Gross refining margins for state-run oil firms tumble in September quarter

Gross refining margins (GRMs) for three state-run oil marketing companies took a hit in the September quarter. The decline, analysts said, was the combined effect of macro demand slowdown, inventory loss, and planned shutdowns.

While core GRM for Indian Oil Corporation (IOC) was $3 per barrel for the quarter, Hindustan Petroleum Corporation (HPCL) reported $2.6 per barrel, and Bharat Petroleum Corporation’s (BPCL)’s GRM was at $3.7 per barrel, according to a SBICAP Securities report.

These margins were far below analysts’ expectations, which were between $4.9 per barrel and $6.3 per barrel. “Most analysts 

may have not factored in inventory numbers,” said an analyst with a domestic brokerage who did not wish to be identified.

Analysts said there had been a slowdown in refining demand in certain global markets, and India’s diesel demand was slowing down. 

In addition, they said, company-specific factors also hit GRMs for these three companies.

“A number of factors contributed to the decline. For instance, IOC had inventory loss, LPG cracks were weak until the Aramco incident happened, and HPCL took a shutdown,” said Nitin Tiwari, vice-president with Antique Stock Broking.

According to the report, IOC’s refining inventory loss stood at Rs 1,534 crore for the quarter.

“Various reasons have contributed to the decline in GRMs for state-run oil companies, including shutdowns due to upgrade for BSVI fuels. The overall slump in demand is also systemically impacting GRMs,” said Aditya Gandhi, vice-president, energy and commodities, Publicis Sapient.

Companies and analysts are hopeful of improvement in the next two quarters.

N Vijayagopal, director of finance for BPCL, expects GRMs to improve in the next two quarters owing to the new international maritime organization (IMO) regulations. These require ships to switch to cleaner fuel starting January. “We expect third and fourth quarter GRMs to be better than the first half,” he said.

Others like Tiwari from Antique are hopeful the onset of winter will spur demand. “For the next two quarters, with winter setting in and IMO guidelines, GRMs should show sequential improvement.”

There is, however, some caution to be exercised with building expectations over IMO. “Nobody has a full view on what would be the exact impact of the new guidelines. In relation to Indian refineries, those who have the flexibility to produce higher grade fuels will benefit from IMO,” Gandhi said. 

“Apart from IMO, there ain't many positive signs of demand revival, as Purchasing Managers’ Index is still contracting.”

Others expect the IMO benefit to trickle in later in the next financial year for companies like IOC. “The second half of this financial year looks rather gloomy as well given planned shutdowns with regard to BSVI upgrade. We cut our GRM and throughput estimate for FY20 to factor this in. However, change in IMO regulations will support GRM in FY21,”analysts with HDFC Securities wrote in a November 2 note on IOC.