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Refineries slash output as margins squeezed - Views on News from Equitymaster
 
 
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  • Jan 25, 2000

    Refineries slash output as margins squeezed

    The output of petroleum products has been slashed by 30% in the last four months of the (almost 5-6 million tonnes). India consumes almost 85 million tonnes of petroleum products per annum of which almost 30% i.e. nearly 25 million tonnes is imported.

    This is primarily due to the increase in the prices of crude. Crude prices have almost doubled in the last six months to touch a level of $27 per barrel. Add to that the import duty of almost $3 per barrel. The refinery margins in India hover at $ 2.2 per barrel.

    Besides, there is a time lag between the increase in price of crude and the increase in the price of petroleum products. Add to that the fact that raising the prices of petroleum products such as diesel in India is akin to a political landmine and the position of refining companies becomes all the more acute.

    Another sidelight of the crude price increase is the increase in base oil prices. Thus the profitability of the lube oil business (which is a very profitable product) for all the refiners such as IOC (Servo), HPCL and BPCL are also under pressure.

    The base oil prices have increased from a level of $ 187/tonne to $ 325/tonne over the past nine months. With the conversion ratio for base oil to lube oil hovering around 1:1.1, lube oil prices have to be increased quite substantially, but this is not possible as there is extreme competition among the lube oil companies.

    For stand alone lube oil manufacturers such as Castrol which imported base oil worth Rs 1.96 bn last year, the over 70% rise in base oil prices without a corresponding rise in the end product prices will squeeze margins considerably. Add to that the expected 5% depreciation in the rupee would only add fuel to the fire.

    Market View:
    While refinery stocks such as HPCL and BPCL are considered quite cheap considering their retail marketing network, the current operational problems have forced analysts to put out a ‘Hold’ on these stocks.

     

     

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