India Ratings and Research (Ind-Ra), a leading rating agency, has said that the sugar industry faces headwinds in the near to medium term in view of a surplus sugar scenario in sugar season (SS) 2017-18, as domestic production is likely to be significantly higher than the earlier estimate.

Recent government measures are a shot in the arm for sugar millers and will uplift depressed sugar prices to a certain extent and curb distressed selling. However, they could stretch the liquidity and credit profiles of the smaller/standalone players, said the rating agency.

Furthermore, the measures do not address the underlying problem of surplus sugar. While exporting surplus sugar is an alternative, it would be challenging as Indian sugar is uncompetitive in the global market, it said.

Ex-mill sugar prices plummeted to about INR31/kg in February 2018 from about INR36/kg at the start of the season. Higher-than-expected production, sluggish sugar offtake, increased competition due to the reopening of closed sugar mills, distressed selling by mills with weak liquidity to clear cane dues (14-day regulation), stockholding limits on dealers in the early part of the season, threat of cheaper imports from Pakistan, speculation about significant sugar surplus in SS 2018-19 and dealers capitalising on multiple factors at play have led to a downtrend in sugar prices.

While Ind-Ra drew comfort from a balanced demand-supply scenario, depleted opening stocks and high import duties, and expected sugar price to remain stable at about INR35/kg, the developments during the season have resulted in sugar prices falling much below the expected levels.