Mumbai: Reliance Industries Ltd (RIL), which runs India’s largest refinery at Jamnagar in Gujarat, is in the habit of highlighting the premium its gross refining margin (GRM) enjoys over the benchmark Singapore GRM as a testimony to the competitiveness of its refinery.

In recent months, this premium has fallen, and at an analyst meet last week, the company said it was no longer prudent to compare its refinery’s GRM to the Singapore GRM, according to three analysts who attended the meeting.

A Reliance Industries Ltd. petrochemical plant in Jamnagar. Photo: Bloomberg

Analysts are divided over the implication of the declining premium.

GRM is the difference between the cost of crude and the value of petroleum products sold.

For the quarter ended 30 September, RIL’s refining margin was $1 (around Rs50 today) per barrel higher than the Singapore GRM. A year ago, the conglomerate’s refining margin was as much as $3.7 per barrel higher than the benchmark.

In absolute terms, in the September quarter, RIL’s GRM came down to $10.1 per barrel from $10.3 per barrel the previous quarter.

In a 15 October dated investor presentation on the company’s website, RIL says the business environment has become more “challenging and volatile" due to macroeconomic issues. Political unrest in West Asia and North Africa has led to disruptions in the supply of crude and resultant price volatility since the beginning of this fiscal year.

In the year to 30 September, the Singapore GRM rose 116%, while RIL’s GRM increased by 27.84%.

Arbitrage narrowing

RIL cited a narrower arbitrage between using heavy (impure) and light (pure) varieties of crude as raw material, and a relative improvement in gasoline cracks (the profit margin in refining crude to petrol) compared with diesel cracks as the main reasons for its GRM not being comparable with the Singapore benchmark any more, a Mumbai-based analyst with a foreign brokerage said. He asked not to be identified.

One of the factors that has traditionally helped RIL command a high premium to the Singapore GRM is its ability to use heavy varieties of crude—which are also cheaper—to yield the same quality of products that other refiners can make only with the light and more expensive crude.

The RIL investor presentation points out that in the September quarter, the Arab light-heavy differential (a measure of the difference between the two types of crude, heavy and light) fell to $3.8 per barrel, down from $5.08 in the preceding quarter.

“Strength in demand for Asian FO (fuel oil) market increased demand for heavy crude grades, lowering Arab L-H (light-heavy) differentials," RIL said in the presentation.

Fuel oil is a fraction derived from the distillation of petrol. While some refineries produce it as a separate distillate meant for commercial sales, the RIL refinery at Jamnagar produces some quantity as a residue, which is now being used as a fuel to substitute expensive imported gas.

Abhijeet Bora, research analyst at IFCI Financial Services Ltd, said the price of light crude coming down has also affected the light-heavy differential.

“The IEA’s (International Energy Agency) decision to release 60 million barrels of oil to compensate for the loss of supply from Libya also led to the price of light crude cooling off from the levels it had reached earlier," Bora said.

RIL’s GRM for the September quarter also came in below the Street’s expectation of $10.5-11 per barrel due to a decline in diesel spreads, according to Chirag Dhaifule, research analyst at Jaypee Capital Services Ltd.

“Asian refiners with large middle distillate volumes (diesel is a so-called middle distillate) were affected by weaker product cracks," RIL said in its presentation. Diesel cracks have corrected with refining in Japan gradually coming back to normal after an earthquake in March led to refinery outages, RIL said.

Diesel accounts for nearly 40% of RIL’s product slate, and a swing in the spread of the fuel either way has a significant impact on the performance of the company’s refining vertical. On the other hand, diesel accounts for only around 19% of the product slate that comprises the Singapore GRM, with the majority of it being petrol.

While diesel spreads have come down, petrol spreads have firmed up in the last two-three quarters, Bora added. This makes the growth in Singapore GRM look spectacular compared with that of RIL.

Asian petrol spreads have benefited from unplanned refinery outages in the region and lower exports from China, according to RIL.

Falling gas output from RIL’s own gas field in the D6 block of the Krishna-Godavari basin has also hurt its refining margins.

Bora and Dhaifule said that cheap gas from D6 was unavailable and RIL used expensive imported liquefied natural gas as fuel; as a result, its margins were hit.

The analyst with the foreign brokerage quoted earlier also said that RIL produces some quantities of sulphur and coke at its refinery, which it previously sold at a high price, further buoying its GRM. Coke and sulphur prices are depressed at the moment and not adding momentum to RIL’s margin, he added.

Analysts divided

Analysts are divided over what declining premium to the benchmark GRM means for RIL.

“The fact remains that RIL’s refinery is not as profitable as earlier," the analyst with the foreign brokerage said. “It may be a temporary phenomenon, but the relative attractiveness that RIL’s refinery enjoyed over others in the Asian region has gone down as of now."

Dhaifule of Jaypee Capital said the falling premium was not a matter of great concern. “Unless demand dries up in the future, leading to an overcapacity, I don’t think there will be too much pressure on GRMs," he said.

Bora expects RIL to regain its competitive edge eventually, but said the company’s GRM and resultant premium to the benchmark could remain subdued over the next two-three quarters.

RIL’s share price fell 0.46% to close at Rs838.40 on Thursday on BSE, while the benchmark Sensex lost 0.87% to 16,936.89 points.

Pallavi Pengonda contributed to this story.