Agree with you that investors (including me; invested @200 in dhampur while the price is going down; this choice partly due to in experience with sugar industry) are in denial that sugar stocks are entering the long bear phase. This could be bad thing if bear phase turns out to be true. It could be good thing if contrarian thesis becomes true.
The problems facing the sugar sector are:
the farmers need to be paid fixed price irrespective of sugar price realization. The successive governments have kept on increasing the sugar support price incentivizing the sugar cane cultivation irrespective of demand supply situation. This support price is proving to be bad for farmers too as loss making sugar mills are not able to pay farmers. Thus resulting lose-lose situation.
Sol: A govt with a political will will have to link the certain part of sugar price with profits of the sugar mills. Very difficult but may happen as last choice.
The GST on ethonol is 18%, which is again proving to be an obstacle in realizing long term target of 20-25% blending.The oil companies may not be willing to pay if you keep increasing the ethonol procurement cost, when imported oil cost is not much (the current high oil prices may not sustain long due to US shale production and decreasing auto sector consumption of oil due to migration to electric vehicles).
Sol: Reduce the GST to 5%. This might happen very soon as govt is giving serious thought to this as per the businessline article.
If govt assures decent margin on ethonol through a long term policy, then all the excess sugarcane can be diverted to ethonol production, by extracting ethonol from sugar cane juice or b-heavy molasses, thus balancing the sugar demand & supply.
Sol: This year the sugar companies have seriously under estimated the sugar output. Also, the distillation capacity too not enough to absorb all the excess sugar cane. In couple of years, with more distillation capacity installed, this can come true. This will make sure the minor loss years to be 1 or 2 & and more profitable years.
I believe, dhampur price could go up to 30-50 rs. The down cycle may not last 4-5 yrs this time, even if govt takes the easily implementable ethonol solution.
Disc: I am new to investing and don’t have much knowledge about sugar industry either. Invested small money in dhampur @200 and can wait until it gets wiped out or until there is a real turn around.
Ethanol will not solve the problem of lower priCe realization from sugar. To make 1 litre of ethanol from heavy molases, mills will have to forego 1.5 kgs of sugar production. And for that one litre of e,thanol (equal to 1.5 kgs of sugar) mills get around 42 rupees per litre from OMCs…still not remunerative enough for su,gar mills,
This presentation indicates, the sugar realization differs by 1.5% (10.37% with final molasses, 8.81% with b heavy molasses). If I am right, it means, it reduces the sugar output by 15% approx. When using b-heavy molasses, the ethonol output is about 25% more (223lt for final molasses & 295lts for b-heavy).
When sugar price goes down to 28 rs due to over production, you will make heavy losses. If you are able to divert 7million tons to ethonol production, due to demand supply match, the sugar prices would come back to 32-34 rs, where you will be making decent profit or at least no loss. The extra ethonol produced will give you profits.
(I believe cost of sugar compensated with profits from power, ethonol & sugar chemicals is 31-32rs/kg.)
This is the case with high production year. When the production is normal, they can realize good profits by balancing the use of ethonol capacity and sugar production.
This is an interesting thought process. Since raw material (cane) can be used for both Sugar and Ethanol, diverting more cane towards Ethanol production should somewhat stabilise sugar prices but for that to happen, the mills have to function as a cartel to decide on the proportion of ethanol to be produced every season.
It is amazing that we can substitute petrol that takes millions of years to make with something that can be grown at will, capturing the carbon in the atmosphere as cane to subsequently use as fuel in Ethanol (Sugar is also a fuel if you think about it, for human beings). 10% blending offers a lot of opportunities and if the govt. can deregulate ethanol procurement prices or fix higher prices, it can cut down on its crude bills and keep its current account deficit manageable.
The bad news is that Ethanol price is regulated around Rs.41/litre by the govt. The supply could go up as the mills increase their ethanol capacity. The demand is huge as currently we are blending only around 3-4% if I am not mistaken and this can go up to 10% without causing significant harm to the engine/internals and drop in performance in modern cars. But knowing the govt., they may meddle in the mill affairs and force them to produce more sugar if they feel price is getting out of hand. An entity controlling both price and supply is pretty bad news.
