Bonds, Currencies & Commodities
Sugar prices to stay unchanged despite record production

Experts believe that with demand rising and only a small surplus in the global market, sugar producers will be encouraged to export more

Sugar, which left a bitter taste in the mouth in early 2010 because of high prices, may not be much sweeter this year despite record production expected in India and Brazil, the world's largest producers.

"We expect a record production of 25 million tonnes in 2010-2011 (October- September) in India," Prakash Naiknaware, managing director, Maharashtra State Cooperative Sugar Factories Federation told Moneylife. The Indian Sugar Mills Association (ISMA) has estimated production at 25.5 million tonnes based on figures of expected output for the 12-months period provided by sugar mills.

Sugar prices, which were about Rs50 per kilogramme in early 2010, have come down to around Rs30 per kilogramme now. However, sugar mills believe that prices are not expected to soften further in the near future.

"A few months back, the government estimated the sugar production for the 2010-11 season at 24.5 million tonnes. A better idea of the production estimate can be made at the end of this month. Therefore, the government's estimate of 24.5 million tonnes is not expected to make any kind of impact on prices as of now. The domestic production this year is expected to be about 20 -25 lakh tonnes more than the estimated domestic consumption," Abinash Verma, director-general, ISMA told Moneylife.

Prices, in the global market, are over Rs3,100 per quintal, while the ex-mill price of sugar is Rs 2,775 per quintal (without duty).  

Mr Naiknavare also feels that despite a record production in the country, prices in the domestic market would not come down. "Prices in the domestic market will neither come down nor go up; it will remain stable at the current level of Rs27.50 per kg (ex-mill, without duty)," said Mr Naiknavare. In 2009-2010, the country produced 18.8 million tonnes of sugar.

"In the first quarter of 2011, the sugar market will remain stable. If the production anticipation comes true to around 25.5 million tonnes, then price may fall, but everything will depend on the government's policies on exports and the monthly sugar sale quota," Mukesh Kuvadia, secretary, Bombay Sugar Merchants Association told Moneylife.

The Australian Bureau of Agricultural Resource and Economics (ABARE) has in a report said that a large increase in production is expected in India and Brazil. Brazil's sugar production is expected to go up by 6.6% to 42 million tonnes. In India, sugar production would increase by seven million tonnes to 27 million tonnes, as higher prices have encouraged a 10% increase in cane planting in 2010-2011 and yields have benefited from above average rainfall during the monsoon, ABARE said.
However, according to ABARE, the European Union, Australia and Thailand are likely to be under-performers this year.  The supply of sugar will remain tight in the international market until the Brazilian cane crop lands in the market. The Brazilian crop is expected to reach the market around end-March. However, prices in the international market may see some downtrend in the next few months, experts say.

"The present price rise in the international market is not driven by fundamentals, so prices would come down slightly globally," Mr Naiknaware said.

"As per estimates of the International Sugar Organisation, there is hardly any surplus in the international market. The international market is already aware of the very small surplus and it is expecting exports from India," said Mr Verma. "The government has also permitted exports of 5 lakh tonnes which is in addition to 15 lakh tonnes already permitted in the past three months for exports against the Advance Licensing Scheme and the sugar lying at the ports. These exports have started and the exports against 5 lakh tonnes under the open general licence (OGL) will happen after a few weeks, when the contracts between sugar factories and exporters are finalised. It is to be seen whether these physical exports will have any impact on the international prices or not. This will depend on import demand which may still require some more imports especially from India."

On the anticipation of production of 24.5 million tonnes of sugar this year, despite the damage of cane crop due to unseasonal rains in the main sugar-producing states, the government has allowed export of 5 lakh tonnes under the OGL. Under the OGL, mills can export sugar without any restrictions or conditions.

Sugar mills in Maharashtra would be largely benefited as out of the permitted quota for export of 5 lakh tonnes, nearly 2 lakh tonnes will be exported from the state, at a time when globally prices are rising.

"For Maharashtra, we expect the upper limit of 9.5 million tonnes and the lower limit would be 9.3 million tonnes this year. The state is ideally located for exports as it has two large ports, the Mumbai Port and the Jawaharlal Nehru Port. Out of the permitted quota for export of 5 lakh tonnes, the state has got the quota of 2 lakh tonnes which will help to keep prices firm," Mr Naiknaware said.


Food inflation jumps to 18.32% on higher vegetables prices

New Delhi: Soaring prices of onion and other vegetables led to a sharp rise in food inflation at 18.32% for the week ended 25th December, a development that may prompt the Reserve Bank of India (RBI) to tighten monetary policy to check further escalation in commodity costs, reports PTI.

Food inflation jumped up by 3.88 percentage points from 14.44% recorded in the previous reporting week, and edged closer to the high level of 19.90%, last witnessed a year ago.

The rise in food inflation has been mainly on account of 58.58% rise in prices of vegetables in the wholesale markets.

Among individual items, onions became dearer by 82.47% on an annual basis, while eggs, meat and fish became costlier by 20.83%, fruits by 19.99% and milk by 19.59%.

The data further reveals that onion prices during the one week period ending 25th December rose by 23.01% in the wholesale markets.

With food inflation accelerating, the RBI may take more measures in its forthcoming quarterly review of the monetary policy on 25th January. The central bank during 2010 had raised short-term key policy rates six times to tame inflation.

