RIL petrochem prices slide by up to 60% as demand slows

RIL petrochem prices slide by up to 60% as demand slows

Mumbai: Tracking a multi-year low in global petrochemical prices, Reliance Industries Ltd, or RIL, has reduced the prices of at least 10 key petrochemical products over the past two months, some by at least 60%, according to analysts tracking the company and wholesale suppliers in Mumbai’s bulk chemicals market.

RIL, India’s most valuable company, had cut prices of benzene, di-ethylene glycol (DEG) and other products used in making plastics that go into the manufacture of toys to pipes, cellphones to kitchenware by 34-42% between October and November, according to a November note by Mumbai-based brokerage Networth Stock Broking Ltd. The report added that RIL had further cut “the forward booking prices of most of the chemicals by 15-20%".

Also See Chemical Reaction (Graphic)

RIL did not respond to a detailed questionnaire emailed on Thursday.

Brokers and suppliers in Mumbai’s Vadgadi chemicals market, operating out of narrow, serpentine lanes in the congested commercial hub of Masjid Bunder in south Mumbai, confirmed that RIL, headed by billionaire businessman Mukesh Ambani, had continued reducing prices of these chemicals for December as well (see graphic).

Analysts and traders at the Vadgadi market linked the price cuts in RIL’s petrochemical portfolio to both declining demand as the slowing global economy as well as huge inventory pile-ups.

“Some inventory pile-up has to be there as most of the industries consuming these products, be it automobile makers, construction companies or textile manufacturers, have all slowed. The offtake has reduced and discounts were bound to follow," said an analyst with a domestic brokerage firm, who did not want his or his employer’s name to be taken as he is not authorized to speak to the media.

“When the basic feedstock price (crude) is facing a steady erosion every day, the forward prices of all the corresponding downstream products are bound to decline," said another bulk chemicals supplier in the Vadgadi market who also did not want to be named because he has business dealings with RIL.

Petrochemicals contribute a small percentage of the company’s operating profits, but RIL’s deep discounts on product prices in response to the global fall in demand for petrochemicals—benzene prices are down to 1980s levels—have seen at least one brokerage, a local unit of Merrill Lynch and Co., lowering late November the target price it had on the company’s shares by some 5.4% over shrunk petrochemical margins.

Some 48% of RIL’s Ebitda (short for earnings before interest, tax, depreciation and amortization, a measure of operational profitability) is contributed by its oil refining businesses, which, too, are under margin pressure, and 38% by exploration and production of oil, estimates Credit Suisse Securities (India) Pvt. Ltd.

Still, the petrochemical price cuts could impact RIL revenues and profits in the October-December quarter, but analysts stopped short of putting a figure to it, saying they would conclude their forecasts only at the end of this month.

For the quarter to September, RIL, which has a 13.5% weightage on the Bombay Stock Exchange’s benchmark Sensex index, reported revenue of Rs46,113 crore and net profit of Rs4,122 crore, flat over the preceding quarter.

While state-owned petroleum firms such as Bharat Petroleum Corp. Ltd have also reduced prices for products such as benzene and toluene, among others, RIL is a dominant entity in many chemical segments and has had to slash prices across a bigger portfolio of products.

According to media reports, RIL has been trying to cut back production in order to align it with the reduced demand, which the company denied.

In a news report last week, the Business Line newspaper reported that RIL had put on hold operations at four units at its Vadodara petrochemical facility. RIL did not respond to a Mint query on this either.

On 27 October, the company had said in a statement that it was carrying out “a planned shutdown of its polypropylene plant at the Jamnagar refinery complex" over four weeks, with “the objective of improving product swing capability and increasing propylene yield".

Also, one analyst, who didn’t want to be named, pointed to the increasing cost of servicing Japanese currency debt at RIL because the yen has appreciated 17% against the rupee since October. The exact amount of this debt was not immediately available.

Another analyst cited the fall in gross refining margins, a measure of profit derived from refining crude oil and selling its derivatives such as petrol and diesel, at RIL.

According to Merrill Lynch data, the average gross refining margin in November was a negative $4.35 per barrel for simple refineries and $3.26 per barrel for the complex refineries, down from $0.96 and $11.08, respectively, a year ago.

Complex refineries refer to technologically superior machinery that can refine so-called heavy oil, improving realizable revenues from oil, while simple refining involves distillation of crude into easily separated petrol, jet fuel, diesel or residual fuel oil.

Vidyadhar Ginde, sector analyst with DSP Merrill Lynch (India) Ltd, lowered RIL’s refining margins forecast by 37% and 21% to $6.3 per barrel and $7.8 per barrel for fiscal 2010 and the following year in a 3 December report. Ginde still has a “buy" rating on the company’s shares with a target price of Rs1,555 each.

Shares of RIL closed at Rs1,117.6 each, shedding 3.58% in value on Friday. That price is closer to its 52-week low of Rs1,019.50 recorded on 24 October than its year’s high of Rs2,347.25 on 12 August.