As a car owner, it doesn’t make me very happy that I will be paying petrol prices for something that has 10% of something inferior to petrol and pay normal petrol prices while also risking the car’s internals (hoses, gaskets, the aluminium in the internals are susceptible to corrosion from ethanol) but this is an interesting optimisation/game theory problem and I am curious to see what the govt. does as mills try to curtail sugar production by increasing ethanol production to get higher realisation for Sugar.
Disc: Not invested in any Sugar company but following the various machinations of the sector.
Agree. The problem with the sector itself is too much govt. Intervention on supply side. Unfortunately, the solution too is govt intervention here, since govt can’t dare to touch MSP easily. The govt will have to regulate and fix the quota for sugar conversion to keep the prices in a moderate range of 32-34 rs. This quota mechanism is nothing new to govt as they are already doing it for inventory. This much control is never good obviously for any stakeholder of the sector , but sugar companies have to live with that. 40-42rs at retail level is good for mills n farmers (not sure how consumer takes it).
We need to study the corrosion part though. The target is 20%blending n don’t see anybody challenging it. I think beyond 25%, it may cause damage.
In the previous downcycle, for 3 years the UPA govt could not convince the oil marketing companies to purchase ethanol from sugar Mills. And just two months before the general elections the sugar export subsidy was withdrawn by the outgoing UPA Govt
All this happened when the sugar king Sharad Pawar was the agriculture minister.
The nett result was a cleansweep in UP and Maharashtra by NDA…making one suspect a conspiracy…an internal sabotage of UPA.
The only hope for sugar investors is the expectation that NDA govt will not be Soo inept in handling the linkage between sugar sector and electoral performance in UP - as the previous govt was.
why omc will buy ethanol at 41 or 42 . who will compensate for loss as deducting taxes diesel or petrol is way below that price of 41 , omc are already in trouble and govt is in no mood to compensate , to think sugar mills can sell ethanol in this climate is wishful thinking
It was fascinating to see many inventing new reasons for staying in sugar stocks, when it was clear, that there will be huge supply and sugar prices will come down.
Cyclical investing should be kept simple, one must know the reasons for buying, as well as selling.
After reading this thread from top to bottom and other articles/blogs as well, I can say that factors such as MSP, ethanol, export subsidies are noise.
Only two things matter:
supply-demand gap
convergence of upward-trending global prices and domestic prices.
Agreeing with more experienced members of this forum, the investment in sugar companies is very risky even at this stage. But according to the article, investors with high risk appetite can consider investing/staying invested in sugar companies.
The risks are:
one more year of bumper 32MT+ sugar production
As the article mentioned, even if revenue sharing formula is implemented in UP, the min price to pay to the farmer is FRP. This makes sugar mills bear all the risk but only take part of upside profit.
Oil prices may not be going up/staying up for getting favourable ethonol pricing environment.
Govt can’t impose too much cess on sugar to compensate for drop of 7-8 rs from cost price
Positives (if it realizes):
Crude going higher supporting higher ethonol pricing & also as mentioned in article, this will support more brazil sugar production diverted to ethonol. [personally feel oil rally may not last long due to US shale pumping & spread of electric vehicles in china & little bit in US & EUROPE)
2)Govt making all right decisions like bringing policy to promote ethonol production; need to impose 1-2 rs cess to pay farmers; giving permission to produce ethonol from sugar; allowing free movement of ethonol between states; implementing rangarajan sharing formula without FRP provision.
[personally, most of this can happen except meddling with FRP; ideally mounting arrears should be bigger worry than FRP I feel, but history suggest otherwise]
Disc: Invested in dhampur on the way down @200; continuously evaluating on averaging or exiting
cyclicals should be bought when they are making losses, hated by all and undervalued by huge margin and sold when they are making profit, loved by all and fairly valued.
So can i conclude this year will be the time to buy, expecting a turnaround in the end of 2019 or 2020 but market perhaps may find value slightly ahead of turnaround?
And of course, a company with lesser debt that can withstand the storm.
Sugar down cycle is minimum 4 years…we are just a few months into the first year of down cycle…last down cycle was 6 years long (2009-2015)…so better to start looking at sugar stocks only around 2022…by then the stock prices will be battered to unimaginably lower levels…
Globally we are having a 10 year long downcycle…yet the sugar production keeps going up…maybe it needs sugar price to fall to 8 cents per pound for a turnaround to happen…
