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Domestic refiners buck global uptrend

Jul 17, 2000

The high petro-product prices might be disrupting the calculations of many central bankers. However, the one person smiling all the way to the bank is the refining company. Global refining companies are having their best quarter in a decade. The refining companies have reason to smile, as the last two years have been tough on them. In '98 the petroleum prices touched their ten-year lows. To counter the depressed prices the oil producing countries cut production resulting in the upward journey of crude oil prices.

However, the rise in crude prices was not followed by a corresponding rise in petro-product prices and this squeezed refining margins even further. Beginning of Year 2000 has seen their fortunes improve as petro-product prices have firmed up. The rise in prices was primarily lead by the U.S, where petrol prices shot through the roof at more than $2 / gallon. In fact the rally in prices had to be cut short by Government intervention.

Refining margins zoom...
$/barrel FY99 FY00
Europe 1.8 4.6
U.S 3.0 6.7

One would assume that with global refining margins bouncing back the fortunes of the Indian refining companies would also swell. Especially, since this sector has been deregulated and prices are linked to international rates.

Sadly this is not be, as although the sector has been deregulated the refining companies are not receiving their dues on time. The Oil Co-ordination Committee (OCC) has not revised the final consumer prices following the rise in international petro-product prices. This has resulted in a deficit in the oil pool account and subsequently the inability of the Petroleum ministry to pay the agreed prices for products purchased. With delay in payments the cash flows of the refining companies have been adversely hit and they will have to resort to costly short-term borrowings. This will also throw their working capital management plans out of sync.

Although the energy sector is positioned for strong growth with the economy on the upswing there are non-market forces affecting the balance sheets of these companies. Thus one can expect these companies to track global trends only with the break down of the administered pricing mechanism.


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