Liquidity for mills: OMCs, sugar mills, banks get into tripartite pacts

Cash-starved sugar mills that produce ethanol are getting into tripartite agreements with oil-marketing companies (OMCs) and banks, which will allow them to get loans on the basis of committed purchases of the bio-fuel by OMCs. This will ease the mills’ liquidity crunch, while boosting ethanol supplies.

Prakash Naiknavare, managing director of the National Federation of Cooperative Sugar Factories (NFCSF), told FE: “Sugar mills will supply the targeted volumes of ethanol to the OMCs while the payments by the OMCs to mills will be held in an escrow account till the targeted supplies are done. The banks will withdraw the interest and principal component, while the balance will go to the sugar mills.”

The poor balance sheets of sugar mills were cited as the biggest road-block in increasing the ethanol production, and the failure of the 2018 interest subvention scheme. Under this scheme, the Centre had approved soft loans for mills to set up new distilleries or upgrade existing ones, expand capacity, and encourage them to divert sugarcane to ethanol making.

To secure the 10% blending capacity by 2022 India will have to increase its existing annual capacity of 4.3 billion litres by another 300 million litres annually. In FY20 India produced and consumed only 1.8 billion litres of ethanol which was just 53% of its existing capacity utilisation.

Eduardo Leao de Sousa, executive director of UNICA (Brazilian Sugarcane Industry Association), said Brazil blends 27% ethanol in automotive fuel and was in a similar situation as India is at present in early 1970’s. India will have to implement what Brazil did in ’70s and ’80s that is to make blending of ethanol mandatory in automotive fuel. “Today we consume around 32 billion litres of ethanol as against India’s 4 billion litres. Blending of ethanol should be mandatory and not optional, besides every sugar mill should be incentivised to put up ethanol distillery which will help to reduce the surplus production of sugar, and give monetary benefits to the producer as well as the government which is forced to subsidise surplus sugar exports by 50%,” De’sousa said.

India provides $140/tonne discount on sugar exports as against the production price of $280/tonne. Ravi Gupta, president, Shree Renuka Sugars, said, to increase the ethanol production for 10% blending across India we have to increase existing capacity by maximising usage of B molasses for ethanol production and also invest in building new ethanol capacity. “The securitisation of future inflows from ethanol sales to OMCs is a good way to fund new projects for those who have weak balance sheets. Ethanol is not only environment friendly it is farmer friendly and also help in using surplus sugar within the country for making ethanol and reducing crude oil imports,” Gupta said.

Going ahead, analysts believe in addition to traditional sugarcane molasses-based ethanol plants, India should continue to promote the development of second-generation (cellulosic) plants. India has roughly 400 million litres per year of planned 2G ethanol plant capacity that should come online over the next four years. Also, increase in price of certain grades of molasses will also increase the utilisation of existing capacity.

Loren Puette, biofuels analyst at S&P Global Platts, told FE that India’s utilisation rate can be increased by raising the remunerative ex-mill price of ethanol derived from its primary feedstocks of C-heavy molasses, B-heavy molasses, and sugarcane. For the current 2019-20 season, these prices stood at Rs 43.75/liter for C-heavy molasses, Rs 54.27/ liter for B-heavy molasses, and Rs 59.48/liter for the ethanol derived from sugarcane juice. “Raising these prices, by 5% to 7% or even higher, would make fuel ethanol production more profitable for distilleries and raise its utilisation rate,” Puette said.