Mumbai: The domestic sugar output is likely to surpass domestic consumption marginally, leading rating agency ICRA said here.

During sugar year (October-September) 2010-11, sugar output is expected to witness a 30-35 percent growth to around 24-25 million tonnes, driven mainly by improved cane acreage in response to healthy cane prices paid in sugar year (SY) 2008-09 and SY 2009-10, adequate rainfall and the consequent increase in sugar yield.

With domestic consumption at around 23 million tonnes and likely exports of around 1.5 million tonnes, total surplus will be around 0.5 million tonnes in SY 2010-11, a report on the sugar industry by ICRA said.

Notwithstanding the improved crop outlook, there has been a recovery in sugar prices since the steep decline seen during February-August 2010. Free sugar prices, which declined to
around Rs 25,000 per tonnes by August 2010 from around Rs 40,000 per tonnes in February, firmed up since then and stood at around Rs 28,000-29,000 per tonnes in Q2 SY 2010-11.

With the crushing season of SY 2010-11 coming to a close, ICRA does not foresee any significant variation in final production from the estimated range. Hence, the sugar price trends in the near term will be largely determined by three factors.

Firstly, the international crude oil prices, which will determine the raw sugar: ethanol mix in Brazil, the world's largest producer. Secondly, the Government of India's policies regarding exports of sugar and import duties.

Thirdly, expectations on domestic sugar production for the coming season (SY2011-12), which will start becoming clearer by April-end, 2011 by which time the cane acreage for the coming season is known.

Based on the currently available trends, ICRA expects sugar prices to show a modest upward movement in the next 6 months.

Sugar mills have also benefited from a sharp increase in levy prices as well as a reduction in levy percentage, it said.

There is also a proposal to decontrol the sector completely and abolish the sugar levy altogether. Reduction in levy, coupled with a hike in levy sugar price is likely to benefit sugar mills significantly. ICRA estimates the benefit to sugar mills at around Rs 1,800-2,000 per tonnes of sugar.