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Refinery margins under pressure

C.J. Punnathara

KOCHI, Dec. 8

AS the spread between the cost of crude and product prices has narrowed down sharply during the past one year, the margins of most refineries have come under pressure, eroding their profitability.

``Since input costs have soared and product prices have not risen correspondingly, it would be more prudent to operate at lower capacities and contain the losses,'' senior sources in the industry said.

Refining margins have fallen by almost 30 per cent from Rs 757 to Rs 549 per tonne between September 1999 and September 2000, the sources added. To add to the woes of the industry, quite often, the price of several refined products reign at levels far lo wer than the cost of crude.

Even as the cost of crude has almost doubled, close to 80 per cent of the product prices are still under the administered pricing mechanism, and have not mirrored the true extent of the rise in input costs.

But for several Indian companies, the setback to the refining sector can be glossed over, at least temporarily, due to outstanding dues from the Government and successful results from marketing operations.

With crude prices not expected to ease in the immediate future, margins are likely to remain under pressure and they could dwindle further. The only way out is for the Government to liberalise the refining sector.

But, according to the time-table drawn up by the Government, the administered price mechanism will be abolished and total decontrol will come into existence only by April 2002. However, there is much more that the Government could do to alleviate the pli ght of refineries in the interim.

Sources said that according to a study undertaken by a foreign bank, the cost of crude purchased by public sector refineries was about 30 per cent higher than that by a private sector refinery operating in the country.

Since crude constitutes the most significant component in input cost, a 30-per cent reduction in cost could result in huge savings and make a major difference to any refinery.

For this, the Government will have to be truly responsive and be in a position to take and implement quick on-the-spot decisions. But the decision-making process most often remains complex and time-consuming.

A judicious and proper mix between spot and future purchase contracts, in tune with the crude prices in the spot and futures market could reduce the burden on the refineries. This will save the country several hundred crores of rupees in foreign exchange .