Interestingly, although a large cross-section of the oil sector had criticised the report, HPCL intends to partly implement the recommendations made in the proposal.

As per the committee report, there will be two public sector companies in the refining sector that will compete against each other. One will be Indian Oil Corporation and the second, a holding company made up of all the other state-owned oil refining and marketing companies.

Thus, as part of the long-term vision an umbrella entity, comprising the likes of Hindustan Petroleum Corporation Ltd (HPCL), Bharat Petroleum Corporation Ltd (BPCL), Cochin Refineries Ltd, Madras Refineries Ltd (MRL) and IBP Company, will be created.

For the immediate future, the committee has however, regrouped the national oil companies into three major market players, led by IOC, BPCLand HPCL. Other recommendations were mainly concentrated on BPCL and IOC. BPCL is to buy up to 33 per cent stake in IBP Company, the Centre may retain a shareholding of 26 per cent. BPCL may also buy up the entire government shareholding in Cochin Refineries, IOC on the other hand may takeover Bongaigaon Refineries and Petrochemicals Ltd (BRPL).

IOC may continue its marketing arrangement with Madras Refineries till the sector is deregulated after which the company can be bought by the highest bidder which would either be IOC or BPCL.

In other words, HPCL was completely ignored from the possibility of enjoying any short term benefits. This is what might have prompted the chairman of HPCL to take the first step towards a formal merger with BPCL.

The merger, if it does become a reality will no doubt have obvious benefits, like lower costs, better reach, and stronger financials. But perhaps more important in terms of operational efficiency for HPCL would be the chairman's proposal to look for an alliancewith an international oil major. This will go a long way in improving the merged company's domestic presence.

However, if the two companies decide to merge, the sole refiners like CRL and MRL could well find the going tough in a deregulated environment. Industry sources state that though CRL might just be able to survive by itself, in a decontrolled environment like some other smaller international players, its growth would be negligible. Further, CRL appears to have contradicted itself in criticising the Sengupta committee report by saying that margins of sole refiners are affected only in case of supply outstripping demand. This scenario in India is likely to take place by next year when around 40 million tonnes of capacity will be added.

Thus, even though the merger between HPCL and BPCL makes sense, the Government being the major shareholder in the two companies will be the deciding authority. However, considering that the Government also holds equity in smaller refineries and would like to divest itsstake at a reasonable amount, the current merger proposal is unlikely to be approved.

Aluminium
One need not read too much into the recent hike in aluminium prices and the roll back of discounts by manufacturers like Hindalco and Nalco. Largely because it is highly unlikely that the measure would give a major fillip to the bottomline of both the companies as domestic demand is still to pick up. More importantly, prices on the LME are still hovering around the $1200-1270 levels, which is almost 20 per cent lower than the levels of $1450-1600 per tonne last year.

It is also imperative to remember that the Rs 1000 cut in prices per tonne and the discounts of Rs 3000-4000 per tonne, were merely desperate measures to rationalise inventory levels. In fact, analysts state that it is this measure which has helped Hindalco sell almost 23000-24000 tonnes in the month of March alone. Importantly, company sources also concur that sales in March have helped Hindalco peg back year end inventory levels to amore respectable 8500 tonnes. In a similar vein Nalco, is also said to have achieved sales of 30000 tonnes in March, which is in stark contrast to its average monthly sales of 10000-12000 tonnes.

Thus, as both the companies have clearly achieved the objective of reducing inventory levels, the hike in prices makes a lot of sense. However, as stated earlier aluminium prices are yet about 20 per cent below last years levels, which does not give the aluminium producers a very huge pricing cushion to play with. Additionally, the prospects prices of the white metal returning to its earlier levels internationally in the interim, also seems bleak at the moment. Especially, since globally the demand for aluminium has increased a mere 1 per cent and the problems of aluminium manufacturers were coupled by the southward dip in global prices, which was easily attributable to the Asian crisis and further deterioration in Japanese consumption, a trend which looks set to continue. Consequently, the Asian premiums for themetal also look set to remain depressed at-least in the interim. This effect will most definitely rub off on domestic aluminium producers, as in India demand for the white metal looks set to follow the same growth pattern of a mere 2.5 per cent achieved last year. Thus, with domestic demand also not likely to pick up, the interim does not look too bright for Hindalco and Nalco.

With contributions from Shishir Asthana and Percy Dubash