Indian refiner BPCL to set up Singapore trading unit
Bharat Petroleum Corp plans to become the first Indian state refiner to open a trading unit in Singapore to take advantage of new crude import rules to buy cheaper oil and get better terms from producers. The move also underscores the growing clout of the world’s third-largest oil-consuming country and its desire to diversify import streams. BPCL, India’s No.2 state refiner, wants to exploit the shifting dynamics of the international oil trade caused by a supply glut to boost its margins. India this month began allowing state refiners – which control two-thirds of the country’s 4.6 million barrels per day (bpd) in refining capacity – to set their own crude import policy, freeing them from the grip of decades-old regulations. This has put state firms on par with private refiners Reliance Industries and Essar Oil that have global trading arms and achieve better margins. “Very shortly we will be opening … we will do it as fast as possible and scale up thereafter,” B. K. Datta, head of refineries at BPCL, told Reuters in an interview. He declined to say exactly when BPCL would be opening a Singapore office. Setting up shop in Singapore would give BPCL access to international trading talent and market intelligence, but the unit is expected to be headed by a company insider. It will initially procure spot crude for BPCL, which along with its subsidiary, Bharat Oman Refineries Ltd (BORL), controls 550,000 bpd in refining capacity. “Slowly we will try to shift all major activities there,” Datta said, handling products and crude trading and shipping. BPCL on average buys 100,000-120,000 bpd of crude oil from spot markets. The state refiner also handles about 240 vessels for crude imports, including some for its subsidiary BORL, according to data compiled by Reuters. “In an over-supplied market it is better to buy spot crude and if you have a trading firm you will have access to first hand information. This will help in getting feed stock at cheaper rates,” said Ehasan Ul-Haq, senior consultant at UK-based consultancy KBC Energy Economics. The trading arm will also give BPCL more flexibility in its operations, giving it the option to resell crude to other refiners or supply its own refineries to boost profitability, Haq said. BPCL is aiming to set up its Singapore trading operation just ahead of refinery capacity expansions. The company will by October complete the expansion of its Kochi refinery in southern India to about 300,000 bpd from 190,000 bpd. BPCL also wants to increase the capacity of its 120,000 bpd Bina plant in central India to 156,000 bpd by 2018. “This is an ideal time to enter into the trading business as crude prices are low and you can test the waters without spending money for leasing the storage. You can trade through floating vessels,” Haq said. In addition to its refinery expansions, BPCL will invest 40 billion rupees ($600 million) to upgrade the quality of fuels produced at its Mumbai and Kochi refineries to Euro VI norms by September 2019 – ahead of a government deadline of April 1, 2020.
After 3 years of trying, India to achieve 5% ethanol blending
After over three years of making 5% of ethanol blending with petrol mandatory, India is set to achieve this target for the first time during the current sugarcane crushing season, that is, by the end of September 2016. To achieve this target, the blenders, or oil marketing companies (OMCs), require 1335 million litres of ethanol every sugarcane crushing season (October-September). Since grains-based ethanol is not allowed to be produced in India, OMCs remained fully dependent for its procurement from sugar mills for which the green fuel is a by-product. “The PM’s personal commitment to renewables and the petroleum ministry’s focus on solving price and implementation hurdles have made a huge difference on the ground. Ethanol in fact, became a key part of the solution for the crisis in the sugarcane sector,” said Narendra Murkumbi, MD, Shree Renuka Sugars Ltd, India’s largest producer of ethanol. The development is likely to transform the fortunes of sugar mills that have been under pressure for the past several years due to falling sugar prices. Until last year, lower price offer and slow pick-up to the contracted quantity of ethanol by OMCs deterred viability of its supply from sugar mills. “OMCs have finalised contracts to procure ethanol to the tune of 1340 million litres for the current year which works out to exactly five percent blending requirement. For ethanol now there is an assured buyer at confirmed price. So, lots of sugar mills prefer to supply ethanol to OMCs rather than to industrial or potable alcohol users,” said Abinash Verma, Director General, Indian Sugar Mills Association (ISMA). In November 2012, the Cabinet Committee on Economic Affairs (CCEA) approved five percent mandatory blending of ethanol with petrol