Bulk buyers take retail route for cheaper diesel

Written by Viraj Nair | Mumbai | Updated: May 7 2013, 07:58am hrs
When bulk diesel prices were deregulated in January, the government had hoped it would enable oil marketing companies (OMCs) to reduce annual under-recoveries by a substantial R15,000 crore (assuming crude prices and the rupee at 2012-13 levels), but that was not to be. The share of bulk diesel in total diesel sales has declined sharply since deregulation, as price-sensitive consumers, especially cash-strapped state road transport corporations, tap retail outlets to cut fuel costs.

Bulk diesel sales, which stood at about 12 million tonnes (mt) or 17% of the total annual consumption of around 70 mt in January, have fallen to about 7 mt (10%) in March, thwarting potential savings of up to R2,200 crore for OMCs since January.

Even as OMCs benefit from declining international crude oil prices, analysts expect purchases of bulk diesel to fall further, eroding potential savings from market pricing. The share of bulk diesel buyers is likely to fall further, but there will be consumers who wont be able to shift to retail diesel; so we expect it to stabilise at a level lower than the current one, said an analyst at an international brokerage tracking the oil & gas sector.

Under-recoveries on diesel which stood at R92,000 crore or 58% of that on all fuels in 2012-13 has slipped to R3.80/litre in the second half of April from R6.42 in the previous month due to the softening of the crude and some strengthening of the rupee. The price difference between bulk diesel and retail diesel was about R9/litre or close to 20% in January, which fell to just R6 or 12% in March and further to R4 now, yet even that was enough to keep bulk users shifting to retail purchases.

As FE had reported earlier, road transport corporations in Tamil Nadu and Kerala had obtained interim court orders restraining OMCs from charging them market rates for bulk diesel. Ironically, Keralas Congress-led UDF government had moved the court against the deregulation despite the decision being that of the UPA government, anchored by the same party.

Bulk users in construction, cement, mining and steel sectors are also following a similar course. Defence, railways and state transport undertakings account for 60% of bulk consumers.

Legal experts say nothing bars these organisations from buying diesel from retail outlets unless the central government clarifies that bulk consumers cannot do so.

Indian Oil accounts for over 85% of bulk diesel sales, which is a fifth of the total market for the fuel in the country. Private fuel retailers such as RIL and Essar had been expected to compete with the state-owned fuel retailers following the deregulation, but have been thwarted by the sharp decline in demand from bulk buyers.

A top HPCL executive said that bulk buyers were being deterred by higher prices, calling it a negative trend for OMCs.