Covid-19 lockdown: Fuel demand likely to slip 40% in April, says report

India's fuel demand, after falling by around 20 per cent in March, is likely to decline further to 40 per cent in April, impacting pricing and increasing borrowing cost for oil marketing companies, according to a report.

The three-week national lockdown ending April 14 has seen individuals remaining indoors, shops and businesses shut, and vehicular movement, including the Railways, airlines, trucks and private vehicles, remaining off the roads.

According to a report by India Ratings, the overall demand for fuel has come down by around 20 per cent, while capacity utilization levels have fallen to 50 per cent in March.

Typically, refining operations under 40 per cent capacity utilisation become unviable due to higher fixed operating expenses. However, capacity utilisation has remained high for OMCs whose sales to own production ratio is significantly high, as they lowered external purchases while ensuring their refineries run at full utilisation, the report said.

"If at all the national lockdown is lifted on April 14, fuel demand is set to fall to around 40 per cent in the month because of the reluctance of people to move outside, restricted air travel, slow pickup seen in industrial and commercial activities due to unavailability of manpower, and slower pickup in freight movement," it added.

From a profitability angle, the worst hit is refining margin, which is the key profit metrics for an OMC. The benchmark Singapore gross refining margins have come down to a low $1.3 a barrel in March from $1.7 in the previous month and from $4.9 in FY19, which was a high $7.2 in FY18.

Margin on key products has trended southwards with the demand slowdown. Gasoline spreads and jet fuel cracks are hit the most, it adds.

The report expects demand disruption from people's reluctance to use shared mobility especially shared cabs, private cabs and public transportation will be higher than the rise in fuel demand from higher use of private vehicles.

Lower refinery utilisation rates can increase the operating expenses on a per barrel basis from the present $2-2.5 incurred at full utilisation, lending operations unviable.

Given the Brent crude in the last 45 days have moved from $55-60 to $20 a barrel as of March-end, OMCs are likely to have incurred substantial inventory losses. OMCs typically keep inventories for 30 days, which will increase if the demand falls, forcing refineries to operate at lower levels.

However, the report does not see any liquidity crisis for the OMCs which have a consolidated debt of Rs 1.9 trillion in FY20, up from Rs 1.4 trillion in FY19 despite internal accruals plunging to a low Rs 2,80 crore on account of higher working capital borrowings, higher subsidy receivables in Q4. Under recovery in the first nine months of FY20 stood at Rs 18,640 crore, down from Rs 43,390 crore in FY19.

The agency expects the net leverage of the three OMCs combined to have increased to over 3.5x in FY20 from 2.5x in FY19.

Plunging fuel demand has OMCs worried on all fronts

National oil companies are staring at inventory losses as they have to bring down refinery throughputs because of the plunging demand for fuels following the nationwide lockdown to contain the deadly coronavirus infection.

India is the world's third-largest energy consumer but the Covid-19 lockdown has shut businesses, suspended flights, stopped trains and brought almost the entire vehicular movement to a halt, impacting fuel demand.

For the full the month of March, total retail volume has come down by 17 per cent, led by a 26 per cent dip in diesel demand and a 17 per cent fall in petrol and practically demand for aviation fuel is down 33 per cent, according to the national data shared by IOC on a year-on-year basis.

The only fuel that saw a demand spike in the month was cooking gas that, too, after panic buying since the national lockdown. Overall, LPG demand rose 1.7 per cent in the month, according to the IOC data.

There are 27.59 crore active LPG customers in the country.

Sugar mills seek third ethanol supply tender from govt-owned OMCs

Sugar mills have urged government-owned oil marketing companies (OMCs) to float the third tender for ethanol procurement because of the expectations of excess production of the green fuel on additional quantity of cane being crushed this season.

The excess production is a major issue as mills had planned to expand ethanol production. With Uttar Pradesh being the largest sugar producer, mills in the state took the lead in urging for another tender.

In a letter addressed to three government-owned OMCs — Indian Oil Corporation (IOCL), Bharat Petroleum Corporation (BPCL), and Hindustan Petroleum Corporation (HPCL), the apex industry body, Indian Sugar Mills Association (ISMA), urged to float a fresh ethanol procurement tender to help sugar mills/distilleries supply more green fuel for blending with petrol and reducing the oil import bill proportionately. Read on...