Sources:;Bs/Vishal Chhabria & Sunaina Vasudev / Mumbai March 13, 2010, 0:44 IST
Analysts see a probable
down cycle for the Sugar.
The sharp downswing in international and domestic
sugar prices in the last couple of weeks has soured the
performance of sugar stocks, and it may get worse as
analysts call a probable down cycle for the commodity.
With sugar production expected to rise globally and domestically,
the price of refined sugar has dipped 20 per cent to around $590
per tonne in the international market after touching a 25-year high
of $740 per tonne this year, propelled by a 10-million tonne (MT)
demand-supply deficit. Additionally, analysts say that announcements
of India and other importers like Egypt deferring purchases, even as
an improving 2010-11 supply outlook will narrow the deficit considerably
(subject to normal weather patterns), have also impacted prices.
Domestic sugar prices are down over 20 per cent from peak
levels in January 2010, partly because of an upward revision
in production estimates for the current sugar season ending
September 2010 and also because of tight inventory restrictions
imposed by the government on buyers and changes in release norms
(from monthly to weekly) for free sale sugar.
Indian production for the 2009-10 season is expected to be
around 16.8 MT according to Indian Sugar Mills Association,
against its earlier estimates of 15 MT; however, analysts expect
it to be around 15.5 MT. By March-end though, more accurate
production numbers will be available to gauge the net additional
sugar imports by India (estimates peg it at about 2 MT), which
will have to be concluded in the next one or two months.
For 2010-11, production is expected to jump 40 per cent in
India, according to a Morgan Stanley report, to 23.5 MT matching
consumption levels.
Meanwhile, Brazil has had a good cane crop as well.
There may be 10 per cent year-on-year increase in sugar
production (about 4 MT) in 2009-10 (ending May) according
to a Rabo Bank report. This has set the stage for a softening in prices.
However, a CLSA analyst notes in a recent report that their discussions
with industry participants suggest ethanol exports from
Brazil could also rise significantly if crude oil prices were to
stay above $85 a barrel. It further says strong crude oil prices and
the recent fall in sugar price have improved the relative attractiveness
of ethanol, and this may limit the increase in Brazilian sugar production.
Meanwhile, sugar stocks have fallen by about 15 per cent
on average in the last month and are expected to fall further,
given the near-universal downgrades. Individual stock performance
would vary due to the diversified revenue streams (sugar, power generation)
and the margin impact of raw sugar imported at higher prices earlier in the year.
However, higher cane costs paid to farmers when sugar prices
earlier this year were sky-high would pinch margins
of all companies, going ahead.
Bajaj Hindusthan and Shree Renuka would face closer investor
scrutiny as debt levels go up, even as cash flows slow because of lower prices.
Balrampur Chini may bottom out sooner given its healthier
cash flow outlook, led by an expected increase in
co-generation revenues, which will also allow it to reduce leverage levels.
Triveni Engineering, however, has held up, well powered
by its successful engineering business.
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