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Lube companies witness a squeeze in margins - Views on News from Equitymaster
 
 
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  • Oct 4, 1999

    Lube companies witness a squeeze in margins

    According to newspaper reports, the sharp increase in base oil prices has increased pressure on margins of domestic lubricant companies. Moreover, the intense competition prevailing in the markets has prevented the lube companies from increasing prices, resulting in shrinkage of margins.

    Base oil, a key raw material for lubricants, is sourced from refineries. The cost of the raw material has gone up significantly from US$ 180 per tonne in March to US$ 240 per tonne currently. The sharp rise in raw material prices and stagnant retail prices have put margins under pressure.

    However, integrated oil companies are able to source base oil from their own refineries, as a result of which they able to keep a tab on costs. Thus, lube companies like Indian Oil Corporation and Hindustan Petroleum Corporation are able to control costs, while Castrol, which outsources its raw material, has had to reduce dealer margins in order to increase its realisations.

    A rise in domestic prices is inevitable, if the increase in raw material costs were to persist. The price rise would be in all probability be matched by all lube companies resulting in an industry wide increase in margins, without a change in retail price competitiveness.

     

     

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