In the business in which the price of purchase and sale is fixed by the government, why is there so much increase in sugar stocks in the business? Let’s know how sugar stocks work?
In the last one month, there has been a sharp rise in the stocks of sugar companies. Domestic and international factories such as tight demand and supply, favorable policy, high ethanol blending in India and increased ethanol storage have led to a 75 per cent jump in sugar stocks in a month. In such a situation, the question arises that despite the business in which the price of purchase and sale is fixed by the government, why is there such a rapid rise in sugar stocks? Let’s know how sugar stocks work?
These stocks climbed up to 75 percent
This year, a sharp rise in sugar prices has been recorded due to the decrease in global sugar production. Dwarikesh Sugar shares rose 75 per cent in a month due to increase in sugar prices. 71 percent in Dhampur Sugar, 69 percent in Bajaj Hindustan, 67.6 percent in Triveni Engineering Industries, 62.1 percent in Avadh Sugar, 56.6 percent in Uttam Sugar Mills, Dalmia India rose 55.4 percent.
Why are sugar stocks gaining momentum
The first reason for the rise in sugar stocks is the low production of sugar in two of the world’s major sugar exporters Brazil and Thailand. Brazil produces about 3.8 million tonnes and Thailand produces 1.5 million tonnes of sugar. Due to drought conditions in Brazil and a decrease in production in Thailand, the supply of sugar at the global level may be reduced by 2 to 5 metric tons, which is 5 to 10 percent of the global turnover of 40 to 4.5 million tons. That’s why sugar prices are increasing.
Increasing demand for ethanol
In addition, oil marketing companies are purchasing sugar mills to add ethanol to the oil. Currently, companies are adding 5 to 6 percent ethanol to the oil and the government has approved to increase it to 20 percent. This will make petrol and diesel cheaper and the government will have to reduce oil imports. According to an estimate, the demand for ethanol will increase from 300 million liters to 600 million liters.
In a business where the buying & selling price is fixed by the government, how is that the sugar stocks are rallying so much?
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Increasing demand for ethanol is good news for sugar companies. Sugar mills are increasing ethanol production with sugar. Currently, the price of sugar is Rs 31 per kg while ethanol is priced at Rs 62.65. Hence ethanol production is more profitable for sugar companies.
Despite ethanol production being highly profitable, Chinese companies cannot produce much of it. Because ethanol production requires a proper distillery which not all mills have. Mills are now investing for the same.
One ton of sugarcane produces 110 kg of sugar and 70 liters of ethanol. One tonne of sugarcane can produce 1.6 times sugar as compared to ethanol. Sugar companies divide their businesses according to this – 60 to 65 percent sugar, 20 to 25 percent ethanol and 10 to 15 percent for power generation.
India produces about 2.5 million tonnes of sugar while the demand for sugar in the country is 3.5 million tonnes. Therefore 5 lakh tons can be exported. India is not exporting competitive due to high cost of production. Brazil and Thailand produce sugar at 40 per cent less cost.
The Government of India is supporting Sugar Mills by giving a subsidy of Rs 6000 per tonne. Due to the high price of sugar in the international market, along with export subsidy, companies are also making money from export.
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