Sugary sweet petrol!

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Classy backward integration move by oilcos

Soon we may have Reliance Sugar and Hindustan Petroleum Sugar, just like we have like Tata Salt. And what makes us think so? Well, of late, oil companies have got busy in sugar exploration than just oil exploration. Mukesh Ambani’s RIL, HPCL and other players have acquired defunct sugar mills on a long term lease basis in the state of Bihar. Commenting on the occasion, Nitish Mishra, Sugarcane Development Minister, Bihar says, “RIL, HPCL, besides Rollon and a state-based industry were on Friday awarded financial contracts for the revival of 6 of the 13 state-run sugar mills in Bihar.”

On one hand, the move will pump in some life into these sick mills and on the other, the government hopes to mop up as much as Rs.3 billion from these deals. But the question really is: Why are these oil majors making sugar sector their next juncture?

For companies, the deal is a masterstroke as it will ensure a cheap and a steady source of ethanol. At the moment, a blend of 10% ethanol is allowed in petrol. However, limited supply and therefore rising prices of raw material for making ethanol was proving to be a deterrent till the moment. But with the acquisition of the sugar mills, the oil companies have struck a backward integration masterstroke which also saves the environment. Now, finally things seem to becoming sweet for these companies. Like SAIL & the Tata Group who long back acquired captive iron-ore mines and are now enjoying its benefits, these oil majors too have securitised key raw material supply in ethanol production which will pay them off in future. Surely these sugary sweet moves will fuel the growth of the petroleum giants...

Edit bureau: Siddharth Nahata

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Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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