Business prospects turn weak for Indian refiners

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Singapore benchmark refining margin falls by a third in Oct as large capacities go on stream

India’s oil refiners are in for a bleak future in the coming quarters as benchmark Singapore refining margins dropped by a third in the second half of October to $8.6 a barrel after hitting a high of $10.7 a barrel on October 10, as large-scale refining capacities came on stream in the Asian region.

The drop is likely to impact the margins of oil refiners like Reliance Industries (RIL), Essar Oil and public sector firms like Bharat Petroleum (BPCL), Hindustan Petroleum (HPCL) and Indian Oil (IOC) if the present weakness persists in the remaining part of this quarter, Emkay Global analysts said in a report. Analysts at brokerages like Anand Rathi and Prabhudas Lilladher seem to concur with this view.

Refining margins of RIL, Essar Oil, HPCL and BPCL may drop by $1.5 to $2 a barrel if the present situation persists in the remaining months of this quarter, forecast oil and gas sector analysts. “Lots of capacities are coming up across continents while demand has failed to keep pace with it. The financial years 2013 and 2014 would see an additional capacity of 1.4 million barrels a day coming on stream while demand is expected to grow by only 0.8 to 0.9 million barrels a day globally, leaving unused capacity of around 0.5 million barrels a day,” said Jagdish Meghnani analyst with Emkay Global.

“It is, therefore, likely that refining margins would remain subdued for the next four to six quarters,” said Meghnani. Emkay estimates show that complex refiners like RIL, Essar Oil and BPCL may be able to mitigate part of the decline in GRMs by around 20-30 cents, as the light heavy differentials have improved by $1 a barrel.

A good amount of refining capacity that was offline for planned maintenance outages have come on stream, forcing the Singapore benchmark refining margin to slip to an average of $8.6 a barrel in October. “If GRMs fall by $1.5-2 a barrel, it could have serious consequences as the drop in refining margin would be around 20 to 22 per cent and would reflect on companies’ performance this quarter,” said AK Prabhakar, senior vice-president and head of retail research at Anand Rathi Securities.

The better margins in the second quarter of this financial year could then be a blip for lots of small and non complex refiners like Chennai MRPL and some refineries of IOC and BPCL, which are primarily dependent on high-cost light and sweet crude oil.

Deepak Pareek, senior analyst at Prabhudas Lilladher said, “the decline in margins were expected since lots of capacities have come on-stream.” However, he added, “We need to work on the estimates as to what would be the impact on their financials if the weakness persists,” said Pareek.

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