The recent government notification prohibiting sugar mills from using cane juice/syrup for ethanol production has caused disappointment in the stock market. This policy shift impacts sugar mills and investors who were banking on the government’s support for the ethanol blending program.
Reasons for the Government Decision:
The government’s move is driven by concerns about a potential drop in sugarcane output, which could lead to an increase in sugar prices. While initial estimates suggested an 8 percent decline in sugarcane production, the government’s decision indicates a fear of a more significant decline.
Impact on Ethanol Blending Program:
The policy change casts a shadow over the government’s ethanol blending program, which had aimed for a 20 percent blending level by 2025. The contribution of sugarcane to this target is likely to diminish, affecting the overall ethanol blending levels.
Feedstock Composition:
The importance of sugar juice for ethanol blending is notable, with government data showing a 19.7 percent share in ethanol feedstock in the 2021-22 season. B-heavy molasses had a 61.1 percent share, and C-heavy molasses had a 2.5 percent share. The new rule reduces the feedstock composition available for ethanol production.
Change in Unit Economics:
While it doesn’t mean a direct loss for sugar companies, there will be a change in the mill’s unit economics. The ethanol-to-sugar production mix will shift, resulting in more sugar production. This aligns with the government’s goal of increasing sugar output to address market needs.
Impact on Mill Profitability:
Integrated sugar mills had benefited from ethanol blending, contributing significantly to profitability. With the altered production mix, sugar mills may see less profitability from ethanol and may have to contend with higher sugar inventories due to export restrictions.
Uncertainties and Potential Support:
Questions remain about the extent of sugar diversion towards ethanol and whether the government can fill the feedstock gap through other sources. The government may reconsider its decision based on sugarcane yield clarity in January-February 2024. Financial incentives or subsidies could be considered to support the industry during this challenging period.
Investor and Industry Confidence:
The abrupt policy change has shaken investor and industry confidence in the government’s unwavering support for the ethanol blending program. Considerable investments have been made in distillery units, and the government may need to reassure stakeholders that this situation is unique and won’t be a recurring issue.
Conclusion: The setback highlights policy risks for the sugar industry, emphasizing the need for a delicate balance between sugar and ethanol production. The government’s outreach to address industry concerns and potential financial support will be crucial in maintaining trust and sustaining the ethanol blending program’s long-term goals.