Posted by: commoditywise | December 22, 2007

Weekend Musings – Indian tippers worried by ethanol gamble

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thanol, the Green Fuel, has been thrown up as a political tool in India. And caught between the ethanolics game of government and the industry are the Indian tippers.   

Faced with almost 10 mn tn of extra sugarcane production, doubling of ethanol blending with petrol would possibly be easy. The Central Government wants to double the ethanol blending to 10 per cent, but the states enjoying the high revenues from alcohol sales are not willing to let go the higher alcohol production in their states. If they do direct more alcohol for ethanol, the Indian tippers pegs would get costlier.  

As the volatile crude oil prices continue to threaten to cross $100 per barrel, India hopes to partially soften the impact by doubling the use of sugarcane ethanol blending with petrol to 10 per cent from October 2008. It also plans to make five per cent ethanol blending mandatory in all states – except Jammu & Kashmir –  even when India’s experience from blending five per cent ethanol for the past two years remains anybody’s guess. 

Since the past more than one year, the government has been talking about doubling the use of ethanol to blend with petrol was in the news since last more than one year. India will require around 1.25 billion liters of ethanol each year if it pushes ahead the plan of 10 per cent blending of ethanol with petrol.  

And the mandate to increase the supply of ethanol to the petroleum sector is given to Sharad Pawar, Food and Agriculture Minister. Pawar is also known as the Maratha strongman from Maharashtra, India’s leading sugarcane growing state. Therefore, astute politician that he is, Pawar has once again thrown up ethonal recently in the hope to pacify members of two, possibly even three, groups – sugar industry that is burdened with over production and subdued prices, government faced with the prospect of hiking petrol price at a time when it is busy fighting the blues of early general elections next year, and possibly farmers – if political will remains hereafter – by promising them early solution to the non-payment of their dues by sugar mills. The non-receipt of sugar cane dues from sugar mills is hindering the smooth sowing of wheat that usually ends by mid-January each year. 

By throwing up ethanol Pawar wants to convey his being on their side with both his loyal sugar industry and also to his government masters that doubled use of ethanol would help reduce the use of costly crude oil and thereby soften the impact of high crude oil prices on the country’s budget. So, while the sugar industry would possibly be happy to see their huge pile of cane molasses being used to make increased ethanol (which possibly would help them increase their profitability hit by over production and subdued prices) the political masters would be happily busy calculating the gains from reduced use of crude oil following the doubled blending of ethanol in petrol. 

Petroleum companies – including the government owned and in private sector – have been opposing the high Rs 21.50 per liter that the sugarcane ethanol makers charge them to lift ethanol. A section of ethanol makers are supplying the product at Rs 2 lower – at Rs 19.50 per liter. So, there’s tug-o-war between the petrol-companies and ethanol makers. 

India’s sugar production during sugar-year ended September 2007 is estimated to be around 29 mn tn. The 15 mn tn molasses is enough to produce around 3,300 mn liters of alcohol – one-third of which is used for potable and industrial alcohol. But not all states are willing to part with their sweet revenues, getting sweeter from revenues of potable alcohol. Like agriculture itself, the subject of alcohol too is a state subject. 

Even when the Central Government wants to introduce 10 per cent ethanol blending, there are 32 states that too would want to join the government’s plan to reduce the country’s crude oil import bill and divert more molasses alcohol to ethanol production.  Potable alcohol industry is one of the biggest revenue earners for almost all the states. The national exchequer itself earns around Rs 25,000 crore revenues from sale of potable alcohol.

So, more alcohol for ethanol would mean less for the potable alcohol industry. And no states would want to see their revenues impacted by higher ethanol use – especially when Article 47 of India’s Constitution envisages that the states shall impose prohibition (on the use of alcohol) for promotion of public health and nutrition. 

Interestingly, it could also be the tussle between the Food processing ministry and the agriculture ministry and the petroleum ministry that want to increase the alcohol use for ethanol manufacturing. Well, even when the issue of states willingness to divert more alcohol for ethanol production remains unsolved, the issue of manufacturing pure – water-free alcohol required for auto fuel manufacturing – too is a big unsolved issue. 

Amidst all this, where does the farmer fit in? Farmers in this political ethanol game are but marginal players – though in reality the farmers are at the very core of the ethanol game. Ignoring them would surely prove to be detrimental to both the sugar industry as also the politicians. But the interests of sugarcane farmers seem to be less bothering to Sharad Pawar and his political masters in the finance ministry and the Central Government. 

No wonder, the Indian tippers are a worried lot, may be the automobile drivers would be happy with ethanol blended cheaper auto fuel, but increased alcohol use for ethanol would possibly reduce alcohol availability for potable alcohol industry and this situation could be used by the potable makers to raise the prices.

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