Sugar Sector Fundamental Report

05th FEBRUARY, 2011

INDEX

CONTENTS Introduction, Steps of Production, SWOT Analysis

Page No 2

Key Factors, Issues

Sugar Futures Delisted

Indian Sugar Scenario

Global, Brazil Sugar Scenario

6-7

Sugar Outlook

INTRODUCTION
The discovery of sugar from sugarcane have originated in New Guinea, and was spread routes to Southeast Asia and India. The Sugar Industry is the second largest agro-based industry next to textiles in India. In India, sugarcane is the key raw material For the production of Sugar. Sugar is produced from Sugar Cane & Sugar Beet, App. 70% sugar is produced from Sugar Cane & 30% produced from Sugar beet. Sugarcane is grown in semi-tropical region; Beet is grown in temperate climate. Sugar Industry is a cyclical in nature. Ethanol is by-product of sugar, can be used as a biofuel alternative to gasoline, and is widely used in cars in Brazil. Begasse is also a by-product of Sugar, can be used as a biofuel and as a renewable resource in manufacture of pulp and paper products and building materials and it is also be used as a renewable energy for power generation.

STEPS FOR PRODUCTION OF SUGAR

Extracting juice by pressing sugarcane Boiling the juice to obtain crystals Creating raw sugar by spinning crystals in extractors Taking raw sugar to a refinery for the process of filtering and washing to discard remaining non-sugar elements and hue Crystallizing and drying sugar Packaging the ready sugar

SWOT ANALYSIS OF THE SUGAR INDUSTRY

Strengths
India is the Second Largest Producer of Sugar after Brazil in the World. Sugar is necessary ingredient in many products. Sugar Industry is tax contributor to the government, provides employment to the farmers. It also supports the downstream industries by providing the raw material like Begasse, Ethanol.

Weakness
India is the Largest Consumer of Sugar leads to shortage of Sugar, Health Problems. Indian sugar Factories uses the old technology leads to low production, losses.

Opportunity
Sugar is widely use especially in drinks, Ice Cream lead to Industry growth. Huge Potential to increase the productivity of Sugar cane by up gradating Technology.

Threats
Sugar Industry is controlled by Politicians which affects the growth. Monsoon could affect the industry leads to low production. Competition with the Brazil and World Market.

KEY FACTORS THAT DECIDES THE ECONOMICS OF THE SUGAR SECTOR

Cost of Production of Sugarcane. Availability of Sugar to Consumers at a fair Price. Recovery of Sugar from Sugarcane. Statutory Minimum Price announced by the Government of India. Sugar Industry is Highly Regulated by Government.

KEY ISSUES OF THE SUGAR SECTOR

Social Issues: Low Price leads to Impact on Development :- Sugar Industry is the focal point for farmers in Rural areas as it is providing employment, low price affects the farmers badly. Poor Working Condition:- Working in Sugarcane Plantation can be backbreaking work with very poor wages. Health Impact due to burning of begasse:- Begasse used as a fuel in boiler. It may create a serious health related problems if pollution control equipment would not be installed.

Environmental Issues:Water Pollution:- Sugar Industries discharges their wastewater during the rainy season in the nearby rivers and other surface Water bodies resulting in severe pollution to the water. Air Pollution:- Burning of cane to speed harvest causes air pollution and increase erosion.

Political Issues:Rules, Acts & Orders:- The government of India Closely monitors sugarcane and its production as they have a substantial Effect on the lives of the people.

SUGAR FUTURES DELISTED IN MAY 2009

45.00 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 Nov 09 May 09 May 10 Apr 09 Dec 09 Apr 10 Aug 09 June 09 July 09 Sept 09 Feb 09 Mar 09 Feb 10 Mar 10 Oct 09 Jan 09 Jan 10

India Sugar Price (Rs per Qtl) New York Sugar (US cents per lb) Nov 10 June 10 Aug 10 Sept 10 Dec 10 July 10 Oct 10

