Weak Crude, Cane Shortage Hit India Ethanol Expansion

By DEBIPRASAD NAYAK and DILIPP S NAG

MUMBAI -- A sharp decline in sugar cane production coupled with lower crude oil prices that make ethanol a less viable option as fuel has hit India's plans to sharply increase its ethanol production capacity, analysts said Wednesday.
This could delay millions of dollars in new investments as sugar mills put off or scrap investments in new ethanol facilities.
"The delay is largely because of the shortage of cane. Though production is likely to revive next year, enough cane will not be available for ethanol production," said Harish Galipelli, head of research at Karvy Comtrade Ltd., a Hyderabad-based brokerage.Sugar cane production in India, the world's second largest producer, is expected drop sharply to 14.5 million metric tons in the current crop year ending September, from 26.3 million tons a year ago, according to industry estimates.
"How can we plan ethanol expansion when we don't have enough molasses," said Dilip Seksaria, general manager of Balrampur Chini Mills Ltd., one of the biggest sugar producers in the country.
Cane production may recover to 19 million tons in 2009-10, but rising demand for sugar as a sweetener may leave millers producing more sugar, leaving less molasses in the process, to be used as a feedstock for ethanol production.
Molasses is a byproduct of sugarcane crushing, but millers have some flexibility in deciding the ratio of raw sugar and molasses produced, depending on the demand for each commodity.
Ethanol can also be produced directly from sugar-cane juice, before it is turned into raw sugar and molasses, but this method is rarely used in India because of a strong domestic market for sugar. India's annual sugar consumption, currently around 22.5 million tons, has been steadily rising.
Lower crude oil prices have also affected the viability of ethanol projects, analysts said.
Indian sugar mills have invested 30 billion rupees ($594 million) on ethanol production facilities in the last 3 to 4 years, according to industry estimates.
There may not be good return on these investments next year if crude oil prices remain at current level, Mr. Galipelli said. "So they are a bit cautious (on new investments), just to avoid this kind of situation."
Crude oil prices have crashed to around $50 a barrel now from $147/bbl a year earlier, making ethanol blending a less profitable proposition for domestic oil companies.
While on the one hand, crude oil prices have fallen, easing the pressure from the fuel oil sector, demand for ethanol for other industrial uses has been steady.
The country currently has an ethanol manufacturing capacity of about 2,200 million liters a year, according to Indian Sugar Mills Association.
The chemical sector consumes around 650 million liters of this and the liquor industry another 750 million liters, leaving only about 800 million liters for blending with gasoline.
"Alcohol prices are on the higher side and (that) is distracting millers," said Sanjay Tapriya, finance director of Simbhaoli Sugar Mills Ltd., another big sugar producer.
Millers are getting 27 rupees to 28 rupees/litre of ethanol from alcohol producers, while price for the fuel industry is fixed at 21.50 rupees/litre.
"For the blending program to be successful, some pricing mechanism needs to be evolved wherein ethanol prices are set (based on) prevailing prices of related products such as sugar and crude oil," said Sridhar Chandrasekhar, head of CRISIL Research.
Indian oil marketing companies are currently required to blend 5% ethanol with regular gasoline sold in the market and the government has pushed back a target to raise this to 10%.
The original plan that envisaged a minimum 10% blend by October 2008 was put on hold because of the sharp fall in crude oil prices that made it less urgent and because of technical concerns raised by the Society of Indian Automobile Manufacturers.
The industry body representing Indian automobile makers said vehicles with older engines may not be able to use fuel that has a 10% blend without making some modifications to the engine.
"The main problem is with two-wheelers as their owners may not be ready to spend money to make their vehicles ethanol-compatible," said K.K. Gandhi, executive director of SIAM.
Indian Oil Corp., one of the biggest oil marketing companies in the country, is currently conducting trials to assess the compatibility of present engines to a 10% ethanol blend. The results are expected by the middle of 2009.
The government's eventual plan - announced last year as part of a new biofuels policy - is to raise the blending level to 20% of total fuel usage by 2017.
Write to Debiprasad Nayak at debi.nayak@dowjones.com