<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[Falling Revenue: Gross refining margins of RIL’s Jamnagar refinery has fallen since
April 2008 (Bloomberg)
A steady fall in demand for petrochemical products and waning gross refining margins (GRMs) are taking the sheen off capital-intensive complex refineries — that can crack any crude to give more valuable petroleum products — around the world this year.
An analysis of corporate results of petroleum majors including Reliance Industries (RIL) reveals that the edge of having a premium complex refinery, such as the one at Jamnagar, may be minimal. As crude prices soared, complex refineries boosted bottom lines of their respective companies in 2007-08 and early 2008-09 due to tightened product markets, strong margins for light products and unplanned outages by large refiners. Simple refiners, on the other hand, suffered on lower turnaround rate and fuel switching in larger markets. Oil supplies from new discoveries also required unique capabilities for processing. This led to huge commitments in refining capacity expansions in the Middle East and other places. But with Opec cutting production, heavier crude oil prices have also seen a spike.
But the scenario has changed. The benchmark Singapore complex refining GRM currently hovers around $2.50-3 per barrel on lower demand. RIL’s GRM crashed to $9.90 per barrel in last quarter of FY2009 from a high of $15 per barrel since April 2008. For the same period, RIL’s diesel spreads were also down at $8.70 per barrel from $23.30, and gasoline at $11 per barrel from $13.80. The company had been struggling to maintain its margins by taking some of the most impure crudes in the world.
Source: ENAM Securities
RIL’s capacity utilisation has also been falling consistently, mainly due to lower demand for gasoline products from US and diesel from Europe, as per CMIE data. RIL’s capacity utilisation has fallen to 100 per cent in February 2009 from 118 per cent in June 2008. It improved to 105 per cent in March though, according to CMIE.
“A fall in light-heavy crude differentials and poor diesel spreads was compensated by improved petchem margins, mainly on polymers restocking by existing customers,” says Ballabh Modani, analyst at Enam Securities in Mumbai.
“RIL is now focusing on low-margin high-volume products to improve capacity utilisation,” says Amar Singh, head of research at Angel Commodities in Mumbai. The recent move by Reliance to give up its SEZ status and tax benefits to sell products locally is seen as a move to improve capacity utilisation of its refineries.
“Narrowing crude differential will hurt complex refiners and affect refinery modification projects around the world,” says Rohit Nagraj, analyst at Prabhudas Liladher. In India, subsidies kept the demand for petrol going at 6 per cent and diesel at around 9-10 per cent annually. Much of the expected capacity expansion is now uncertain. “Projects at the drawing and feasibility stage are also getting deferred by a couple of years,” Nagraj adds.
Any further drop in demand for petrochem products can further affect refining margins, and even lead to a shutdown of at least 10 million barrels per day of output around the world. Refining firms certainly have tough times ahead.
With inputs from Muthukumar K.
(Businessworld Issue dated 12-18 May 2009)