Export parity pricing: death knell for OMCs

The change in pricing policy of fuels will hurt state-owned oil marketing companies

It seems that the finance ministry is working with a single focus of reducing the fiscal deficit, irrespective of the impact it has on individual sectors and companies.

In order to bring down the deficit due to fuel by nearly Rs 15,000 crore, the finance ministry has decided to change the pricing policy for petrol and diesel from “trade parity” to “export parity”.

This will reduce the selling price of both fuels, and impact the profitability of the already ailing PSU oil marketing companies.

Trade parity pricing takes into account weighted average price considering 80% of import parity and 20% of export parity. Import parity is the landed price of the goods in India taking into account freight, insurance and duties, while export parity is the price at which the exporter can sell its produce in the market.

Export parity is generally the global prices which are cited along with either the port of destination or port of export.

Most goods in the country are priced based on their import parity. Take the case of steel - if Japanese or Korean companies want to sell their products they have to do so by adding freight cost, insurance during transit and the relevant import duties to export prices. It is this margin of safety that Indian steel producer play with.

Similarly in case of oil, the small margin earned by PSU oil marketing companies is only on account of the difference between international prices, transport and other duties. A research report from Quant Broking says that the $5-6 per barrel of gross refining margin that the public sector companies earn is the difference between import parity and export parity rates.

Thus, if the pricing policy is changed to export parity, there will be little in terms of profit that these public sector companies will make. Add to this, the non-payment of dues from the government and then there is little reason to invest in these oil marketing companies (OMCs).

The very viability of new projects will be in question if the new policy is implemented. By reducing its fuel subsidy bill, the government is creating a new set of non-performing assets for the banking sector.

Expansion projects of OMCs have been largely bank-financed, and if the new policy is in place, the numbers will need to be reworked which can give the banks second thought in funding these projects.

The best way to circumvent this export parity based pricing policy is by actually exporting the fuel. While private sector companies have this option and have been doing it, the option is not available to public sector OMCs given their huge distribution set-up in the country.

The highhandedness shown by the ministry will have a severe impact on the profitability of public sector oil marketing companies and some private players as well.