Refining and Marketing: Overall profitability dented; Industry to making operating losses in Q1 2005-06, says CRIS INFAC

June 30, 2005
CRIS INFAC

CRIS INFAC estimates that the industry will make operating losses to the tune of Rs. 12-15 billion for Q1 2005-06, against an operating profit of Rs. 55-60 billion in Q1 2004-05.

Despite the upward revision of petrol and diesel prices on June 20, 2005, the refining and marketing industry is set to incur operating losses in the first quarter of 2005-06.

The freeze on import parity price for the month of April 2005, which continued till mid-May, hurt the profits of refining companies, while it brought slight gains to oil marketing companies (OMCs). However, the non-revision of retail auto and cooking fuel prices for a substantial part of Q1 2005-06 dealt a body blow to the refining and marketing industry as a whole.

OMCs had been facing severe pressure on the marketing front, as the domestic auto and cooking fuel retail prices were not aligned to international prices. The freeze on import parity price was intended to shift part of the burden of higher international product prices to refining companies. As a result of this price freeze, gross refining margins (GRMs) were in the red in April 2005, while OMCs recorded positive marketing margins.

However, the price freeze was done away with in mid-May 2005. While this resulted in GRMs recovering partially, retail auto fuel margins went into the red. The situation improved only marginally in June, after the price hike.

According to Nagarajan Narasimhan, Head, Research, CRIS INFAC, "The subsidy burden on the PSUs, including that shared by ONGC and GAIL, has mounted to a whopping Rs.33 billion as against an estimated Rs. 29 billion in Q1 2004-05. This increase in subsidy burden is despite the decline in volume, increase in domestic prices of LPG in November 2004, and reduction in excise duty on LPG and SKO."

Adds Nagarajan, "The situation is likely to worsen in the month of July as the international prices of HSD and MS have increased by 10-15 per cent. If no immediate measures are taken, the marketing segment may witness huge losses even in the second quarter, assuming international prices remain firm."

Concluded.

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