Sugar becomes Sugar FREE...

The stocks in the Indian sugar sector which had given a strong run up last year owing to a shortage in the supply of sugar is showing the signs of weakness and is expected to do so.

Last year because of a bad monsoon, a fall in the supply from the Brazilian front and production surging, fortunes of the sugar industry changed dramatically. For some of the companies there market cap surged by over twice the debt on their books and it was a complete change in the capital structure, of the whole industry.

However, Sugar companies, which were expected to make bumper profits because of soaring sugar prices — Rs 41.15 per kg in January 2010 — are now facing the heat because of the peaking of the sugar cycle. Ever since scaling a peak in January, prices have corrected by almost 33.5 per cent to Rs 28 per kg. This is also one of the reasons why most sugar companies have seen a sharp decline in their share prices.

Sugar prices have corrected globally and in the domestic market. This is consequent to expectations of the global sugar industry moving from a deficit to a surplus situation. According to the International Sugar Organisation (ISO), the world sugar market, which was estimated to see a deficit of about 8.51 million tonnes for sugar season (October to September) 2009-10, could see surplus stocks of 2.5 million tonnes in the forthcoming season in 2010-11. This however is not something surprising. The Indian and the global sugar industry goes through this phase almost after every 5-7 years.

• With the Rise in sugar prices, the demand from the mill owners for the cane increases
• This leads to most of the farmers shifting to sugar form their current crop production to realize higher cane prizes
• As more and more farmers enter into cane production, the cane supply increases
• leading to a rise in the sugar supply and hence fall in the prices and then the reverse cycle starts, which is currently beginning to happen in the Indian Sugar Industry

Moreover, the profitability of the companies will also get hit on account of inventory losses both in the case of raw material and on the finishes sugar front. The industry is lobbying for a levy on the imported sugar to have a check on the imported sugar into the country and if this happens could give a little breather to the companies, otherwise its one sector which one, as an investor should avoid.

Happy Investing...!!!