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Care for a Blend?

In this week's FinMail we take a look at the reason behind the recent surge in the sugar stocks. We also take a look at the ambitious project of the government that's been fuelling the rally.

The Story:

Did anyone say Sugar Stocks? Or Did anyone mentioned multi-baggers and I heard Sugar Stocks? Nevertheless, it doesn't make a difference. If you have been an active follower of the markets for the past few months, you know how huge money has been dripping in Sugar. Sugar Stocks have been on roll since the beginning of the year.

Being the second-largest producer of sugar (17% of the world's total production) you might just get the context behind the rise. The top sugar producer companies like Shree Renuka Sugars Ltd, Bajaj Hindustan Ltd, Dwarikesh Sugar Industries Ltd, Dalmia Bharat Sugar and Industries Ltd, Triveni Engineering and Industries Ltd have surged from the least at 139% to the highest at 310%.

But that's not it, research companies suggest that the bull run in these stocks is not yet over. There is still a lot of growth that remains in these stocks. But you might be wondering what all are the reasons that are fuelling this rally? It's not that India has just recently gained the title of 2nd largest producer. It has been one of the largest producers for years, even it was the world's top producer for some time. It can also be possible that there has been a sudden spike in sugar products. But on the contrary, the demand for sugar has in fact seen a slowdown. So what's actually up?

There are not a lot of reasons but only one that has been fuelling (pun intended) this rally and that is fuel, ethanol to be more precise.

What's up with the Ethanol story and how it became a reason, everything as usual in this FinMail. Let's start!

What is Ethanol?

Ethanol is a very pure form of alcohol and it is a major constituent in Alcoholic drinks, Antiseptics and our new companion - Sanitizers. It is derived from the processing of Sugar from Sugarcane and it is a byproduct of Sugarcane. It can also be extracted from foodgrains such as maize, rice, wheat and other products like corn and rotten potatoes. Basically, it can be founded anywhere where there is a presence of starch. But how come petrol and ethanol are related?

Petrol and Ethanol

Crude Oil and its never-ending importance. We made a FinMail out of it last week and yet again here we stand repeating the same thing yet again. The countries producing it? Definitely better placed. But what about the countries that import it?

Crude Oil bills have been a headache for countries for decades with their rising prices and no decrease in consumption. Countries that pay out a lot in Crude bills often stand to face economic pressure. India too imported ₹7,17,000 worth of Crude Oil in FY 19-20 which stands around 3% of India's GDP. That is a lot! That is why economies stay vigilant on finding out ways to reduce their Import Bills. And in one of the same ways, a study found that Ethanol can be blended in Petrol and can be used for vehicles. It produces less pollution and also doesn't impact the usage of vehicles. Voila!

And then started the practice of mixing Ethanol with Petrol for using them as fuel in vehicles. The number one producer of Sugar, Brazil has been doing it for years and have been successful so why don't we give it a try and then began the vision to start mixing Ethanol in Petrol since the year 2003, during the Vajpayee Government.

India had been mixing Ethanol with petrol in lesser proportions, we still were searching for ways to shift to an alternative. Then came the updated National Policy of Biofuels in 2018.

The National Policy of Biofuel aimed to mix Ethanol and Petrol, the process called Ethanol Blending in order to reduce the country's dependence on petrol and crude products. To summarise the policy, it aimed to achieve a blending target that can significantly reduce the impact of crude oil imports on our economy.

Why Ethanol Policy?

The plan is to start blending ethanol with petrol in phases, keep increasing the proportion of ethanol in the fuel. The target is to achieve a blending ratio of 20% ethanol and 80% petrol. The government set the target to achieve the expected blending by 2030 but then it was advanced by 5 years to 2025. The target was yet again preponed to 2 years by 2023.

Our union minister Nitin Gadkari also announced that the government has decided to allow ethanol-based flex engines i.e. the vehicle engine that can run on a variety of fuels (basically petrol and/or ethanol). The government issued a draft to automobile manufacturers to design vehicles that can run on petrol blended with ethanol to the extent of 12% and 15%. On achieving the blending target of 20%, India can reduce the Import Bill to the extent of $4 Billion a year.

Another reason that makes our Ethanol Blending target more attractive is that the blend of ethanol in petrol emits lesser carbon monoxide and other harmful greenhouse gases. While it is an economically viable option, it is eco friendly too. Ohh and that's not it, studies show that using ethanol as a fuel is carbon neutral if produced from farm products such as sugarcane and corn (the biomass absorb CO2 as it grows). Hence, Sone Pe Suhaga!

So India eyes limiting down its oil import plus curbing pollution up to some extent. So now you know why it is being pushed aggressively and automobile companies are asked to set up flex engines.

India is even trying to use only ethanol as fuel replacing petrol. The government has started giving permission to establish 100% ethanol fuel stations. OMCs too are investing in the development of ethanol plants.

That being said, our current Ethanol production capacity stands at about 300 Crore litres per annum. If we need to achieve the 20% target, experts believe that we will need to achieve the production target of 1000 Crore litres. With the target being set, there only remains the actual work of ramping up the production capacity. In the same step, the government announced a ₹41,000 Crore package that aims to help the companies with the same. And the sugar sector is definitely going to get benefited from it and hence the rally.

Also, the farmers producing the sugarcane crop are going to earn more as the sugarcane that was wasted due to overproduction would now be utilised as Ethanol production doesn't necessarily require good sugarcanes. And as sugarcanes is not the only thing from which Ethanol can be produced, every other waste crop that has starch in it will be of use now. Even the farm waste that is burnt by the farmers in Delhi as well as other northern states that create pollution problems every year wouldn't be an issue if that was to be used for ethanol production.

But as they say, there's always something challenging that comes along.

Challenges Ahead:

The first and foremost challenge that tags along and also probably the most serious one is that to produce ethanol, sugarcane and rice straws are used. Well, to be blunt, these crops are high water-consuming crops. In Maharastra alone, 70% of the total irrigation water is used for just these two crops. Being a water deficit country it would do more harm than good if it goes overlooked.

The second is the capacity issue. With only less than 2 years remaining for the target and more than 3 times the Ethanol capacity needed to meet the target, we don't know how the situation would pan out. The production capacity is definitely being ramped up at utmost priority but to ramp up at this speed, the target seems more ambitious than achievable.

The third challenge in the way of the government is that with the government giving more attention and support to the farmers producing ethanol based crops, India faces the danger of a food crisis wherein the farmers producing food grains will be encouraged to switch to cash crops like sugarcane, corn, etc and there could be a shortage of food grains.

And the concerning challenge that remains is that the government seems to have no clear view of the future. The government, on one hand, is promoting ethanol-based fuel and planning to encourage companies to manufacture mixed fuel-based engines, while on the other hand, the government is promoting the electrification of vehicles and also backing the research on hydrogen-based fuels.

It does not harm the government to have multiple views but it does harm the manufacturing companies which have to divide focus to all three of them - Ethanol, Electric, and Hydrogen.

It does seem that the government is using ethanol-blended petrol as a temporary solution and want to shift to electric-based vehicles in the long run but for the time being while it develops why not use the waste of farm products?

Let's hope that what we aspire to become doesn't come in the way of what we actually are working towards.

That is it for this week's FinMail. Stay safe & keep learning.


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