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Domestic demand to sweeten sugar prices at high levels despite demonetisation: ICRA

The sugar prices dipped further to Rs 34,500-34,750/MT in the first week of December following subdued demand from traders due to the cash crunch.

, ET Bureau|
Updated: Jan 02, 2017, 06.36 PM IST
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HYDERABAD: Sugar prices are expected to remain firm in the near term despite demonitisation due to the high domestic demand and tight stock position triggered by the low production this sugar year (SY), views rating agency ICRA.

Sabyasachi Majumdar, Head, Corporate Ratings, ICRA, said, “The expected decline in the sugar production during SY2017, coupled with the decline in the domestic sugar stocks during SY2016 and the impact of the global sugar deficit scenario has firmed up domestic sugar prices to Rs 36,200/MT in October 2016, although there was a dip in November following the demonetisation and the arrival of the new crop."

Further, Majumdar said, "The sugar prices dipped further to Rs 34,500-34,750/MT in the first week of December following subdued demand from traders due to the cash crunch. However, with the demand having recovered owing to the ongoing festive season, the prices have improved slightly to Rs 35,000/MT currently. In ICRA’s view, sugar prices are expected to remain firm in the near term, given the tight stock position.”

ICRA believes that domestic sugar consumption is likely to outpace domestic production for the second successive year in SY2017, given the lower sugar production in the major states of Maharashtra and Karnataka. While this decline will be offset to some extent by increased sugar production from Uttar Pradesh, the overall production is expected to decline by 9% and fall short by 2.5-2.8 million tons from domestic sugar consumption, which continues to grow at a steady pace of 2-3% a year.

An opening stock of 7.6 million tons for SY2017 is likely to result in the overall sugar availability between 30.5-31.0 million tons, which is expected to meet the domestic consumption of around 26 million tons. However, the closing stocks of around 4.8 million tons in SY2017, lower than the normative sugar stock level of around 6.4 million tons (based on the assumption of requirements of three months domestic consumption), would be sufficient to meet the requirement of around two months of domestic consumption, said ICRA in a report on Monday.

“Sustained healthy realisations and healthy recovery rates are likely to result in healthy contribution margins for UP-based mills, despite a Rs 25 per quintal increase in the cane price for SY2017. With the FRP (fair and remunerative price) of cane for SY2017 fixed at the same level as of the previous year and sugar prices on the higher side, the profitability of mills based in Maharashtra and Karnataka is likely to improve. However, the extent of increase in absolute levels of profits could be moderated with the decline in the cane availability in these region,” said Majumdar.

Overall, ICRA expects efficient and forward-integrated sugar mills to report healthy profitability trends across most key producing states over the next two to three quarters. However, overhang of past losses, which were largely funded by debt, will continue to weigh on net margins, capitalization and coverage indicators of sugar mills, especially the weaker ones, the rating agency said.
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