At a time when many industries are facing margin pressures, the global petroleum refining industry is doing well now with healthy margins. Gross refining margins or GRMs — the difference between the selling price of refined products and crude oil required to produce them — have improved during the September ’11 quarter from the June ’11 quarter in spite of oil prices staying high. Removal of customs duty on petroleum products signals that the benefit to Indian standalone refiners would be less.
The Refining Marker Margins (RMM), a generic indicator published by BP every week rose to $13.98 per barrel in the September quarter, which is the highest in almost three years. The Singapore-Dubai crack margins quoted by Reuters moved up from $7.91 / barrel in July to $10.04 in August. “Singapore GRMs improved significantly in August due to a significant improvement in spreads,” a monthly update report from B&K Securities said. According to the International Energy Agency, the June quarter saw Chinese refineries working at lower-than-expected capacity level, which is likely to continue in the September quarter. End-July, a refinery in Taiwan with a capacity of 540,000 barrels per day was shut down reducing regional supplies.
India cut the customs duty on crude oil and petroleum products in end-June this year to bring down under-recoveries of stateowned refiners and exploration firms. A reduction in customs duty lowers the duty protection enjoyed by refineries. As a result, the benefits of a rise in global refinery margins is likely to get somewhat diluted when it comes to domestic standalone refiners. Companies such as Reliance Industries, Essar Oil and Mangalore Refinery are expected to post refinery margins in line with their June quarter numbers.
The weakness in the rupee is, however, going to play in favour of domestic refiners. The Indian rupee weakened to 46 against US dollar in the first week of September ’11 from an average of 44.7 for the June ’11 quarter. This means every dollar of refining margin will translate into more profits in rupee terms.
The September quarter outlook for domestic standalone refiners — RIL, Essar Oil, and MRPL—appears robust, with their profitability staying on par or above that in June ’11 quarter.
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