Meanwhile, in the non-food category, the prices of fibres and minerals have climbed by 35.53% and 30.58%, respectively.

Rising food prices will reflect in the monthly inflation data for December, scheduled to be announced on 14th January. The overall inflation, as measured by the wholesale price index (WPI), in November had come down to 7.75% from 8.58% a month ago.


Steel price hike bodes well for Tata Steel

Brokerages say the latest price hike is sustainable on improved demand and particularly favourable for the world’s seventh-largest steel producer which has captive raw material supplies

The future is looking pretty exciting for Indian steelmakers, according to brokerages.

In a report on Tata Steel released recently, Motilal Oswal Securities (MOSL) says, "Steel prices have recovered by 10-15% across the world over the past one month due to end of de-stocking, supply correction, and raw material cost pressures. HRC (hot-rolled coil steel) prices have risen to $670 per tonne. Demand is likely to pick up over the next couple of months, as buyers return to the market post winter vacations in the western world. A strong steel price scenario is expected for 4-5 months."

In the past few days, Indian steel producers JSW Steel, Essar Steel and Steel Authority of India have announced a 3-5% hike in prices. Kotak said in a report on 3rd January, "Unlike earlier price revision, this appears to be sustainable, noting (1) the cost-push driven increase in steel prices globally over the past few weeks, (2) likely seasonal improvement in demand and restocking, and (3) alignment of domestic steel prices with landed costs of imports. We expect companies with captive raw materials to benefit; Tata Steel will be the biggest beneficiary, in our view."  

MOSL agrees that the future for Tata Steel looks particularly exciting. The steelmaker, which has a presence in Europe, Thailand and Singapore, is set to expand its capacity at Jamshedpur from 6.8 million tonnes per annum (mtpa) to 10 mtpa, to start coking coal production at its Benga project in Mozambique and iron ore production at its newly-acquired direct shipping ore (DSO) project in Canada. The brokerage says that a "$100 per tonne increase in steel prices tends to expand the margins of Indian operations by $50 per tonne, thereby driving the equity value by $425 million".

In November 2009, Tata Steel paid $88.2 million to Sydney-based Riversdale Mining to jointly mine coking coal from Benga in Mozambique, to feed its Corus steel-making facilities in the UK and Europe. According to the company, the Benga project has coal reserves of 502 million tonnes. Tata Steel owns 35% stake in Benga with the right to buy 40% of the produce and this will remain even if it sells its 24% stake in Riversdale, on the A$3.9 billion takeover offer by Rio Tinto for the Australian mining company.

In a report late December, independent brokerage CLSA had said, "Recent commentary by Tata Steel's management indicates that the company has not yet decided on making a counter-bid for Riversdale. We consider a counter-bid by Tata Steel as unlikely, as it would reverse the focused balance sheet de-leveraging process currently underway. Acceptance of Rio Tinto's offer for Riversdale has a higher likelihood, but would require Tata Steel getting comfort from Rio Tinto on coking coal supplies."

MOSL says, "Though the coal production is expected to be small at about one million tonnes (on attributable basis from Benga) in FY13 and logistic bottlenecks remain in evacuating large quantity of coal from Mozambique, the keen interest of Rio Tinto group with a firm bid of A$3.9 billion for Riversdale, and a possible counter bid, is likely to get reflected in valuations of Tata Steel sooner than expected."

In September 2010, Tata Steel acquired an 80% stake in the direct shipping ore (DSO) project in Canada's New Millennium Capital Corp (NML). The DSO project has 64 million tonnes of proven and probable mineral reserves. As part of the agreement, Tata Steel will reimburse NML 80% of the cost to date on the project, arrange funding up to CDN$300 million for capital costs and commit to take 100% of the DSO project's iron ore products, of specified quality, at world market prices for the life of the mining operation. The joint venture is expected to produce four million dry tonnes per year of iron ore products.

The Tata Steel stock price was up by over 1% today, after New Millennium said it received environmental approval for its iron ore project with the Indian steelmaker and the joint venture partners expect to begin production by the second quarter of 2012.

According to MOSL, "The Jamshedpur expansion to 10mtpa would be completed by December 2011 and coking coal and iron ore production would start in 2HCY11." The sale of Teesside Cast Products steel plant in northern England for nearly $500 million will help deleverage its balance sheet and reduce earnings volatility for its Europe operations, MOSL says.

The brokerage also points out that over FY10-11 Tata Steel has sold around Rs12 billion worth investments in group companies such as TCS, Tata Power and Tata Motor and it is likely to further unlock value of investments worth about $900 million over the next 2-3 years.

MOSL points out that while steel volume sales and realisations are expected to improve over the next two years, "declining coking coal integration on account of lack of growth at coal mines and appreciation of Indian currency (Rs43 a dollar for FY13) will drag margins".

Capacity utilisation at Tata Steel Europe (formerly Corus) has improved dramatically since FY09, mainly because it reduced purchases of third-party steel. It has undertaken various cost-cutting measures, including rationalisation of staff. Tata Steel margins recovered in 1HFY11 but a subsequent steel price correction and raw material cost inflation weighed in the second half. But with a recovery in steel prices, margins are expected to be higher in FY12.


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