Oil marketers plan ATF export, price cut to keep clients

Written by MG Arun | Mumbai | Updated: Feb 9 2012, 08:18am hrs
Call it the collateral damage of saving domestic airlines. As carriers eye fuel imports to bypass heavy state levies, oil retailers for whom selling jet fuel is a key source of profit are staring at a loss of business. In order to retain their airline customers, they now plan to cut prices to match import prices or export ATF.

Government-owned Bharat Petroleum, Hindustan Petroleum and Indian Oil Corporation make heavy losses by selling auto and cooking fuels below cost.

We will have to match the price of the imported fuel, K Murali, director (refineries), Hindustan Petroleum, told FE. We may take a hit on our margins, but we need to remain in that business, since it's one of the few products outside government control. Exporting ATF is another option, he added.

Domestic consumption of ATF has been growing at around 10% as airlines have expanded capacity by 18-20% and fly more routes.

Oil companies sold 5.08 million tonne jet fuel in fiscal 2010-11, a growth of 10% over the previous year, show petroleum ministry data. Another 4.45 million tonne was exported. For the nine-month period of April to December 2011, 4.12 million tonne was sold in the domestic market, again a 10% increase over the previous corresponding period.

Oil marketing companies shares rose on the exchanges on Wednesday, while those of airlines fell. HPCL rose marginally to close at R285.80 on the BSE, while HPCL was up 1.24% to close at R576.55. IOC, meanwhile, moved up marginally and closed at R272.75. The share of Kingfisher Airlines was down 4.46% to R27.85, and SpiceJet down 5.49% to close at R25.80. The benchmark 30-share Sensex closed 0.48% up at 17,707.32 points.

State governments charge 4-22% sales tax on jet fuel, making imports cheaper. Until February 1, ATF was sold at R62,908 per kilo litre in Delhi and R63,864 in Mumbai, around 40% higher than the Singapore price of R43,000 and R42,500 in Dubai.

Oil companies cautioned that direct imports, if approved by the Cabinet, will lead to more congestion at ports and generate idle capacity at storage terminals. We will have to consider exporting the fuel, since it is produced anyway in the refining process, said a senior BPCL official. However, I doubt if oil companies have been consulted on this. We await the Cabinet decision. BPCL sold 1.1 million tonnes of ATF in

fiscal 2010-11 to earn Rs 4,552 crore revenues, nearly 4% of its total revenues of Rs 1,66,038 crore.

These companies do not have the infrastructure to

import ATF; so where's the question of them directly

importing fuel, asked PK Goel, director (finance) of

Indian Oil corporation, India's largest oil refiner. They will not get credit on buying the fuel.

Oil companies have been giving cash-starved national carrier Air India 90 days credit on ATF sale. They had earlier extended credit to Vijay Mallya-owned Kingfisher Airlines also, but later moved to a cash-and-carry scheme after it defaulted on its payments.

There are three main challenges in airlines trying to import ATF, the first being the need to ensure economies of scale, said K Ravichandran, senior vice-president and co-head, corporate ratings at ICRA. Airlines need to import at least 20,000-30,000 tonnes in one go. Second, they should have access to storage facilities and third, their purchases should be backed by insurance from reputed international insurance firms.

ATF has become a very tough market, especially after the entry of private players into the market, says he. However, the share of private players like Reliance Industries and Essar Oil in ATF is just around 5%.