* Govt wants oil companies to achieve 5 pct blending of
ethanol in gasoline
* Hopes to reduce record current account deficit by cutting
* Demand for ethanol will give sugar mills a shot in the arm
* Oil firms float tender for 1.33 bln litres of ethanol
* With Brazil as inspiration, ethanol blending could keep
By Rajendra Jadhav
MUMBAI, Oct 15 Struggling sugar mills in India
are seeking solace in producing ethanol from crushing sugarcane,
as the government ramps up pressure on oil retailers to cut
fossil fuel imports by blending gasoline with the biofuel.
New Delhi, scrambling for ways to cut nearly $20 billion off
its oil costs as it battles a record current account deficit,
could save around $1 billion on annual imports of crude as it
pushes oil firms to hit a goal of 5 percent blending of ethanol
Reaching that blending target in 2013/14 for the first time
since its introduction over six years ago would lift earnings at
indebted mills in the world's No.2 sugar producer and help curb
a notorious cycle of glut and deficit in Indian sugarcane
With Indian mills making ethanol from molasses, a byproduct
of sugar production, the fading of that cycle would also ensure
more consistent output of the sweetener. That would provide
greater stability to global sugar prices with India less
prone to swinging between net exports and imports of sugar.
"Since oil companies have floated tenders ahead of the
sugarcane crushing season and there are no tussles over ethanol
pricing, 5 percent blending can be done this year," said Sanjay
Manyal, an analyst at Mumbai-based brokerage ICICI Direct.
Disagreements between mills and oil companies over pricing
stymied progress after India launched its ambitious ethanol
blending programme in 2006, trying to emulate the success of
Brazil's booming biofuel industry.
But state-run oil firms such as Indian Oil Corp Ltd
, Hindustan Petroleum Corp and Bharat
Petroleum Corp have been far more amenable to mills'
demands on pricing since the rupee plumbed record lows in
August, driving up their crude oil import costs. These firms
import crude to produce refined products like diesel and
gasoline, which they sell through their fuel pumps.
"Oil companies won't find any problem in paying higher
prices for ethanol (than last year) as they are buying imported
crude oil at much higher prices due to the weak rupee," said
Deepak Desai, chief consultant at Ethanol India, a private
company that helps set up ethanol production units.
Mills were supplying ethanol at around 38 rupees per litre
in the latest tender, with imported gasoline costing 46 rupees
The matter has taken on greater urgency since Oil Minister
Veerappa Moily told Prime Minister Manmohan Singh in August that
5 percent blending could be achieved in 2013/14, helping
preserve the country's precious foreign exchange. India's crude
import bill was $144 billion last fiscal year - the largest part
of its overall import costs.
SLOW AS MOLASSES?
The new crushing season, expected to start in November,
could lead to record ethanol output if oil companies finalise
tenders for 1.33 billion litres of supply from December 2013 to
November 2014. That would dwarf the 80 million litres they
bought in the 2012/13 sugar year that ended on Sept. 30.
But some millers cautioned that oil marketing companies were
dragging their feet in finalising tenders, although oil firms
said deals would likely be sealed soon.
"We also want to achieve 5 percent blending as early as
possible. We will try to award tenders by the end of this
month," said an official with a state-run oil retailing company,
who declined to be named as he was not authorised to speak with
That is good news for mills that have been struggling with
low sugar prices due to a surplus in production of the sweetener
for the fourth straight year.
Indian sugar output usually plunges after a few years of
surplus as the glut in supplies drags on prices and mills'
ability to pay cane farmers. That prompts farmers to switch to
other crops such as wheat, leading to a cane shortage that lifts
sugar prices and attracts more farmers in subsequent years.
A successful ethanol blending programme would weaken that
cycle by providing more consistent demand for cane, said Ashok
Jain, president of the Bombay Sugar Merchants Association.
"Ethanol is more reliable source of income than sugar," he
And market participants reckon that ethanol blending in
India has room to grow beyond 5 percent, citing compulsory
blending in Brazil which stands at 25 percent. Although raising
blending above 10 percent is unlikely in the short-term as it
would require modifications to automobile motors, while any
strengthening in the rupee could also make blending less
appealing as crude imports would become cheaper again.
"If 5 percent blending becomes successful, there is scope to
increase it to 10 percent without any change in car engines,"
said ICICI Direct's Manyal, who has been tracking sugar
companies for seven years.
(Editing by Joseph Radford)