 "Chennai Petro to seek RBI nod for commodity hedging")
While on the one hand private refineries are reducing their throughput to protect themselves from the unprecedented depreciation of the Rupee against the Dollar, public sector refineries are having to take the heat, thanks to the obligation they have as a PSU and the “unfavourable” formula chalked out by the government.
A classic case study to look at is how the Rupee depreciation impacts the refineries of the Chennai Petroleum Corporation Ltd (CPCL), a subsidiary of the oil major Indian Oil Corporation. The Chennai-based refiner has said that the unprecedented depreciation of the Rupee and volatility in the foreign exchange market resulted in an exchange fluctuation loss of Rs 341 crore in 2012-13.
R S Butola, chairman, Indian Oil Corporation, said that for the downstream and refining companies like the CPCL, whatever gains they made were eroded by depreciation of the Rupee and high volatility in the crude oil market. But, as petroleum products continue to be a major energy source for the country and demand in India is projected to grow at rates way above the world average, as a petroleum refiner, this presents big growth opportunities for CPCL.
However, the real challenge for CPCL is how it is going to protect itself in situations like the current one where the Rupee has hit an all-time low against the US Dollar. Agrees A S Basu, managing director of Chennai Petroleum Corporation, who said the company’s earnings were impacted on the back of a sharp Rupee depreciation.
The refining business is largely a Dollar-denominated one with payments for crude made in Dollars and product prices being realised in Rupee, based on international FOB quotes. It is to be noted that the payment for crude is with reference to the exchange rate prevailing on the due date of payment, whereas the product prices are derived based on the average exchange rate of the relevant pricing period (fortnightly or monthly depending upon the product). Considering the operating cycle, i.e. the difference between the timing of cash outflows on crude payment and cash inflows on product sales, the exchange gain/loss to the extent of this timing difference could impact the bottomline.
It is estimated that on an average, the offset of exchange gain / loss on product sale is around 70 per cent of the exchange gain / loss on crude. Basu says the company is now looking at commodity hedging through its parent IOC.
“We are planning to approach the RBI and IOC to seek their approvals for commodity hedging, it will protect us to a large extent, along with natural hedging, though not completely.”
To a question if the CPCL would be able to explore other possibilities, Basu said, “In future we have to think about the other possibilities. Who will pay the bill when we are not able to generate ourselves, the government will not, so we have to find out a way to address this issue.
Already, our gross refining margins are down, and if we are not going to recover the 30 per cent, it will only put more pressure.”
Basu ruled out any cut or delay in project investment, while agreeing that to a certain level it will put pressure. For example, in the resid (oil products that remain after petroleum has been distilled) upgrade project which will help the company improve profitability. Of the project cost of Rs 3,110.36 crore, around Rs 450-500 crore will be foreign loan, “and because of this we will not put the project on hold, but the cost will certainly go up.”
CPCL’s foreign currency loans as of today are basically ‘preshipment credit in foreign currency (PCFC) loans and are backed by exports. Thus there is a natural hedging available to a large extent. However, the different in exchange rate at the time of repayment during export realisation may give rise to a delta plus or minus.
A classic case study to look at is how the Rupee depreciation impacts the refineries of the Chennai Petroleum Corporation Ltd (CPCL), a subsidiary of the oil major Indian Oil Corporation. The Chennai-based refiner has said that the unprecedented depreciation of the Rupee and volatility in the foreign exchange market resulted in an exchange fluctuation loss of Rs 341 crore in 2012-13.
R S Butola, chairman, Indian Oil Corporation, said that for the downstream and refining companies like the CPCL, whatever gains they made were eroded by depreciation of the Rupee and high volatility in the crude oil market. But, as petroleum products continue to be a major energy source for the country and demand in India is projected to grow at rates way above the world average, as a petroleum refiner, this presents big growth opportunities for CPCL.
However, the real challenge for CPCL is how it is going to protect itself in situations like the current one where the Rupee has hit an all-time low against the US Dollar. Agrees A S Basu, managing director of Chennai Petroleum Corporation, who said the company’s earnings were impacted on the back of a sharp Rupee depreciation.
The refining business is largely a Dollar-denominated one with payments for crude made in Dollars and product prices being realised in Rupee, based on international FOB quotes. It is to be noted that the payment for crude is with reference to the exchange rate prevailing on the due date of payment, whereas the product prices are derived based on the average exchange rate of the relevant pricing period (fortnightly or monthly depending upon the product). Considering the operating cycle, i.e. the difference between the timing of cash outflows on crude payment and cash inflows on product sales, the exchange gain/loss to the extent of this timing difference could impact the bottomline.
It is estimated that on an average, the offset of exchange gain / loss on product sale is around 70 per cent of the exchange gain / loss on crude. Basu says the company is now looking at commodity hedging through its parent IOC.
“We are planning to approach the RBI and IOC to seek their approvals for commodity hedging, it will protect us to a large extent, along with natural hedging, though not completely.”
To a question if the CPCL would be able to explore other possibilities, Basu said, “In future we have to think about the other possibilities. Who will pay the bill when we are not able to generate ourselves, the government will not, so we have to find out a way to address this issue.
Already, our gross refining margins are down, and if we are not going to recover the 30 per cent, it will only put more pressure.”
Basu ruled out any cut or delay in project investment, while agreeing that to a certain level it will put pressure. For example, in the resid (oil products that remain after petroleum has been distilled) upgrade project which will help the company improve profitability. Of the project cost of Rs 3,110.36 crore, around Rs 450-500 crore will be foreign loan, “and because of this we will not put the project on hold, but the cost will certainly go up.”
CPCL’s foreign currency loans as of today are basically ‘preshipment credit in foreign currency (PCFC) loans and are backed by exports. Thus there is a natural hedging available to a large extent. However, the different in exchange rate at the time of repayment during export realisation may give rise to a delta plus or minus.