The Cabinet Committee on Economic Affairs (CCEA), in a recent announcement, has increased the basic price of ethanol by 5%

The Cabinet Committee on Economic Affairs (CCEA), in a recent announcement

According to an ICRABSE -0.91 % note, this increase in ethanol price by the Central Government for the procurement season 2017-18 (starting December 2017) to Rs. 40.85/litre for the oil marketing companies (OMCs) is likely to result in an increase in the total contribution margin by around Rs. 200/MT of sugar produced for fully integrated sugar mills.

Sabyasachi Majumdar, Senior VP, ICRA, said, “During the crushing season 2017-18, mills are expected to produce around 25 million tonnes of sugar, an increase by 20%-23% compared to 2016-17. Consequently with a higher quantity of molasses available this year, the mills might achieve a 1.10-million KL of ethanol supply, with Uttar Pradesh's mills contributing nearly half of the output. With ethanol contributing nearly 10-15% of the sugar mills’ turnover for integrated sugar mills, an upward revision in ethanol prices is expected to encourage sugar mills to enhance the supply of ethanol for blending, thereby augmenting their revenue and improving their ability to pay sugarcane farmers.”

The Cabinet Committee on Economic Affairs (CCEA) decision implies that the OMCs will be able to procure ethanol at the price of Rs. 40.85/ltr in 2017-18 as against Rs. 38.97/ltr in 2016-17 for blending with petrol. The applicable Goods and Services Tax (GST) of 18% and the transport charges would be borne by the OMCs. The price increase aims at increasing the participation of the sugar mills in the EBP by providing remunerative and stable prices to suppliers and reducing the dependence on crude oil imports.

According to ICRA estimates, with the new ethanol prices, the total contribution margin is likely to increase by around ~Rs. 200/MT of sugar produced for a fully integrated sugar mill, which translates into a half per cent margin at the operating level. However, for a partially integrated mill, the increase in margins is likely to be proportionately lower.

By BOA Bureau