Oil marketing companies buy ethanol at a fixed price from local sugar companies for a 95:5 mix with petrol for retailing. For the last three years, they have been buying ethanol for Rs 21.50/litre. This contract ended on October 31, 2009 and is therefore, now up for re-negotiation between the government and mills. The sugar industry has collectively quoted a price of Rs 27/l for the new contract and would like this price to be locked for the next three years to remove uncertainty in revenue.
But the ministries of oil and finance are in favour of re-negotiating the price after six months to keep it in line with the spot market. India allows duty-free import of ethanol, making it necessary for sugar mills to remain on a par with imported ethanol from chief rival Brazil.
“Globally, there has been a correction in all commodities in the last 10 days as tighter US interest rates suck out liquidity from the markets. Ethanol and sugar prices have dropped accordingly. But this is just the start of this new interest rate cycle. We will see further correction in prices ahead,” said a market watcher.
The other reason for their reluctance to fix a price for three years is the promise of better sugar cane production both in India and Brazil in the forthcoming summer. In India, a bigger cane crop would mean greater production of the by-product molasses from which mills produce ethanol. In Brazil, mills use cane juice to directly produce ethanol. Bigger cane Brazilian output is certain to reduce ethanol prices in the world market.
Moreover, global ethanol prices also move in tandem with crude oil prices since ethanol can replace petrol in Brazil’s flex fuel cars. Crude oil has been hovering at around $80 barrel and is unlikely to spurt significantly higher over the next one year.
That should keep ethanol affordable too, say market analysts. According to the World Bank, real prices of crude oil are projected to average $75/bbl (in 2009 dollars) in 2010, with nominal prices rising from $62/bbl in 2009 to $80/bbl in 2020.
“Sugar companies obviously realise that ethanol prices could drop. That is why they would like the government to fix a high price for a fairly long time,” said an analyst seeking anonymity.
Oil marketing companies floated a fresh tender for a one-year period from November 1, in which they stipulated that mills supply a minimum 90% of the purchase order quantity. If they default, they would be required to pay 10% of the basic rate for the undelivered quantities. Oil marketing companies have been customers of last resort for sugar mills who sold their ethanol to the potable and industrial alcohol industry because they paid much more than Rs 21.50/l.
