Sugar mills in India, the world’s largest producer after Brazil, are betting on government subsidies to end the biggest industry shutdown in the nation’s history and stem losses at companies

Sugar Mills Seek State Aid to End Worst Impasse: Corporate India

Sugar mills in India, the world’s largest producer after Brazil, are betting on government subsidies to end the biggest industry shutdown in the nation’s history and stem losses at companies. Mills in Uttar Pradesh, the state that is India’s biggest cane producer, will call off the shutdown only if the government agrees to pay part of the cane price to growers, M. Srinivaasan, president of the Indian Sugar Mills Association, said in a phone interview yesterday. Bajaj Hindusthan Ltd. (BJH) and Balrampur Chini Mills Ltd. (BRCM) are among those that want the state to bear about 20 percent of the cane costs, he said.The mills, including India’s biggest producer Bajaj Hindusthan, which announced an indefinite shutdown in Uttar Pradesh this week, say the suspension is necessary to prevent their losses from widening. The factories are squeezed by a rule that allows states to fix cane rates to help about 50 million farmers, a powerful voting bloc, to earn more as political parties face national elections by May 2014.

“How can the government force the mills to lose money unless they give some incentives,” said Michael McDougall, head of the Brazil desk at Newedge Group in New York. “The government has to do something. It’s not an easy situation.”

Viable Price

The shutdown may delay cane crushing and reduce output from the 25 million metric-ton Indian crop projected by the Indian Sugar Mills Association, Director General Abinash Verma said Nov. 20. Local prices have tumbled to almost a 17-month low, prompting factories in Uttar Pradesh and Maharashtra, which account for 62 percent of the nation’s output, to sell below cost.

It cost mills an average of 36 rupees to produce 1 kilogram of sugar in Uttar Pradesh, while their average selling price at the factory gate averaged about 31 rupees in 2012-2013, according to ISMA.

Producers can pay a maximum of 225 rupees ($3.60) per 100 kilograms (220 pounds) of cane, compared with the state-set price of 280 rupees in Uttar Pradesh, Srinivaasan said.

The state government should pay the difference to allow companies to start processing, he said. Bajaj, Dhampur Sugar Mills Ltd. (DSM) and Triveni Engineering & Industries Ltd. (TRE) will suspend crushing until a viable cane price is fixed, the companies said in separate exchange filings this week.

“With this kind of adverse pricing, no mill can start and even if they start, they don’t have the money to pay,” Srinivaasan said. “Most countries have market intervention programs. Some kind of system needs to be put in place for the long run.”

Tax Breaks?

Mills in Uttar Pradesh owed farmers as much as 24 billion rupees for cane supplied last season and that figure may jump to as much as 130 billion rupees if they were to be paid at the 280-rupee rate in 2013-2014, Verma said.

The government will not give any subsidy to mills, though it’s open to considering requests for tax concessions, Rahul Bhatnagar, principal secretary for sugar in the Uttar Pradesh state government, said yesterday.

Bajaj reported a record loss in the three months to Sept. 30, while Balrampur Chini Mills Ltd., the second-largest sugar producer, posted its second straight quarterly loss. Bajaj has slumped 42 percent in Mumbai trading this year, while Balrampur has lost 6 percent, compared with the 4 percent gain for the benchmark S&P BSE Sensex. (SENSEX)

“No investor would like to touch sugar shares,” said U.R. Bhat, Mumbai-based managing director of Dalton Capital Advisors India Pvt., a unit of U.K.-based Dalton Strategic Partnership LLP that has about $2 billion in assets globally. “Finance is frozen, and banks won’t lend them more. Unless they crush more they cannot make profit.”

Ethanol

India should consider a flexible ethanol blending program to reduce the volatility in sweetener prices and link cane prices to market rates of sugar, mills association’s Srinivaasan said. The government could buy sugar from the mills to absorb the surplus that’s damped prices, he said.

Inventories in India surged to a five-year high of 8.85 million tons at the start of this season, enough to meet demand for four months, according to the mills’ association. The reserve may expand to 10 million tons by the close of the season on Sept. 30, 2014 if the nation fails to export any sugar, it estimates.

Delayed crushing may cut Indian crop, reducing a global glut and potentially boosting futures traded in New York that have plunged 51 percent from the 30-year high reached in February 2011.

“A subsidy will be a temporary phenomena, and it will be like a first aid,” Chanchal Biswas, an analyst with Dalmia Securities Pvt., said by phone from Kolkata. “For a longer term solution, the cane price should be linked with the sugar price. Without this, the losses will continue and the survival of the sugar companies will be a problem.”

To contact the reporter on this story: Pratik Parija in New Delhi at pparija@bloomberg.net