India mandates fuel blending, sets higher ethanol price

17 August 2010 09:42  [Source: ICIS news]

MUMBAI (ICIS news)--India’s decision to make ethanol blending mandatory and its move to hike prices of the green fuel may adversely affect alcohol-based chemical production in the country, industry sources said on Tuesday.

Its Cabinet Committee on Economic Affairs (CCEA) had set the prices of ethanol at rupees (Rs) 27/litre on 16 August, up from Rs20-21/litre previously, as it enforced the 5% blending of ethanol on petroleum.

This price would remain in force until a government panel created a formula for ethanol pricing, a government source said. The higher price was set despite stiff opposition from the ethanol-based chemical industry, as well as the Ministry of Chemicals and Fertilizers, the source said.

“If the ethanol is available in the range of Rs18-20/litre in the open market, there is no need for the government to fix the price for ethanol-blended petrol at Rs27/litre,” said a source at a chemical manufacturer.

The ethanol price hike could have an adverse effect on the chemical industries that use the fuel as raw material as sit would translate to higher production cost, the source added.

“There are very few large ethanol-based chemical producers in the country. So if the raw material prices are raised, the small and medium producers will be largely affected,” the source said.

Some alcohol-based chemical industry may be rendered incompetent and some segments, like the paint industry may find it difficult to pass on the increased costs to their consumers, analysts said.

“The new price will not only increase the raw material costs but will also reduce supply as the blending programme has now been made mandatory,” said Sageraj Bariya, analyst with Angel Broking.

Chemical and alkali manufacturers, meanwhile, may now be forced to import ethanol, he added.

“The hike in ethanol values will hurt small and medium producers most. And in the short run, some of them may be forced to shut down or reduce operations,” said an analyst with Motilal Oswal Securities.

The Indian government had made the sale of ethanol-blended petrol mandatory in 2007 but could not implement the programme until recently due to a shortage of ethanol and opposition from the chemical industry.

($1 = Rs46.60)

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By: Priya Jestin

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