Refining margins suggest dull earnings ahead

KARACHI: Falling Gross Refining Margins (GRMs) in the first quarter of the current fiscal year suggest dull earning prospects for the sector in upcoming months.

Refinery production decreased one per cent to 673,000 tons in July compared with the same month last year, when output was 679,000 tons. The one per cent decline has been mainly attributed to a 12 and 10 per cent decrease in furnace oil and jet fuel production, respectively, according to a JS Global Capital analysts’ product-wise analysis of provisional statistics.

However, the report points out that the volatile nature of GRMs, high regulatory risk and the prevailing circular debt situation also needs to be considered.

Impressive results last quarter, which have yet to be announced, have started to shrink during the current quarter. Average industry GRMs have fallen to around $3 per barrel versus an average of $3.8 per barrel recorded in the previous quarter.

Pakistan Refinery’s GRMs have turned negative again due to the one per cent downward revision of their product prices in August, in stark contrast to a four per cent upward movement in the crude oil price, said JS Global Capital’s analyst, Umer Ayaz.

Ayaz believes that National Refinery (NRL) and Attock Refinery (ATRL) are still likely to be operating on positive GRMs. NRL, because of the company’s stable lubricant earnings and its relatively comfortable liquidity situation and ATRL, because the company’s market share increased by one per cent in July. HSD and Mogas However, High Speed Diesel (HSD) production increased seven per cent on a yearly basis in July and reached 275,000 tons, mitigating the effects of the slight drop in production of jet fuel and furnace oil.

The growth was mainly due to better product margins which encouraged refineries to raise their operating rates during the month. Similarly, Mogas production in the period was also up by 10 per cent on a yearly basis and stood at 114,000 tons primarily on the back of improved product demand in the country amid restricted gas supply at stations and a reduced price differential between petrol and compressed natural gas.

Published in The Express Tribune, August 19th, 2010.