowest in the world at 9.8 kg per person compared with the world average of 22. Also with rising income levels and the Chinese Government favouring increased sugar consumption by curbing consumption of saccharine, sugar prices are headed northwards. India and China are the highest consumers of sugar worldwide with combined sugar consumption at roughly 23 percent of global sugar production. The duo of India – China combined with crude prices would shape the destiny of future sugar prices. Sugar prices in India don’t exactly mirror global prices as both exports and imports are controlled by the Government – exports of sugar is banned till March 2007 whereas import duty is applicable at 60 percent from the next crushing season i.e. October2006 to September 2007.

Being the world’s largest producer and exporter of raw sugar, Brazil to a large extend determines global sugar prices. With the current rally in crude prices Brazil would look to benefit from both sides of the story. On one hand the Brazilian Government has increased the percentage of ethanol to be added with gasoline thus bringing overall petroleum costs down. On the other hand this increased diversion of cane to produce ethanol with result in lesser cane supplies to produce sugar, leading to high global sugar prices to benefit the Brazilian exporters – so everyone wants to be in Brazil’s shoes right now.

Power from sugar
Apart from the ethanol story, a by-product in the sugarcane crushing process called bagasse can be used to generate power. In the past when oil prices were low and sugar prices quite high, the mills used to get rid of bagasse as a residue. With current sugar prices nowhere near its all time high achieved during early 1970’s and spiraling crude prices, bagasse is now seen as a useful by-product to generate power and heat. Figures from ISMA confirm that 50 sugar mills are carrying out projects to produce 700 MW of power thus taking the total generation capacity to 1400 MW. Sugar mills operating such power co-generation projects also get CER’s (Certified Emissions Reductions) certified under the Kyoto Protocol and can then sell them to another party. Balrampur Chinni Mills has tied up with IFC, Washington for the sale of these carbon credits. Deficient power capacity in India along with increased by-product revenue streams for sugar mills makes a strong case for generating power from bagasse.

Miracles don’t happen overnight and it is not possible for sugar to alleviated energy security concerns completely

It would be very interesting to see how sugar pans out for India. If one looks at the strong position that Brazil is in now, it has to be understood that they started their sugar program way back in the 1970’s. India needs to be patient and should be watching crude oil and Brazil very closely before going in for aggressive capacity additions on the ethanol front. Nevertheless with India being one of the leading producers of sugar worldwide and with high crude price here to stay, fundamentals are in the right place for seriously considering sugar as alternate energy source and reduce our over dependence on the Middle East. One should also understand that sugar based ethanol program is not going to alleviate India’s energy security concerns completely, as crop-based ethanol program competes with agriculture resources that are require to feed billions of people.

One thought on “Sugar-Can it help to somewhat relieve India

  1. hi!,I like your writing very so much! proportion we coimcnmuate more about your post on AOL? I require a specialist in this house to solve my problem. May be that is you! Taking a look forward to see you.

Leave a Reply

Your email address will not be published. Required fields are marked *