Trading in Sugar Futures was banned on 26th May 2009 for Six Months to curb the Rising sugar price, later the ban was extended till September, 2010.Food Inflation was 9% in May 09. Banned in Sugar Futures didnt help the consumers because price touched a high of Rs 40 in many parts of the country in Dec 09 When Food inflation was 20%. Sugar Prices were mainly high due to lower production to 15.95 million Tons in 2008-09 lower by 44% from 28.6 Million Tons in 2007-08. Sugar Consumption was 24.2 million Tons in 2008-09 vs. 23.5 million Tons in 2007-08. India Imports 2.78 Million Tons in 2008-09 Vs. Nil in 2007-08. In order to meet domestic production shortfall, government slashed import duty to zero from 60% in July 2009 to till March 31, 2010 and extended the deadline to till December 31, 2010. To fill the gap between supply and demand, government took measures like not allowed export of sugar and allowed duty- free import of raw and white sugar Since 2009. As a result price cooled down. India Sugar Production is expected to 25.7 Million Tons, Consumption is expected to be 25 Million Tons in 2010-11. With the improvement in Domestic Production Government decide to impose 60% Import duty from January, 2011. With the lapse of ban on 30th September, 2010, there was an expectation from traders, investors and sugar industry regarding re-launch of future trading. But the government delayed the decision and said it will review the sugar situation before relaunch of sugar future trading. After reviewing the Sugar Situation the Government realized that price increased not because of trading in Future Market but mainly due to lower production, demand and supply situation. The government relaunched the Sugar Futures on 27th December, 2010 at a time when international prices are high. The government is enthusiasm by domestic production.

INDIA SUGAR SCENARIO

Sugarcane and Sugar Production in India Typically follows a cyclical pattern, wherein 2 to 3 years of higher production are followed by 3 to 4 years of lower production. India is expected to produce 24.525.7 million tonne (MT) while the carry forward stock is 5.4 MT. The country consumes about 22 MT so there is an 8 MT excess sugar of which 4 MT is to be stocked for next year consumption. The Central Government has announced export quota of five lakh tones but it is yet to be implemented due to food inflation rising up and cabinet secretary asks food ministry to refer the issue of exports to the empowered group of ministers (eGOM), but no date has been fixed for the EGOM meeting yet. The discretion on sending the issue to the EGOM was left to the food minister since there is no ban on exports as such. However the food minister would find it difficult to go ahead with the decision will expose him to blame sugar price rise later. This can delay the decision by a few days and it will be taken on the basis of data on both prices and production provided by the ministry. The commerce department has also opposed the export of 5 lakh tone of sugar proposed by food ministry as he said we dont want to face a situation where we forced to import. There are global supply worries due to a drought in Brazil, the worlds largest sugar producer, and a record rainfall in Australia. Maharashtra the Countrys biggest sugar producer, may miss its sugar production estimate of 95 lakh tone for 2010-11 by at least five lakh tone due to drop in sugar recovery and a likely decrease in cane production. The average sugar recovery in the state till January 3, 2011 is less by 0.3% as compared to the same period of the previous year. Of the five lakh tone export quota announced by the central government, Maharashtra mills have received clearance to export 2 lakh tonne. There is a deficit of 10-12 million Tonnes of Sugar in Asia. Sugarcane farmers of India Second largest state producer Uttar Pradesh may earn more in 2011-12 crop year as the centre plans to raise the Fair and Remunerative Price (FRP) the floor price of cane fixed by the Union Government of cane by ` 4 a quintal to ` 143 from ` 139. A delegation of Sugarcane growers from UP said to Congress General Secretary Rahul Gandhi and demanded an increase in cane support price to at least Rs 200 per quintal. The government introduced 60% import duty with effect from January 1 after the end of a zero duty period which was imposed in July 2009 to meet domestic production shortfall. The food ministry is also considering a proposal to slash the import duty on the sweetner from the Current 60% to 20-30% by March as domestic supply is projected to exceed demand for the first time in three years. Sugar Futures are falling due to ample supply from mills, uncertainty for exports and sluggish demand from retailers and bulk consumers like soft drink and ice-cream makers due to fall in temperature against supply mainly puled down sugar prices. India Sugar output may be 8.4 MN Tons 15% more from year earlier between Oct 1 Jan 15. India to review sugar supply situation next month, food Ministry Official says. The gap between demand & supply is narrow, the export window is yet to be opened up, taking all these factors together sugar prices in 2011 will remain exposed to market conditions.

