Chini Kum profit more from ethanol

Too much sugar could cause diabetes. And diabetes calls for long-term remedy. This is precisely what the sugar industry in India is going through these days. With the global and domestic markets facing a glut of sugar, millers have a crisis on hand. Following two successive bumper sugarcane crops, sugar production is expected to exceed domestic demand so much that the third year’s production will not be required at all.

So what happens to all that excess sugar? There is hope in the form of ethanol. Here’s how. Currently ethanol is produced from molasses, a by-product in the sugar manufacturing process. This ethanol has a ready market in the manufacture of Indian Made Foreign Liquor (IMFL) and other chemicals industries. However, ethanol is also being used globally for blending with petrol to cut down greenhouse gas emissions and reduce dependence on the fast-depleting fossil fuel reserves.

Now a new, more economical method for producing ethanol directly from sugarcane juice (instead of molasses) is available. This means that not only can sugar millers deal with the excess sugar stocks problem by diverting cane juice for making ethanol instead of sugar; they can also generate more revenues through this route, since ethanol fetches higher margins.

In India, blending of ethanol with petrol has been talked about for some time now, but oil companies apparently haven’t shown enough interest in picking up ethanol from the millers. “Against the required quantity of 550 million litres, oil companies have barely lifted 125 million litres,” says S L Jain, director general of the Delhi-based Indian Sugar Mills Association (ISMA).

Finally last week, the Cabinet Committee on Economic Affairs (CCEA) approved a proposal that would make it mandatory for oil companies to blend 5% ethanol with their fuel, with a plan to increase this to 10% by next year. This comes as a new lease of life for ailing sugar millers. It is also likely to kickstart India’s progress towards higher ethanol blends in automotive fuels — a practice that’s gaining momentum in many countries, especially the US and Brazil.

Pune-based Praj Industries is among the leading companies that provide technology for setting up fuel ethanol plants, both in India and globally. Praj CEO Shashank Inamdar explains that shifting from the molasses-based process to extracting directly from sugarcane juice doesn’t require major additional investment. “Only a small module needs to be added to the existing plants. Most sugar distillery plants can be used in their present form,” he says.

Sugar millers are expectedly happy. “We see this as a good opportunity to de-risk against the cyclical nature of the sugar industry,” says Simbhaoli Sugars executive director G S C Rao. As he stirs a couple of Sugar Free tablets in his tea, Rao calls it a “farmer-friendly programme”.

With the flexibility to switch between sugar and ethanol, it’s expected that millers will be able to stay profitable, and in turn pay farmers on time. With a more consistent remuneration, farmers too would be able to plough some of their income into improving their farming methods and raising sugarcane crop yields.

The sugar industry is estimated to open with around 10 million tonne leftover stocks from last year (the sugarcane cycle begins in October and runs through till end-September ). Add to this the estimated production of 30 million tonne during the current year (October 2007–September 2008) and the total availability will be around 40 million tonne. Consumption, which was at 19.5 million tonne last year, could rise marginally to 20 million tonne this year, taking into account increased consumption of processed foods like biscuits, confectionery and beverages. Now if we assume exports of 3.5-4 million tonne, a very optimistic scenario, the sugar industry could close with more than 16 million tonne of unsold stocks in September 2008.

With the selling price for ethanol being fixed at Rs 21.50 per litre by the government for the next three years, millers can be assured of better returns compared to selling refined sugar. Moreover, millers have adequate capacities to produce ethanol even after accounting for current consumption by IMFL and chemicals manufacturers. “The molasses we have are sufficient for ethanol production up to 10% blend,” says Rao, adding that Simbhaoli Sugars has an installed capacity to produce 120 kilolitre of ethanol, which is being augmented by another 60 kilolitre capacity by March 2008.

However, oil companies in India, which haven’t taken fancy to the blending programme so far, may still have reasons to find less value in the current scenario. Because petrol, with which ethanol is proposed to be blended, constitutes just 20% of their fuel revenues, unlike most other countries. It’s only when ethanol is blended with diesel that the cost and environmental benefits will accrue in a significant way. However, mixing diesel with ethanol requires an emulsifier and work is still on in this area, says Jain.

Sugar millers say there are other issues as well that must be tackled to make the industry more competitive. Balrampur Chini Mills CFO Kishor Shah points to the procurement prices of sugarcane, which are administered by the state governments. “The government should free cane prices,” he says.

India could draw a few lessons from other countries, especially Brazil which has become the world’s second-largest producer of ethanol after the US (which uses corn instead of sugarcane). Inamdar points to the Brazilian model, which follows a 50:50 split in production of sugar and ethanol, where if sugar demand dips due to a surplus, more sugarcane is diverted towards ethanol production, and vice versa. “Once you allow this flexibility, market economics will regulate the supply of sugar and ethanol. A self-governing system will come into place,” he says.

India is also far behind the Brazilian norm, which specifies between 20 and 25% ethanol blend in automotive fuels. The US is pushing for E85, or an 85% ethanol blend in gasoline. To meet these norms, major carmakers such as Volkswagen, Fiat and General Motors have developed flex-fuel cars that run on any concentration of ethanol ranging from 0 to 100%. According to estimates, nearly 80% of cars sold in Brazil are flex-fuel cars.

Industry observers say it’s too early to gauge the effects of this transition in India. Says Kotak Commodity Services research analyst Amol Tilak, “For the next one year or so, I don’t see it impacting sugar on a positive front.” So it may not be until after October 2008 when the real changes will begin to show and only then we could know if this prescription is truly working.