Refinery margins of Indian companies are likely to be lower in the current quarter, going by the ruling global prices, even as domestic refiners are currently doing better than their Asian peers. It is estimated that the margins will be $4-6 a barrel, despite inventory gains.
Gross refinery margin (GRM), the difference between crude oil and product prices, is a reflection of a refinery’s profitability. Crude has climbed up 11 per cent to average around $71.49 a barrel so far this month, against $64.83 a barrel in July. It touched the year’s high at above $74 a barrel on Friday.
Indian companies say GRMs this quarter could suffer due to a narrowing of the crack between diesel and crude. Crack is the differential between the price of refinery products and crude. With the rise in diesel price being lower than the rise in crude oil prices, the margin narrows. Diesel accounts for 40-45 per cent of the total production of distillates in India.
“Cumulative GRM up to August so far is $6.9 per barrel. If crude remains at its present levels, we could end the current quarter between $4-4.5 per barrel,” said B N Bankapur, Director, Refineries, Indian Oil Corporation.
IOCl earned $7.36 a barrel against $16.81 a barrel of GRM in the first quarter of 2008-09 owing to record price levels last year. Bankapur, however, added that the current quarter could see inventory gains against the last quarter, which witnessed inventory losses, since rising prices help companies which stock crude at a lower earlier price. Besides, products also fetch a higher rate.
State-owned refiners Mangalore Refinery and Petrochemicals (MRPL), a subsidiary of Oil and Natural Gas Corporation, and Chennai Petroleum Corporation (CPCL) witnessed an over 50 per cent reduction in their profits for the first quarter, as their GRMs crashed.
While MRPL's GRM for the first quarter fell by 57 per cent and stood at $7.98 a barrel against $18.36 per barrel in the first quarter of 2008, CPCL registered GRM at $6.88 per barrel, a fall of 56 per cent compared with $15.89 per barrel during the first quarter of 2008.
However, industry experts say Indian refineries are performing better than their Asian counterparts. “Indian refineries are more complex and demand in the country is robust. Though there are signs of recovery, margins globally are still under pressure,” said Naresh Nayyar, CEO, Essar Oil. Nayyar did not divulge Essar Oil‘s cumulative GRM for August so far.
Moody's Investors Service, in a report last week, said it is still very cautious about performance of the Asian refiners, who are suffering from very weak margins due to new capacity, rising input costs, the demand destruction seen over the past 18 months and the absence of any signs that such demand growth is sustainable.
“With the addition in the first half of 2009 of new refining capacity, primarily in India and China, simple refining margins in Asia have dropped from a positive $0.62 per barrel in the first quarter of 2009 to (–) $3.51 in the second quarter of 2009. As a result, most of the region’s large refiners reported declining profitability in the period.”
According to BP's Global Indicator Margin -- a generic number derived from third-party data using regional crudes and product yields -- the June 2009 basis for GRM stood at $4.98 per barrel. In comparison, GRMs for the US' Gulf Coast and Midwest refiners stood at $6 per barrel and $8.54 per barrel, respectively.
Singapore refining margins averaged $(–)0.11 per barrel during the period, while the Mediterranean margins stood at $2.55 per barrel.
“The high complexity factor of Indian refineries will give them an edge over other Asian refineries, as Indian refineries are more exposed to diesel, whereas international refineries focus on production of light distillates like naphtha and gasoline. Companies could also report inventory gains," said Vinay Nair, research analyst, Khandwala Securities.
