Fuel hike may not address concerns over OMC credit: ICRA

Because of the significant delay in the release of cash compensation, liquidity position of the public sector oil marketing companies has been negatively affected, resulting in increased reliance on short-term borrowings, credit ratings agency ICRA said in a report

New Delhi: The government’s decision to hike diesel, domestic cooking gas and kerosene prices and cut customs and excise duty will not be adequate to alleviate concerns over the credit profile of state-owned retailers, reports PTI quoting credit ratings agency ICRA.

ICRA senior vice president & co-head, corporate ratings, K Ravichandran said “concerns remain” on the government compensating retailers for losses incurred on selling auto and cooking fuel below cost.

“Uncertainty on diesel price deregulation and indirect control on the pricing of petrol” were also a concern.

ICRA said diesel price deregulation looks unlikely in the near term because of soaring inflation.

“Consequently, regulatory risk will continue to weigh heavily on the credit risk profiles of PSU OMCs,” it said.

“Because of the significant delay in the release of cash compensation, liquidity position of the public sector oil marketing companies (OMCs) has been negatively affected, resulting in increased reliance on short-term borrowings.

“Moreover, such high level of borrowings results in higher interest expenditure, which are not compensated in the existing under-recovery sharing mechanism,” ICRA said.

In response to soaring oil prices, the government on Friday announced a Rs3 per litre hike in diesel, Rs50 per cylinder increase in domestic LPG and Rs2 per litre raise in kerosene rates. Also, it slashed import duty on petrol and diesel by 5%, did away with the import duty on crude oil and reduced the excise duty on diesel to Rs2 per litre from Rs4.60 a litre.

“As a result of these measures, while the gross under-recoveries (or revenue loss) will fall by a modest amount (Rs49,000 crore), the absolute level of gross under-recoveries will still remain sizeable (about Rs120,000 crore) for FY11-12,” ICRA said.

It said the “final under-recovery sharing mechanism that the government will be announcing during the course of the year will be critical to determine the profitability of the PSU oil marketing companies”

Because of the sheer size of the revenue loss, the share of government compensation (which till now has been around 50%) and that from upstream companies (that has hovered around 33%) will have to be higher than usual as the absorptive capacity of OMCs is limited by the modest profits.

“On the brighter side, import duty changes will translate to marginally higher import duty differential, leading to higher gross refining margins (GRM),” it said.

Consequently, retailers with a higher product cover for marketing, such as IOC and BPCL, will stand to gain and will be able to partly mitigate the pressure on marketing profits.


Due to slack in demand, steel production is slowing down

Along with the slowdown in all core industries due to slack demand, crude steel production has increased marginally only by 0.27% to 58.76 lakh MT in May 2011 from 58.60 lakh MT a year ago

During the course of last week, Moneylife has been publishing articles regarding the slowdown across a number of industries. Until now, we have covered the slack in demand for energy, cement, realty and textiles. All of these industries are major sectors of the Indian economy. Along with these, the steel sector is facing growth issues as well.

As per a recent report released by the World Steel Association, crude steel production in India increased marginally by 0.27% from 58.60 lakh metric tonnes (MT) in May 2010 to 58.76 lakh MT in May 2011. Comparatively, it had grown by 11.36% in May 2010 from 52.62 lakh MT in May 2009. The world production of steel across 64 countries—including India—grew by 4.19% in May 2011 over the same month last year. As for China, its production grew by 7.82% for the same period.

The demand for steel has also been impacted by the slowdown in vehicle production. The auto industry is one of the major consumers of steel. According to IIP (Index of Industrial Production) data, the manufacturing of passenger and multi-purpose vehicles fell by nearly 11% from March to April 2011. Production of commercial vehicles fell by 14% during this period. Some analysts feel that the decline is due to the slack in demand during the monsoon—but in fact, for the same period last year, the fall in production was barely 0.2%.

According to a recent Karvy report, "Infrastructure activities have been slowing down and (this is) thereby leading to lower demand for steel."

It may take some months before we see production picking up, as various broker reports state that the demand for steel might continue to remain subdued.

"There is a slump in steel consumption in both the global and domestic markets, mainly because nothing is happening in sectors like auto and construction. Going ahead, there would be a cut in production as the prices are declining and they also need to align with market conditions," an analyst told Moneylife, preferring anonymity.

The Ministry of Steel feels that the policy regarding iron-ore exports should aim at attracting investment in steel-making capacity so that the value addition and export of finished products are promoted, instead of export of raw material. However, this does not seem to have happened.

 "There is a scarcity of iron ore. Current prices won't sustain mainly because of the slump in demand for steel. However, the demand from China continues to grow. Steel production for May has shown growth on a month-on-month basis. In India, regulatory hurdles and seasonal factors have slowed down the demand for ore," added the analyst.

India is the 5th largest producer of crude steel in the world, based on rankings released by the World Steel Association and is expected to become the 2nd largest producer by 2015-16. As per the Association's April report, "India is expected to show strong growth in steel use in the coming years due to its strong domestic economy, massive infrastructure needs and expansion of industrial production. In 2011, India's steel use is forecasted to grow by 13.3% to reach 68.70mmt (million metric tonnes). In 2012, the growth rate is forecast to accelerate further to 14.3%." However if the current scenario continues, the above figures may be hard to achieve.


BASF India approves acquisition of business of Cognis in India

The Cognis business will be integrated in BASF India with effect from 1 July 2011

Consequent to the acquisition of Cognis Holding GmbH by BASF SE worldwide in December 2010, the board of directors of BASF India have approved the proposal to purchase the business of Cognis Specialty Chemicals Pvt Ltd in India, for a lump sum consideration of Rs134 million. The Cognis business will be integrated in BASF India with effect from 1 July 2011, subject to requisite approvals.

“With the acquisition of Cognis, BASF will strengthen its performance products business and further expand our position as the world’s leading chemical company”, said Prasad Chandran, chairman, BASF Companies in India and Head South Asia.

“The product portfolio of Cognis complements BASF’s product portfolio well. We are now in a position to serve our customers better,” he added.

The integration of Cognis into BASF India will strengthen BASF’s leading position in personal care ingredients and value-added products for home care. It will also expand BASF’s existing portfolio in the nutrition & health as well as detergents & formulations businesses.

On Monday, BASF ended 1.42% down at Rs579.65 on the Bombay Stock Exchange, while the benchmark Sensex gained 0.94% to 18,412.41.


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