Generators electrify refining margins

Roughly 50 to 60 per cent of Indian refiners' production is diesel and with the increase in its consumption, the margin for the refineries are estimated to improve by $0.75 per barrel in 2008-09.

According to a recent report of Mumbai-based brokerage Edelweiss Securities, India's diesel consumption has grown 13.5 per cent in the last four months compared with the corresponding period of the previous year.

While similar consumption has been seen across the globe due to the preference of diesel powered cars, in India the reason is different. It is the high use of diesel generators.

While the Index of Industrial Production has grown by over 6 per cent in the November 2007 to January 2008 period, electricity generation has shown a declining trend. The electricity generation growth has come down from 6 per cent on year-on-year basis to near 3 per cent in the same period.

"Growth in the sales of diesel possibly implies that diesel-powered generators are increasingly being used to generate electricity in households and industries," said Niraj Mansingka an analyst with Edelweiss in his recent note to clients. The note attributes sales of commercial vehicles in the past as the other reason helping the consumption of diesel.

According to the industry body Indian Diesel Engine Manufacturing Association (IDEMA), the sale of diesel gensets have seen a growth of 15-20 per cent in the last three years. The association did not have the absolute number of gensets sold.

The growth for the diesel gensets in these years have come on the back of demand from new housing and commercial high rises that require power back-up besides the boom in telecom industry that uses gensets as the power back-up for its base tower stations.

"The growth in these years have also come from information technology and auto ancillary, which require above 1,000 KVA gensets," said Ramesh Pasrija, chairman, technical committee, IDEMA. "We expect double-digit growth for the diesel generators for next three to five years," he added.

"The diesel-crude spreads have widened recently on the back of spurt in demand for diesel, leading to high refining margins for Indian refiners and increasing under-recoveries for oil marketing companies," said Edelweiss in its note.

The brokerage estimates refining margin for financial year 2009 and 2010 to increase by $ 0.75 and $0.5 per barrel, respectively. The margin of Indian public sector refineries without any import duty differential benefit was $5.73 a barrel in financial year 2008.