Sugar stocks’ outlook turns sour on export curbs

While strong lobbying to reverse the restriction is expected, share prices are seen hitting new 52-week lows before the new season rolls in

The government’s decision to cap sugar exports at 10 million tonnes (mt) contracted for, with no exports between June 1 and October 31, 2022 (except under restrictive conditions), has led to a big negative shift in the industry perspective. Sugar stocks witnessed panic selling and share prices have crashed in the past two sessions.

India and Brazil are the two biggest producers of sugar and both are “swing players” in the export market. India has produced surplus cane and surplus sugar in the past two years, despite greater diversion to ethanol production for blending with fuels. In 202122, exports earned over $4.6 billion for the industry, and this year was expected to see similar earnings. However, the curbs mean companies will have to wait until the new crop starts coming in before they can export again. This means holding inventory.

As far as domestic consumption is concerned, sugar production is likely to exceed consumption by 7-8 mt. There is significant inventory already due to bumper crops in the last two seasons, and inventory will only grow. Insofar as can be judged, a good sugarcane crop is also expected this year, although the monsoon will be critical for this waterintensive crop. This will mean a higher surplus over domestic consumption.

Since sugar can be considered a necessary good, the supply overhang should lead to a sharp drop in domestic prices, which gels with the government’s attempts to control inflation. Greater diversion of cane to ethanol production is a possibility since the higher diesel and petrol prices make that attractive. However, there are capacity constraints in this area and the industry probably lacks the distillery capacity to fully avail of this potential opportunity.

There may be caveats, softening the export control. First, exports may still be undertaken with “specific permissions” whatever that entails. Also, exports under tariff-rate quotas (TRQ) and CXL quotas to the EU and the US are still being allowed.

Sugar is a politically sensitive industry – many parliamentary constituencies in Uttar Pradesh and Maharashtra are in sugar-growing regions, with a large chunk of the population dependent, directly or indirectly on the cane and sugar value chain. So, it’s likely that there will be intensive lobbying to sidestep this regulation or to get it rescinded.

However, net-net, this is still negative for the sugar industry since it will lead to a squeeze on exports and a drop in domestic prices. It will take a while before we see how the industry responds to the controls but most analysts expect four months of this financial year to be either a complete washout or at least disappointing.

Almost every listed sugar stock has seen 10 per cent knocked off the share price in the past couple of sessions once rumours of the control started floating around. At some stage, value investors will come in, and once the monsoon arrives, we may see a reassessment of the situation. If the industry successfully lobbies for a rollback, there will also be a relief rally. But until such time as any of these events occur, the sector is likely to see continuing downtrends. We may see quite a few stocks hitting new 52-week lows before the new season rolls in.