ISLAMABAD: In a troubling development, gross refining margins (GRMs) for local crude refiners fell significantly, falling to an average of US$4 per barrel during the fourth quarter of FY23. This development was revealed in the newly released data.
According to a report of SHERMAN Securities (Pvt.) Ltd., this is the lowest quarterly margin in the last two years. The sharp drop in GRMs has generated concerns that numerous refineries may suffer losses.
During the same period last year, GRMs reached a high of US$22 per barrel due to a global shortage of refined products in the aftermath of the Ukraine-Russia war. However, between April-June FY23, the global crude and product markets showed a divergent trajectory, with Arab Light crude oil prices falling by 3% while key product prices decreased by 4-25% in US dollar terms. This led to a decrease in the margins.
What is Gross Refinery Margin (GRM)?
Gross Refinery Margin (GRM) is a crucial financial indicator used to assess the profitability of a petroleum refinery’s operations. It measures the difference between the total revenue a refinery generates from selling refined products (such as gasoline, diesel, jet fuel, and petrochemicals) and the cost of crude oil, which serves as the primary input for the refining process.
GRM essentially reflects the value-added by a refinery’s processing activities. It takes into account the refining complexity, operational efficiency, market demand, and global crude oil prices. A higher GRM indicates that a refinery is able to extract more value from each barrel of crude oil it processes, resulting in higher profitability.
What next?
The start of FY24 holds some optimism for local refineries, as GRMs have seen a minor rebound during the first few months of the new fiscal year. Furthermore, considerable inventory gains are possible, owing to price increases, which might provide some respite to the industry.
Despite these encouraging indicators, the average local industry GRM of US$4 per barrel from the last quarter is insufficient to meet processing costs. This means that the direct and indirect cost of refining one barrel of crude oil, exceeds $4, leaving the refinery business in losses.Â
Analysts anticipate that refineries will struggle to recover their processing expenses and may incur losses. It is important to note here that the particular GRMs for any company may differ depending on the weightage of product slates in total output. According to industry estimates, local refineries require GRMs of well over $5-6 a barrel to break even, or be profitable.
The dramatic drop in crack spread. A crack spread refers to the overall pricing difference between a barrel of crude oil and the petroleum products refined from it. It is an industry-specific type of gross processing margin.Â
Apart from the drop in crack spread, the price differential between diesel, jet fuel products and crude oil, has contributed significantly to the overall drop in GRMs. On a quarterly basis, the spread for diesel and jet fuel, which accounts for approximately 49% of the product slate of local refineries, was drastically reduced. The diesel spread declined from an average of $30 per barrel in 3QFY23 to roughly $14 per barrel, showing a significant decrease in worldwide demand for High-Speed Diesel (HSD). Similarly, the spread for jet fuel fell from US$46 to roughly US$17 per barrel.
Due to this, some refineries may experience losses in 4QFY23 due to decreased GRMs. Moreover the PKR saw exchange losses from an average 9% QoQ devaluation versus the US dollar, which in turn amplifies the losses. And finally the impact of super tax adjustments for FY23, prove to be a final blow to the bottom line of local refineries.
Analysts expect that Attock Refinery (ATRL) will earn Rs 4 per share, assuming a refinery utilization rate of roughly 80% throughout the quarter and an average GRM of around US$10 per barrel. However, increased super tax adjustments as well as potential inventory and exchange losses may have an impact on earnings.
Pakistan Refinery (PRL) is also predicted to suffer difficulties, with losses of Rs2.8 per share projected for 4QFY23. Lower GRMs at $2 per barrel for the corporation, as well as significant exchange and inventory losses, are likely to be the key drivers to this negative financial picture. Analysts believe that PRL operated at 75% capacity utilisation, with 80% of its crude consumption coming from the Middle East and the remainder coming from Russian oil, which was obtained at a lower CFR price towards the end of the financial year.
According to sources in local refineries, the local refineries are carefully examining their financial circumstances and considering solutions to overcome the obstacles provided by diminishing GRMs and other market swings.
It is pertinent to mention here that all refineries are waiting for the upcoming refinery policy which will further improve margins after rise in duty protection on both petrol and diesel. Barring a few refineries, most of the refineries are in better financial health, thanks to better earnings led by peak GRMs during last year.
