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Up to 25% hike in ethanol prices to shrink OMC margins, boost mills

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Financial Express
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In a relief to the sugar industry struggling to cope with exorbitant state-fixed cane prices, the Cabinet Committee on Economic Affairs (CCEA) on Wednesday decided to raise the rate of ethanol produced directly from sugarcane juice by 25% from the rate announced in June, for blending with petrol. The move is aimed at incentivising mills to cut surplus sugar production that would prop up prices of the sweetener, and proportionately trimming oil imports that have weighed on the country’s trade balance and the rupee. Similarly, the CCEA hiked the price of ethanol made of the so-called B-heavy molasses by over 11% from the level declared in June to Rs 52.43 per litre.

But it reduced the rate for the biofuel produced from the usual C-heavy molasses marginally to Rs 43.46 per litre. All these price changes will be effective from the 2018-19 ethanol year, starting this December. While sugarcane juice is very rich in sucrose content and is used to produce sugar first, the B-heavy molasses, too, have some sweetener in them; only C-heavy molasses don’t typically have any sugar content. Currently, ethanol is allowed to be produced only from C-heavy molasses and the price is fixed at Rs 40.85 per litre for 2017-18.

The move, while hailed by sugar mills, can potentially narrow the wide margins currently enjoyed by oil marketing companies (OMCs). For instance, while OMCs on Wednesday sold petrol price at Rs 80.73 per litre (in Delhi), their final cost on each litre of ethanol they used for blending stood at only Rs 61.98 per litre, including all relevant expenses and taxes, according to a sugar industry calculation. Similarly, OMCs’ cost on each litre of ethanol made of C-heavy molasses will touch Rs 65.46 in 2018-19, while that on the biofuel produced out of only B-heavy molasses could touch Rs 77.42 per litre. If ethanol is produced out of cane juice, the cost will be Rs 86.36 per litre.

Assuming that OMCs retain the same margin throughout 2017-18 on all the 163 crore litres of ethanol supplies approved by them, they tend to save more than Rs 3,000 crore if they pass on the benefit to consumers. This margin, however, would fall once the latest prices for 2018-19 take effect (see chart). If oil prices fall from the current elevated levels, the margins will drop even further and vice versa.
Mills say they don’t yet have technology to produce ethanol directly out of sugarcane juice (Only HPCL is learnt to have this technology). So it will take some time before they get to produce the biofuel from cane juice. However, there are chances that 25% of next year’s ethanol will be made from B-heavy molasses.

The move follows the government’s decision earlier this month to make available subsidised loans of Rs 4,440 crore to sugar mills to create additional ethanol capacity. It also comes at a time when the sugar mills, already struggling to cut a glut in the market, are expecting another year of record production.

However, the latest move, while providing some relief to mills, will hardly be a substitute for the rationalisation of cane prices by the Centre and states like Uttar Pradesh — a long-pending demand of sugar companies. As such, ethanol makes up for less than 10% of mills’ revenue.

Assuming that all supplies for blending with petrol will touch 5% (or around 160 crore litres) in 2018-19, the hike in prices of the biofuel (produced out of the usual C-heavy molasses) in 2018-19 will raise the mills’ realisation by around Rs 450 crore and inflate costs of OMCs accordingly, according to some industry executives.

However, it will reduce the losses of mills by just Rs 1.60 on purchases of each quintal of cane at the fair and remunerative price (FRP) fixed by the Centre. For most part of the current sugar year that started from October 2017, the losses to mills stood at Rs 63 per quintal, based on the Rangarajan panel’s linkage formula, according to the Indian Sugar Mills Association (ISMA). The losses, based on the state advised prices benchmark prices fixed by states like Uttar Pradesh, are even higher.

Cane arrears as of end-July had touched Rs 15,500 crore, a record for that time of the year. Hailing the price revisions for ethanol made of B-heavy molasses as one of the best steps by the government, ISMA director general Abinash Verma said: “This price will compensate for the loss in revenue from the sugar sacrificed. Therefore, sugar mills will be incentivised to divert surplus ‘B’ heavy molasses, which is in abundance, for ethanol production. The current constraints on capacities to produce more ethanol will also have to be overcome by investing in ethanol projects over the next two to three years.”

The government has already announced a policy in June 2018 to extend subsidised loans to sugar companies and for which over 150 applications have been submitted. In 2017-18, the blending level will touch just about 5%.

Author: Sustainability Outlook Desk