Low Sugar Output May Derail Move to Boost Ethanol

By DEBIPRASAD NAYAK
MUMBAI -- Despite rising crude oil prices, Indian refiners may not be able to switch to increased use of ethanol because of a plunge in sugar output to a four-year low.
Refined sugar prices in the country have risen almost 70% in the current crop year that began Oct. 1 as output fell to 14.7 million metric tons compared with the record of 28.5 million tons clocked in 2006-07. Production next year may be lower than an industry estimate of 20 million tons.
In contrast, ethanol prices are fixed by the government, giving millers little scope to earn margins that they are currently enjoying on sugar. The scenario is unlikely to improve soon because the fall in output this year may deplete the country's stocks, keeping the sweetener's prices high and, dashing attempts by the government and oil companies to curb consumption of regular gasoline at a time when crude oil costs rise.
"Even if you see a marginal improvement in production next season, sugar prices are not going to come down as the carry over stocks will be lower and millers will prefer to produce more sugar than ethanol," said Sridhar Chandrasekhar, head of CRISIL Research, a unit of Standard & Poor's.
Ethanol prices are currently set at 21.50 rupees ($0.45)/litre.
In India, ethanol is produced from molasses, a by-product of crushing sugarcane.
The country has a capacity to produce about 2,200 million liters a year of ethanol, according to the Indian Sugar Mills Association.
Of the total, the chemical industry consumes around 650 million liters, the liquor industry another 750 million liters while demand for ethanol is about 800 million liters.
Indian sugar mills have invested 30 billion rupees on ethanol production facilities in the last three to four years, according to industry estimates.
Indian oil marketing companies are currently required to blend 5% ethanol with regular gasoline. The program hasn't been fully implemented, in part because the refining companies and sugar mills couldn't agree on a price.
The original plan was to sell 10% blended gasoline from October last year. That plan is far from being implemented because the initial phase of a 5% mix hasn't yet been fully accomplished, and the whole exercise lost its urgency after oil prices plunged. So far, Indian refining companies weren't too keen on using ethanol as oil prices had fell more than $100 a barrel, but the situation has changed now, said Sanjay Tapriya, director of finance, Simbhaoli Sugar Mills Ltd.
Ethanol usage becomes profitable if the oil prices rise above $55-$60, he added.
Recovering crude oil prices prompted Hindustan Petroleum Corp., one of the nation's biggest state-run refiners, to plan restarting two of its closed sugar mills in eastern India at a cost of 6.14 billion rupees to produce ethanol.
Crude oil prices have increased about 60% to $71 since January. India, Asia's third-largest oil consumer, imports about 75% of its requirement oil, and spends billions of dollars in subsidies to keep retail rates affordable.
"If you look at crude oil, it's again posing a threat. People will again start moving towards alternative fuels," said Harish Galipelli, head of research at Karvy Comtrade Ltd.
Demand for ethanol will again revive if oil prices continue to rise, Mr. Galipelli said.
Write to Debiprasad Nayak at debi.nayak@dowjones.com