‘India has a future in ethanol’

NIDHI NATH SRINIVAS
TNN, FEBRUARY 23, 2006

If sugar is the new Internet, India may well be its Silicon Valley. As the second largest producer in an increasingly sucrose-deficit global market, India is the new star on the commodity investment horizon. Leading analyst and Paris-based broker Jonathan Kingsman tells Nidhi Nath Srinivas why foreign investors are making a beeline for the new honey pot. Excerpts:

What makes India suddenly so important in the world’s balance sheets?

India’s size of production has always made it important. But now that 5 million tonnes of European beet sugar is out of the market, Brazil is producing more ethanol due to current price signals, and world consumption is rising 2% annually, it is India that will help fill this hole. Everybody wants to share in this growth story. At what levels do you expect world prices to stabilise? We are expecting equilibrium in the long term at 14-16 cents/lb with oil at $55-60/barrel. But there are some caveats to that because of price signals in the ethanol market. This is election year in Brazil, where the government would like ethanol to be cheap. Any political action to ensure that could distort the market.
The United States is phasing out MTBE and its oil companies are desperate for oxygenates. So they could become ethanol importers at any price. Crude oil prices could rise and change the calculation. Lastly, weather could be a problem. Cane crops have been disappointing in China and Mexico.

Is it a good idea to refine imported raws and make white sugar?

Certainly. Asia is a sugar deficit area. It is also cheaper to move raw sugar over long distances and white sugar over short. The back haul rates for containers are low too. So it makes sense to import raw and produce white for local market. Producing white closer to consumers has an additional advantage that you can give the quality and packaging they demand. It also enables you to build a brand.

How much will India export this season?

May be up to 1 million tonnes, wholly due to price signals. As Indian prices are below world prices at present, it will export to neighbouring countries. As India doesn’t have adequate stocks, the danger is that if you export too much, it could lead to a local shortage. So India may have to import later. This inverse on the world market is not really a bad thing.

Bio-fuels are suddenly fashionable. Does ethanol have a future in India?

I believe more than Brazil, it is India that has a future in ethanol, mainly because it is derived from a by-product, molasses, instead of cane juice. In Brazil, ethanol is part of a debate whether the country should use sucrose, which is in demand, to make food or as a fuel. In India that debate is irrelevant. In fact, as India’s sugar production increases, the output of molasses will increase too. Instead of dumping that in the world market, it would be more profitable to make ethanol out of it.

Has India been wise in instituting an ethanol programme?

You have to look at potential outcomes before you mandate anything. If the price of crude oil drops or there is a drought, ethanol will become an extremely expensive alternative that may need subsidy to survive. That would force India to import ethanol.

Would you say that the risks in being import dependent in bio-fuels is larger than those associated with crude oil?

Undoubtedly. Oil is fungible. It can come from any origin and the only risk is price. Bio-fuels are agri-produce, dictated by weather and crop cycles. So the risks of short supply and price swings are much higher.

Yet so many countries are now pushing bio-fuels!

The problem is that it is hard to find any negatives about bio-fuels. They are Green, farmer-friendly, appeal to every politician’s desire to reduce import dependency, allow governments to give subsidy to growers of oilseeds and sugarcane, and generate industrial investment. All this makes bio-fuels very palatable to everyone across the political and economic spectrum.