GLOBAL SUGAR SCENARIO

Major Countries Production (000 Metric Tons) Brazil 45000 40000 35000 30000 25000 20000 15000 10000 5000 0 2006-07 2007-08 2008-09 2009-10 2010-11 (E) 5000 0 India China USA Major Countries Consumption (000 Metric Tons) 30000 25000 20000 15000 10000 Brazil India China USA

Source: United States Department of Agricultures

Source: United States Department of Agricultures

Major Countries Import (000 Metric Tons) India 4500 4000 3500 3000 2500 2000 1500 1000 500 0 2006-07 2007-08 2008-09 2009-10 2010-11 (E) China USA

Major Countries Export (000 Metric Tons) Brazil 30000 25000 20000 15000 10000 5000 0 2006-07 2007-08 2008-09 2009-10 2010-11 (E) India

Source: United States Department of Agricultures

Source: United States Department of Agricultures

World Sugar Production is down, consumption is up & prices are increasing due to South Brazil crop which Produce two-third of the total Global raw sugar requirement, is entirely rain-fed and a record rainfall in Australia. Estimated Surplus production is down from a forecast 6.2 million tons to an estimated 3 million tons. World Sugar Production for the 2010-11 marketing year is estimated at 161.9 million Tons from 153.4 million tons, consumption is estimated at 158.2 million tons in 2010-11 from 154.09 million tons in 2009-10.

World Production is lower as production in Brazil is expected to be lower than estimated of 39.4 million tons in 2010-11 from 36.4 million tons in 2009-10. Brazil accounts for 24% of world production, while Asia accounts for 37%. Production in Asia is down by 1.4 million tons to 60.3 million tons. Production in China is expected to 12.7 million tons in 2010-11 from 11.5 million tons. Production in Australia is expected to 4.8 million Tons in 2010-11 from 4.6 million Tons in 2009-10. Production in United States is 7.6 million tons in 2010-11 from 7.2 million tons in 2009-10. World market sugar prices reached a 30-year high in November and 2011 will be the third year that global production/ consumption has been in deficit. Most of the sugar consumed in Ireland is produced in the EU, the Food and Drink Industry Ireland (FDII) told that tightness in supply has been exacerbated by recent indications from the EU that it would be issuing 3,50,000 tonnes of export licences for sugar. This means that a large quantity of sugar will exit the EU, which is particularly unhelpful at a time when sugar supplies are scarce. Sugar cane crops in Australia could sustain significant damage from a tropical cyclone Yasi forecast to cross the coast of northern Queensland. Australian raw sugar production in 2010-11 may reach about 4 million tons thats less than the 4.6 million tons produced in 2009-10, the Australian Bureau of Agricultural and Resource Economics and Sciences said in a report last month on flood damage. Cyclone Larry in 2006 destroyed about 40 to 50% of the cane crop in the area, Bureau said.

BRAZIL SUGAR SCENARIO

Brazilian Sugarcane production for 2010/11 is estimated at 639 million tons from 603 million tons in 2009-10. The excessive dry weather combined with the humidity in mid-September adversely affected the size and development of the crop. Sugarcane crushing in the South-Central region of Brazil totaled 2.44 million tons in the second half of December 2010, a 76.39% drop to the same period in 2009. Total Production for sugarcane in December to 555 million tons.

SUGAR OUTLOOK
INDIA Sugar Mill Delivery M30 at Delhi (Rupees/Quintal)

Short & Medium Term :We Expect the Sugar Price in Delhi remain range bound between 2962-3044 per/Quintal. Long Term:We expect the price to correct from upward bounces.

Source: Bloomberg

G L O BAL NYMEX Sugar (USD/lb)

We Expect the Price to be remain range bound between 28-35 USD/lb.

Source: Bloomberg

Dr. Pankaj Dhanki

Kaushal Jaini

Pinky Chandnani pinky.chandnani@danisecurities.com

Devashish Srivastava devashish.shrivastav@danisecurities.com

pdhanki@danisecurities.com Kaushal.jaini@danisecurities.com

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