REFINING INDUSTRY: Downturn may continue for a couple of quarters

THE June quarter results of three standalone petroleum refiners reflect the challenges faced by the industry globally. The scenario remains dull and is not likely to improve anytime soon, since incremental demand takes time to absorb the large surplus capacity. The cyclical downturn in the industry should continue at least for another couple of quarters before investors can hope to see a revival. Mangalore Refinery, Chennai Petroleum and Essar Oil reported heavy erosions in profitability for the quarter ended June 2010, with only MRPL managing to stay in the black even after a rise in sales. As the global inventory of oil products continued to swell, the rise in product prices was not as strong as the growth in crude oil prices. This resulted in the gross refining margins (GRMs) — the difference between the cost of a barrel of crude oil and sale proceeds of products from it — falling substantially from their year-ago levels.

All the three refiners also suffered foreign exchange losses. In the year-ago period, they had registered foreign exchange gains that had boosted their performances.

These companies attempted to make up for lower margins with higher volumes. Essar Oil operated its refinery at 105% of its capacity processing — 33% higher volumes compared to the year-ago period. Similarly, MRPL operated at the 130% utilisation level, which increased its throughput by 2%. Chennai Petroleum, however, reported a 13% lower output at 2.3 million tonne for the June quarter.

But this has not deterred them from continuing with their expansion plans. Essar Oil, which aims to increase capacity by 25% within a year, got a booster with its parent’s listing on the London Stock Exchange. The listing has enabled it to infuse over $633 million into the company. With sales from its Raniganj CBM block set to commence by December 2010, it opens up a steady revenue stream for the cash strapped major. MRPL is also continuing with its project to expand capacity and set up a polypropylene unit by end-2011.

Unless there is a significant unplanned refinery shutdown, product supply and inventories are expected to remain in abundance during the upcoming summer driving season in the US. Considering the refinery capacity additions during the remainder of 2010 and 2011, spare capacity is expected to remain relatively high in the short term. These factors are expected to keep the GRMs under check.