which was notified by the Centre under the Motor Spirits Act on January 2, 2013. According to the Act, OMCs have to record five percent ethanol content in petrol by June 30, 2013. However, considering weak supply orders on un-remunerative price offer, OMCs managed to achieve to a maximum 3.5 per cent so far. While sugar mills blamed lower price for inadequate supply offer of ethanol, OMCs accused falling crude oil price for the low price quotes as blending of ethanol could be a loss making proposition. As against a maximum price fixed for ethanol supply at Rs 43 till the contracts finalised till December 2014, the government in January 2015 raised its prices to Rs 48.5 – 49.5 a litre depending upon the proximity of the delivery station from the distillery units. Interestingly, OMCs had floated tenders for the requirement of 2660 million litres equivalent to 10 per cent of blending target. But, the target of 10 per cent ethanol blending with petrol looks unachievable in near future. Sanjay Tapriya, CFO, Simbhaoli Sugars Ltd said, “attractive price and assured pick up is also helping to achieve 5 per cent blinding target.” The demand of rectified spirit (a pre-from of ethanol) has shifted from domestic sugar mills to overseas markets including the United States and Brazil as its landed cost on Indian ports works out to nearly 25 per cent cheaper. As against the price quote of Rs 40-42 a litre from domestic sugar mills, the imported alcohol for industrial consumption costs Rs 30 a litre now. “As a consequence, around 700 million litres of demand for industrial application has moved to overseas markets. Indian chemical industry has imported an estimated 200-210 million litres so far this crushing season,” said Rakesh Bharatia, Chief Executive Officer, India Glycols Ltd. Meanwhile, OMCs have floated tenders for ethanol procurement of 2660 million litres, equivalent to 10 per cent of blending target which seems achievable gradually in five years. But, sugar mills are required to invest immensely in expansion in the distillation and storage facilities. According to Deepak Desai, Principal Consultant of ethanolindia.com, new investment has started coming in into expansion in distillation capacity or storage facilities. Through B-heavy molasses, supply of ethanol can be increased to 5300 million litres gradually in the next few years from the existing 2800-3000 million litres now to meet demand from all the three segments including potable alcohol, fuel ethanol and industrial alcohol.
Cash flow for construction sector to improve in FY17: Report
Cash flow for construction companies is likely to improve in 2016-17 as most of the orders procured in the last two years are expected to be executed this fiscal, says a study by India Ratings (Ind-Ra). According to the study, companies in the construction sector continued to witness negative cash flows from operations in 2015-16, which is likely to improve gradually to near zero levels this fiscal as more orders procured during the last two years are executed. “Competitive intensity had reduced for new orders over the last two years and hence margins on such orders are expected to be higher,” the ratings agency said. Order inflow in the construction sector is likely to grow as the government has increased outlay for highways and railways in the Union Budget 2016-17. The government increased allocation for highways by 28 per cent and targets to award 10,000 kms of highways in 2016-17. The government has also laid out ambitious targets for spending on other infrastructure sectors like irrigation, drinking water supply, housing and power supply. “Prudent accumulation of orders with close correlation between capacity to execute and order book size will be crucial to improvement in the cash flows and credit metrics of individual companies,” it said. Ind-Ra further said it expects companies to focus on margins and funding while bidding for new projects and to limit their order books near the current level as a multiple of revenue, which will provide for a moderate growth in revenue along with improvement in cash flow margins. According to the agency, the negative cash flows from operations are a legacy of the aggressive bidding seen during FY10-FY12, when companies focused on building their order books. “In such orders, EBITDA margins were very close or even lower than retention money margins in some cases, leading to negative operational cash flows. Also, the companies did not focus on funding by the customer, resulting in long receivables and inventory holding periods,” the study said. It further said construction sector’s receivable days has widened by 33 per cent to 141 days and inventory holding period has risen by close to 9 per cent to 124 days in the last five years. “Construction sector is likely to see gradual improvement in FY17, even as liquidity remains weak due to negative cash flows,” Ind-Ra said.