Indian sugar companies, dependent for years on sweets and softeners, are eagerly awaiting a whole new segment - cane based fuel ethanol- to put an end to their fluctuating fortunes.
With the Indian government set to make it mandatory that all petrol must contain five percent ethanol from October, sugar companies see ethanol as a way to insulate against cyclical lows in sugar prices that occurs every four or five years.
Industry officials believe the jump in petrol prices above $70 per barrel could spur the government to strictly implement ethanol blending and also increase the level to 10 percent within a year.
Nine out of 29 states in the country have introduced ethanol blending, but weak implementation has meant slow sales. "We expect the demand for ethanol to rise quickly after the new blending norms," said G.S.C. Rao, executive director of Simbhaoli Sugar.
Rao said Simbhaoli was targeting to earn nearly half its revenues from ethanol and power in a year as two new plants would treble output to 180,000 litres per day.
At least a half-a-dozen other firms including Balrampur Chini Mills, Riga Sugar and S.V.P Industries are boosting or setting up new ethanol capacity.
India imports nearly 70 percent of its annual petrol needs, which is about 110 million tonnes. The demand for gasoline is expected to climb to 132 million tonnes in 2007.
The expenditure on crude purchases tops 1,600 billion rupees, or $34.5 billion annually.
OPPORTUNITY KNOCKS: Industry estimates the country would need 523 million litres of ethanol in 2007 with five percent blending and one billion litres with 10 percent blending.
Though the installed capacity is sufficient to meet this requirement, companies are expanding with an eye on the future.
"Since crude prices are not softening, ethanol is acquiring an urgency," Prerana Desai, senior research analyst at Man Financial Commodities India Pvt Ltd. "The demand will really pick up, but only after a year," she added.
But there are several others who do not share the industry's optimism and feel it is too early to pop the champagne corks.
The government has yet to come out with a single policy on ethanol and biofuel. It has also not developed plans to meet challenges in years when there is a shortage of the sweetener in a country where sugarcane is perceived primarily as a food crop.
"India being such a huge consumer of edible sugar, there is always a lingering doubt on whether the government will divert cane back from fuel in a shortage situation," said a senior industry official. But he said looking at the production prospects, such a situation was not likely to arise for at least two years.
India's sugar consumption is estimated at 18 million tonnes annually, and production for the crop year ending in October at 19.1 million tonnes. It is likely to rise to 22 million next year.
An analyst said another niggling area has been the price which the state-run oil companies pay for ethanol.
While sugar makers have been demanding 23 rupees per litre, the companies have been paying 18.75 rupees. "This issue will fade away as the government has more or less settled to pay the higher price," said Om Prakash Dhanuka, chairman and managing director of eastern-India-based Riga Sugar.
Many firms were expanding ethanol capacity to tap into the more lucrative international market, said Gnanasekhar Thiagarajan, executive director with Commtrendz Research.
However, the prospects for that have been clouded as the government last week banned sugar exports and it was not known whether the ban applied to sugar derivatives.
"The boost to ethanol capacity would be even more, if the path to exports are cleared," he said. Top Indian sugar maker Bajaj Hindusthan said it was not limiting expansion to India alone, but also looking to acquire an ethanol and sugar plant in Brazil to grab a share of the international market.
"We are extremely serious about it...that's where the largest domestic demand for ethanol is," said Narayan Raman, president of corporate and investor relations, Bajaj Hindusthan Limited.
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