2:24 AM
McGhori
KARACHI: Prices of Arab light crude have remained strong in January 2012 compared with those in December 2011, but the middle distillate prices (with the exception of naptha) declined in the range of 4 to 5 per cent, reducing the middle distillate crack spreads.
According to Topline Securities analyst, Nauman Khan, such a price trend was estimated to reduce domestic gross refinery margins (GRMs) by 7 per cent in January to $1.6 per barrel as against $1.7 per barrel the previous month.
Pakistan Refinery Limited managing director Aftab Hussain, when asked to comment, said that the GRMs had remained depressed internationally. Yet the effect in our country would come later due to the impact of exchange rate (exchange loss) and turnover tax.
The Topline analyst concurred saying that the rupee depreciation and strength of dollar, particularly in the first half of the year, could have an adverse impact on profitability of the domestic refinery sector, since 80 per cent of the crude was imported and even indigenous oil was dollar denominated.
Regarding the turnover tax, he stated that the suppressed GRMs could create a scenario for the application of the turnover tax which could further dampen sector profitability.
The analyst observed that on product-wise basis, negative spread on naphtha could convert to negative $5.5 per barrel as against $7 per barrel last month, while spread on HSFO could widen to negative $11 as against $8 per barrel in December.
In the superior product category, HSD and Kero spreads were estimated to decline to $10 per barrel from $16 per barrel while MS spreads were expected to dip into negative from positive $1 per barrel the previous month.
With firm oil prices and their implications on domestic political and economic scenario, the analyst stated that the inherent regulatory risk associated with the reduction in deemed duty on HSD comes into lime light.
`Under the prevalent scheme 7.5pc customs duty is charged on the imports of HSD, which in turn is providing a profitability cushion for domestic refineries`, Nauman Khan stated.
In recent price revision, deemed duty is currently hovering around $9.5 per barrel in absolute terms while current levels of international HSD prices could push the same above $10 per barrel in the upcoming February price revision.
The Pakistan Refinery MD said that the duty was 7.5 per cent of the C&F price and that the amount in dollar terms could vary with the change in price of crude. Overall, he said that it had resulted in negative margins for the refineries.
The Topline analyst affirmed that the deemed duty was the jugular vein of refinery sector profitability and its decline from current levels could adversely affect refinery sector`s profitability.
All of it was feared to culminate in higher regulatory risk for refineries.
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