Covid-19 outbreak likely to have a near term adverse impact on sugar consumption and prices

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New Delhi, April 3, 2020: The disruption caused by the COVID-19 virus pandemic is likely to result in some adverse impact on sugar off-take in the near term, which in turn may result in some pressure on sugar prices. This is notwithstanding the decline in the domestic sugar production along with the sugar exports which is likely to result in closing stocks correction to 10-10.5 million MT for sugar season, SY2020 from 14.5 million MT in SY2019.

Says Mr. Sabyasachi Majumdar, Senior Vice President & Group Head, ICRA Ratings,  “The decline  is mainly due to lower sugar production and higher sugar exports. However, if the Government continues with the buffer stocks of 4 million MT in next year too, the net available sugar balance for market would be around 6-6.5 million MT, which is closer to the normative sugar stock levels.”

Domestic sugar production estimates for SY2020 at 26.5 million MT is lower by 19.5% Y-o-Y in SY2020. This is primarily due to the decline in cane availability in Maharashtra and Karnataka due to the drought last year and heavy rainfall/water logging during the current year (August – September 2019). ICRA expects the domestic sugar consumption of around 26.0 million MT in SY2020. In SY2020, as on Feb 2020, the export contracts have been made for a quantity of over 3.5 million MT, out of which about 2.2 million MT are shipped. Considering that the exports are likely to be around 4.5-5.0 million MT when compared to the Government-approved 6 million MT, the closing stocks would be around 10-10.5 million MT.

 

“The decline in domestic sugar production along with the monthly sugar release mechanism and creation of 4 million buffer stock has supported the sugar prices in the recent past. The sugar prices remained rangebound between Rs. 32-33/kg during November 2019 – February 2020. However, the expected lower sugar off-take in the near term owing to the covid-19 pandemic impact with lockdown in most states (closure of manufacturing units pertaining to soft drinks, confectioneries etc.) is likely to exert some pressure on the sugar prices. The global covid-19 outbreak has also adversely impacted the global sugar prices. However, this phenomenon could be temporary. ICRA expects that in SY2020, the non-increase in the FRP and SAP cane prices along with the higher sugar realisations on a YoY basis and the Government support in the form of subsidies for sugar exports is likely to support the profitability of mills.” Mr. Majumdar added.

As far as the medium-to-long term outlook is considered, in ICRA’s view, the long-term sugar prices and profitability of Indian sugar companies would remain cyclical and dependent on domestic and international demand-supply trends. The latter in turn would hinge on agro-climatic conditions in the major sugar-producing countries and the trends in crude oil prices (which determine the diversion of cane crop to ethanol). The price trends in the international markets would be one of the key determinants of future profitability. Within the sugar industry, however, players with high operating efficiencies, forward integration and strong capital structure would be best placed to ride out the cycles.