India's struggling sugar mills seek solace in ethanol

Reuters

* Govt wants oil companies to achieve 5 pct blending ofethanol in gasoline

* Hopes to reduce record current account deficit by cuttingcrude imports

* Demand for ethanol will give sugar mills a shot in the arm

* Oil firms float tender for 1.33 bln litres of ethanol

* With Brazil as inspiration, ethanol blending could keepgrowing

By Rajendra Jadhav

MUMBAI, Oct 15 (Reuters) - Struggling sugar mills in Indiaare seeking solace in producing ethanol from crushing sugarcane,as the government ramps up pressure on oil retailers to cutfossil fuel imports by blending gasoline with the biofuel.

New Delhi, scrambling for ways to cut nearly $20 billion offits oil costs as it battles a record current account deficit,could save around $1 billion on annual imports of crude as itpushes oil firms to hit a goal of 5 percent blending of ethanolin gasoline.

Reaching that blending target in 2013/14 for the first timesince its introduction over six years ago would lift earnings atindebted mills in the world's No.2 sugar producer and help curba notorious cycle of glut and deficit in Indian sugarcaneplanting.

With Indian mills making ethanol from molasses, a byproductof sugar production, the fading of that cycle would also ensuremore consistent output of the sweetener. That would providegreater stability to global sugar prices with India lessprone to swinging between net exports and imports of sugar.

"Since oil companies have floated tenders ahead of thesugarcane crushing season and there are no tussles over ethanolpricing, 5 percent blending can be done this year," said SanjayManyal, an analyst at Mumbai-based brokerage ICICI Direct.

Disagreements between mills and oil companies over pricingstymied progress after India launched its ambitious ethanolblending programme in 2006, trying to emulate the success ofBrazil's booming biofuel industry.

But state-run oil firms such as Indian Oil Corp Ltd, Hindustan Petroleum Corp and BharatPetroleum Corp have been far more amenable to mills'demands on pricing since the rupee plumbed record lows inAugust, driving up their crude oil import costs. These firmsimport crude to produce refined products like diesel andgasoline, which they sell through their fuel pumps.

"Oil companies won't find any problem in paying higherprices for ethanol (than last year) as they are buying importedcrude oil at much higher prices due to the weak rupee," saidDeepak Desai, chief consultant at Ethanol India, a privatecompany that helps set up ethanol production units.

Mills were supplying ethanol at around 38 rupees per litrein the latest tender, with imported gasoline costing 46 rupeesper litre.

The matter has taken on greater urgency since Oil MinisterVeerappa Moily told Prime Minister Manmohan Singh in August that5 percent blending could be achieved in 2013/14, helpingpreserve the country's precious foreign exchange. India's crudeimport bill was $144 billion last fiscal year - the largest partof its overall import costs.

SLOW AS MOLASSES?

The new crushing season, expected to start in November,could lead to record ethanol output if oil companies finalisetenders for 1.33 billion litres of supply from December 2013 toNovember 2014. That would dwarf the 80 million litres theybought in the 2012/13 sugar year that ended on Sept. 30.

But some millers cautioned that oil marketing companies weredragging their feet in finalising tenders, although oil firmssaid deals would likely be sealed soon.

"We also want to achieve 5 percent blending as early aspossible. We will try to award tenders by the end of thismonth," said an official with a state-run oil retailing company,who declined to be named as he was not authorised to speak withmedia.

That is good news for mills that have been struggling withlow sugar prices due to a surplus in production of the sweetenerfor the fourth straight year.

Indian sugar output usually plunges after a few years ofsurplus as the glut in supplies drags on prices and mills'ability to pay cane farmers. That prompts farmers to switch toother crops such as wheat, leading to a cane shortage that liftssugar prices and attracts more farmers in subsequent years.

A successful ethanol blending programme would weaken thatcycle by providing more consistent demand for cane, said AshokJain, president of the Bombay Sugar Merchants Association.

"Ethanol is more reliable source of income than sugar," hesaid.

And market participants reckon that ethanol blending inIndia has room to grow beyond 5 percent, citing compulsoryblending in Brazil which stands at 25 percent. Although raisingblending above 10 percent is unlikely in the short-term as itwould require modifications to automobile motors, while anystrengthening in the rupee could also make blending lessappealing as crude imports would become cheaper again.

"If 5 percent blending becomes successful, there is scope toincrease it to 10 percent without any change in car engines,"said ICICI Direct's Manyal, who has been tracking sugarcompanies for seven years.

(Editing by Joseph Radford)

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