India’s Largest Fuel Retailer Expects Demand To Drop 40% In April-June

Indian Oil Corporation Ltd., the nation’s largest fuel retailer, expects the consumption of petroleum products to decline 40 percent in the first quarter of financial year 2020-21 due to a nationwide lockdown.

The demand for aviation turbine fuel, petrol and diesel is down 30-40 percent, of which jet fuel is the worst impacted, IOL’s management said in a conference call organised by Elara Capital. A surge in demand for liquefied petroleum gas for household cooking partially offset the slump in demand of transport fuels, it said.

India has enforced the world’s strictest lockdown to contain the new coronavirus pandemic as all economic activity barring production and transport of essential goods was frozen in the first phase. Certain industries and services have been allowed to resume operations with certain conditions in the second phase ending May 3.

IOL management said that the refiner is running its refineries at 60 percent capacity as against almost 100 percent utilisation in the previous financial year. It, however, expects fuel consumption to reach normal levels in the quarter ended September and the second half of the fiscal.

For the fourth quarter of financial year 2019-20, the state-owned company does not expect any major impact on its financials due to Covid-19 as the lockdown started only in the last week. But, it expects ‘massive’ inventory losses due to a plunge in crude prices.

Brent crude – the Asian benchmark for oil – averaged lower in the fourth quarter of financial year 2020 due to global economic uncertainty because of a price war after Saudi Arabia and Russia couldn’t agree on output cuts after the virus outbreak hurt demand.

Lower crude price means inventory loss on inventory purchased at a higher price, and vice-versa. In the quarter ended March, the average crude price fell 18 percent and also recorded the biggest single-day drop since 1991.

The refining business is also expected to remain under pressure due to lower gross refining margins globally. Some of these losses will be partially offset by the marketing business, said the management.

This could be because the company has not fully passed on the benefit of lower crude prices to consumers by reducing retail fuel prices, increasing gross marketing margins or the mark-up earned on sale of every litre of petrol and diesel.

The management said the company is getting crude at good prices from the Asian market but the benefit will be reflected later as it will be delivered in June-July. The oil refiner largely imports from Iraq and Saudi Arabia, and the U.S.

Other Highlights

• Borrowings would be higher in Q4 on account of higher receivables from government.
• FY20 capex was Rs 29,000 crore, of which Rs 17,000 crore was on BS-VI fuel upgrade.
• Estimated capex for FY21 at Rs 25,000 crore; can be reduced depending on economic growth