Ever since the Indian Government increased the percentage of ethanol to be blended with fuel to 10%, and sugar and second generation ethanol makers have started jumping around. Many analysts too have started putting out positive reports on such stocks.
Is the hype justified?
Let’s find out:
Indian companies produce about 4,60 crore litres of ethanol every year
50% is used in Alcohol production, leaving 230 crore litres for other uses.
Of the balance, 130 crore litres are used for potable, industrial and other uses.
This leaves 100 crore litres ethanol for fuel blending.
In 2017-18, Indian sugar mills worked hard and sold 113 crore litres of ethanol.
The procurement price was 40.85 and the mills ended up with Rs 4,500 crores of ethanol sales.
Now, 113 crore litres of ethanol works out to just 2% of the total fuel that is eligible for blending, leaving a massive deficit in supply.
This is why Indian sugar companies have decided to increase the production threefold to about 450 crore litres by 2022.
The investment that is required for increasing ethanol capacity is Rs 10,000 crores.
Now, one barrel of oil is at US $60 or Rs 4,200.
Also, one barrel of oil contains about 73 litres of petrol (36 litres of diesel, 20 litres jet fuel, 6 litres propene and 36 litres of other products such as butane)
The cost of importing one litre of petrol works out to approximately Rs 39 per litre, after refining, trasportation, storage, etc.
And we are paying Rs 40.85 per litre of ethanol.
Going forward, with EVs rolling off fast from the assembly lines, it is expected that the price of crude will drop dramatically.
When this happens any government may not pay 40.85 per litre to ethanol.
At that time, what will happen to the Rs 10,000 crore invested in the new capacities?
Won’t the companies go sick? Also, sugar consumption is falling around the globe because it is associated with many lifestyle diseases.
Therefore, going full ballistic on the ethanol story can be an extremely risky proposition.
If you still are bullish on ethanol, take some time out and double check wit an industry professional before jumping in.
The sugar lobby is strong in the present govt. One of the prominent ministers is known to be associated.