20% Ethanol Blending Goal Means More Sugarcane Utilisation

(CRISIL Ratings) Industry’s sugar inventory level and cash flows of millers shall also improve -- India’s aim to blend 20% ethanol in petrol by ESY1 2025 — or ~990 crore litre annually — will require effective utilisation of both grain and sugarcane feedstock2 to increase its supply.

Annual ethanol production from grains is expected to see a significant increase to ~600 crore litre by the next season (this season’s production estimate is ~380 crore litre; see chart 1). The balance will have to be produced by processing ethanol from sugarcane, which is viable given the substantial capacity in place.

This, in turn, can help optimise sugar inventory, particularly considering the high carry-over stock expected at the end of the current season owing to the government restriction on diversion for ethanol production and exports.

A CRISIL Ratings analysis of 17 integrated sugar mills, accounting for about one-third of sugar-based ethanol supply, indicates as much.

Blending ethanol helps reduce India’s dependence on crude oil imports. The ethanol blending rate has steadily risen 200-300 basis points each season since ESY 2021 (see chart 2).

While grain utilisation for producing ethanol is not controlled, the government determines the quantum of sugarcane utilisation based on its estimation of demand-supply balance of sugar for the year ahead.

Last year’s erratic rainfall is expected to have impacted sugarcane production3 this year. Consequently, ethanol production from the sugarcane route is expected to be restricted to ~250 crore litre (equivalent of 2.5 million tonne of sugar) this season.

Says Poonam Upadhyay, Director, CRISIL Ratings, “Ethanol blending could still improve to 14%4 in ESY 2024 as extraction from grains has significantly risen due to 40% capacity expansion. That will compensate for the reduced output from sugarcane. However, to reach the 20% blending target by ESY 2025, allocating sugarcane required to produce ~4 million tonne of sugar can be considered for ethanol production, similar to the season 2023.”

In the upcoming season 2025, gross sugar production is expected to be ~33.5 million tonne, with consumption at ~29.5 million tonne. Additionally, sugar inventories are projected to be healthy by the end of this season.

Hence, allowing sugarcane — equivalent to the quantity required to produce 4 million tonne of sugar — for ethanol supply (~390 crore litre) can be considered, while the larger remaining share will be sourced from grain-based route.

1 ESY refers to ethanol supply year (November-October), ESY 2024 is the ongoing season
2 Grain-based feedstock includes maize and damaged foodgrains whereas sugar-based feedstock comprises of sugarcane juice/ syrup, B-heavy and C-heavy molasses
3 Sugarcane crop takes about 12 to 18 months to mature depending on the variety and sowing time
4 Cumulative blending for the first eight months through July 2024 was ~13% — or 477 crore litre — higher than 12% in ESY 2023.

Excerpt from Deccan Herald: In December 2023, the government prohibited the use of sugarcane juice or sugar syrup for ethanol production in the 2023-24 ESY (December-November) to ensure adequate sugar availability for domestic consumption and keep prices in check.

The government on Thursday permitted the use of sugarcane juice and sugar syrup for ethanol production in the 2024-25 ethanol supply year (ESY), reversing last year's ban.

"Sugar mills and distilleries are allowed to produce ethanol from sugarcane juice/sugar syrup, B-Heavy molasses as well as C-Heavy molasses for ESY 2024-25 as per the agreement/allocation with OMCs (oil marketing companies)," the food ministry order said.

The Food Ministry and Petroleum and Natural Gas Ministry will periodically review the diversion of sugar for ethanol production vis-a-vis sugar production in the country to ensure year-round availability of sugar for domestic consumption, it added.

Official data shows ethanol blending in India has reached 13.3 per cent by July of the current season, up from 12.6 per cent during the 2022-23 season. Currently, the country's total ethanol production capacity stands at 1,589 crore litres.

The government aims to achieve 20 per cent ethanol blending target by 2025-26. READ MORE