Why Indian sugar stocks must be wary of the ethanol story
Sugar stocks in the April quarter had some reasons to cheer about. While the core sugar business continued to be under pressure due to oversupply, there was good news. The ethanol business which contributed nearly 12% to the revenues in the quarter ended up contributing nearly 50% of their profits. This has given hope to sugar stocks, but there is need for caution. Here is why!
Only ethanol is viable now
Among the various bio-fuels available only ethanol blending is actually viable in India. Other sources like Jathropa are not exactly scalable and the yield is too low to justify a full-fledged business model. Modi and Gadkari have spoken about the need to reduce dependence on fossil fuel imports and that is only possible through ethanol.
Ethanol has other costs
While it is true that ethanol blending can reduce the cost of fuel meaningfully, there are some costs that we need to be conscious of. Production of sugarcane and distilling ethanol is very water intensive, which becomes a major challenge in a country with rampant water shortage. Also sugarcane growing for ethanol takes away a large share of fertile cultivable land. That is almost equivalent to forsaking food production, which is hardly acceptable in a country like India where agricultural yields and efficiency are already quite low.
Problem of size
If you look at the global pecking order of ethanol production, India does not even figure in the top 10. For example, the US produces 41 MT of ethanol and Brazil 20 MT while India produces only 0.30 MT of ethanol. That is because of low ethanol productivity and it would really take a very long time for India to really become a significant player in the ethanol blending value chain.
But, where is the water?
That is the million dollar question. While the US makes ethanol out of corn and Brazil out of sugarcane, India makes ethanol out of molasses. That is very water intensive. The average water requirement in India is 2.5 times the water required to blend one liter of ethanol in the US or in Brazil. While the US and Brazil largely depends on rain water, India relies on ground water resources for half of its ethanol needs.
Numbers don’t add up for India
There is a dichotomy to begin with. India blends just 2-3% ethanol whereas it is 45% in Brazil. If India were to even achieve up to 10% blending, our water consumption would be twice that of Brazil. India does not have so much cultivable land. Sugarcane accounts for 3% of cultivated land which will have to touch 7% to blend 10%. That hardly looks like a practical solution!
