Billionaire brothers Shashikant and Ravikant Ruia, who run India’s second-biggest oil refinery, will increase fuel sales at home as capacity additions in China and the Middle East shrink export margins.
Essar Oil Ltd. (ESOIL) will reduce overseas sales from its 400,000-barrel-a-day plant as it predicts local demand for gasoline and diesel will rise in the year ending March 31, Managing Director Lalit Kumar Gupta said in an interview. The end of an above-normal monsoon in India will help revive diesel demand in Asia’s second-biggest energy consumer, he said.
“Domestic sales will rise and protect margins,” Gupta, 53, said by phone from New Delhi. “Demand in India will increase, and local refineries will be needed.”
New processing capacities in China and the Middle East are set to increase supplies of petroleum products to Asia and erode earnings of export-focused refineries including Essar Oil and Reliance Industries Ltd. (RIL), controlled by tycoon Mukesh Ambani. The coming jump in output has forced Asian oil companies including Japan’s JX Holdings Inc. (5020) and South Korea’s SK Innovation Corp. (096770) to also cut their profit estimates.
“Huge capacity additions coming in Asia over the next one year will weigh on global margins,” Vinay Nair, an analyst at Karvy Stock Broking Ltd. said from Mumbai. “Although Essar Oil is focusing on the domestic market, it isn’t immune to global margin risks.” He doesn’t rate Essar shares.
Each of the Ruia brothers has a net worth of $4.1 billion, according to the Bloomberg Billionaires Index.
Mumbai-based Essar Oil primarily sells fuels to state-run Indian refiners at market rate. Those refiners in turn sell below cost to help curb inflation.
Essar Oil has slumped 26 percent this year, compared with a 4.6 percent gain in the benchmark S&P BSE Sensex. (SENSEX) The shares gained as much as 1.5 percent to 53 rupees and traded at 52.25 rupees as of 10:57 a.m. in Mumbai.
This year, India received the biggest monsoon rain since 2007, according to the India Meteorological Department. More rain means farmers don’t have to depend on diesel generator sets to irrigate fields. India is the world’s second-biggest grower of rice and wheat.
Demand for fuels in the country in the year ending March 31 is estimated to increase 4.1 percent to 162.1 million tons from a year earlier, according to the Oil Ministry. Diesel demand may rise 6.3 percent to 74.5 million tons and gasoline consumption 4.5 percent to 16.5 million tons. By the end of the decade, demand for diesel may rise to 97.9 million tons and gasoline to 28.8 million tons, according to the ministry.
“There will be a rise in diesel demand because more rains also mean a rise in agricultural activity and use of tractors,” Gupta said.
China is tripling refinery capacity amid predictions its economic growth will to slow to the weakest in 14 years, while new processing units mainly in Saudi Arabia are triggering a glut. Profit from processing oil will drop by an average of 11 percent in 2014, according to the median of eight trader, refiner and analyst estimates compiled by Bloomberg in October.
“China and the Middle East will start catering to Asian demand, and there will be enough supply in a scenario where economic growth is still slow,” said Dhaval Joshi, a Mumbai-based analyst at Emkay Global Financial Services Ltd.
Profit from turning Dubai crude into diesel in Singapore, an Asian benchmark, has dropped to an average $16.91 a barrel this quarter, according to data from London-based broker PVM Oil Associates Ltd. The average earnings in the full quarter a year earlier was $18.54 and in the preceding three months $17.68.
Following three consecutive years of losses, Essar Oil must boost its refinery earnings to return to profitability. Reliance Industries, coping with a three-year decline in natural gas output, needs higher earnings from the world’s biggest refining complex to resuscitate operating margins from the lowest since at least 1992.
Refinery capacity in China, the biggest oil consumer after the U.S., will grow 7.3 percent to about 660 million metric tons a year in 2014, state-owned China National Petroleum Corp. estimates. That’s the equivalent of about 13.3 million barrels a day. By contrast, the country’s oil demand will increase by about 3.9 percent to 10.6 million barrels a day, according to the International Energy Agency in Paris.
Companies including PetroChina Co. (857), China Petroleum & Chemical Corp. (386) and Sinochem Group will start about 1 million barrels a day of new refining capacity next year, compared with 340,000 barrels a day in 2013, according to China International Capital Corp. That will cause a supply glut, spur exports and diminish Asian refining margins, Guo Chaohui, an oil analyst at the Beijing-based bank, said in an Oct. 22 report.
Saudi Arabian Oil Co., the world’s biggest oil company, started its 400,000 barrel-a-day Satorp refinery in Jubail in July at reduced rates. The state-owned company known as Saudi Aramco plans to operate the plant at full capacity by the end of this year. Aramco will begin operations at another 400,000 barrel-a-day plant in Yanbu next year, followed by the 400,000 barrels-a-day Jazan refinery in 2016.
“If all of the new refineries come immediately, obviously there will be some pressure on margins, but my sense is that they will all come gradually,” Essar’s Gupta said. “That may match with the incremental demand for fuels.”
Essar Oil earned $6.93 a barrel from crude oil processing in the quarter ended Sept. 30, compared with $7.86 a year earlier. Reliance Industries earned $7.70 for every barrel of crude it processed in the latest quarter, compared with $9.50 a year earlier and $8.40 in the preceding three months.
“The strategy to increase local sales can help shield against any major margin erosion,” Nair said. “This is probably the one strategy that will work in this market for the time being.”