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Crude spike swings advantage in favour of ethanol economics

ICICI Securities 10 Mar 2022

Buzzing:

Crude prices have spiked up by 40% to US$130/barrel resulting in petrol base price (without duties, taxes, dealer’s margin) crossing ethanol procurement prices. Along with a reduction of import bill, enhancing farmer’s income level & environment benefits, ethanol blending is also commercially advantageous at crude prices above US$100/barrel.

Context:

The government has set a target of ethanol blending with petrol at 10% in 2022 and 20% in 2025. This would require 430 crore litre in 2022 and 1000 crore litre by 2025. Further, the introduction of flex fuel vehicles would open the way for blending even above 20% levels.

Our perspective:

Sugar and other agri-based industries would be commissioning new distilleries to the tune of ~250 crore litre in 2022, which would take the overall distillery capacity to ~750 crore litre by the end of 2022, including the grain based distilleries. The government would further encourage higher blending levels along with introduction of flex-fuel vehicles. Currently, gross sugar production is closer to 36 MT while sugar mills are diverting 3.5 MT equivalent towards ethanol. This, along with ethanol production through grains, would ensure 450 crore litre of ethanol blending in 2022. The sugar & grain availability is sufficient to take ethanol blending levels beyond 20% in the next two to three years. The opportunity in ethanol blending for sugar & agri based companies is enormous with 9 MT excess sugar production and ~15 MT excess food grain availability every year. Sugar companies with 2-3x increase in distillery capacities (Dwarikesh, Avadh, Dalmia Bharat Sugar, Dhampur Sugar, Triveni Engineering & Balrampur Chini) would be biggest beneficiaries from an expected increase in ethanol blending reinforced by current geopolitical development.

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