The global shipping industry’s shift to cleaner fuel will prove to be a bonanza for India’s fuel refiners led by billionaire Mukesh Ambani’s Reliance Industries Ltd., according to Macquarie.
The International Maritime Organisation established new standards to cut pollutants blamed for environmental damages. Ships from January 2020 are required to use fuel oil—a residue of petrol, diesel and jet fuel—with a sulphur content of less than 0.5 percent compared with the existing 3.5 percent.
Due to the shift in the shipping industry, Macquarie expects the demand for middle distillates—primarily fuel oil and aviation turbine fuel or high-grade kerosene—to rise. Reliance Industries, and state-run Indian Oil Corporation Ltd., Bharat Petroleum Corporation Ltd. and Hindustan Petroleum Corporation Ltd. will benefit as they have already started producing low-sulphur fuel.
Higher demand will double the product’s crack spread—the difference between the price of wholesale petroleum product and crude, says Macquarie. “We expect middle distillate cracks to expand from $15 a barrel today to $30 due to a substantial demand pull from the shipping industry.”
Ambani’s RIL is expected to benefit as its refining hub—the world’s biggest— in Jamnagar, Gujarat has the ability to process a wide range of distressed crude grades. Its gross refining margin can hit $20 a barrel by financial year 2020-21 against the estimated $12, Macquarie said.
The three public-sector oil refiners’ earnings are expected to see a steady rise in the next financial year largely on the back of completion of state and general election and implementation of new IMO regulations, says Macquarie.
- HPCL’s gross refining margins is expected to rise by 72 percent to $11.5 a barrel by financial year 2020-21, partially benefitting from planned capacity expansion.
- BPCL’s consolidated earnings per share is expected to double to Rs 82, partially led by stabilisation of Kochi refinery, capacity expansion at Bina and Mumbai plant.
No Respite From High Oil Prices
The change in regulations is expected to keep crude prices at an elevated level, said Morgan Stanley in an earlier note. Brent crude will reach $90 a barrel by 2020 as new international shipping regulations take effect, overhauling the types of fuels produced by refiners, it said.