Refinery: GRMs improved sharply in Jan-12

Jan-12 GRM up 41% YoY: Gross Refining Margins (GRM) for Pakistan’s refining space increased by 41% MoM USD5.79/bbl during Jan-12, as increase in product prices outpaced crude oil prices during the month. With one month lagged pricing, Jan-12 margins shall determine Feb -12 local refiners’ profitability.

Significant improvement in FO and Naphtha led GRM growth:  Reduction in FO discount to crude oil during Jan-12 remained the major reason for improvement in GRMs. FO discount decreased by USD3/bbl to USD-7.15/bbl. Improvement of USD2/bbl in naphtha spread (to USD-8.59/bbl), further supported margin growth. MS prices witnessed noteworthy 9% MoM jump due to heavy refinery outages in Europe and it spread increased by USD3.52/bbl.

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Sharp improvement in GRMs; ATRL and PRL the key beneficiaries: After healthy Jan-12 GRM, ATRL’s appears to be the gainer as its FY12 to date GRM at USD3.96/bbl is 11% higher than FY11 average GRM. Similarly NRL and PRL’s FY12 (to date) average GRMs were 8% and 60% higher than FY11 average, implying strong earnings prospect for local refineries during FY12 as well.

NRL: Base oil prices shall witness further improvement:NRL, which is sole base oil producer, had increased it base oil prices by 4-6% on January 21, 2011. Further improvement in the base oil prices could be witnessed in the coming months due to reduction in global supplies coupled with upcoming refinery maintenance period (starts from March). Therefore, we expect NRL to strongly bounce back in 2HFY12.

Jan-12 GRM up 41% YoY

Gross refining margins for the local refiners for the month of Jan-12 witnessed a healthy gain of 41% MoM and averaged USD5.79/bbl. This would lead to an improvement in refiner’s profitability during Feb-12, as one month lagged pricing formula is used for determining ex-refinery prices.

Significant improvement in FO and Naphtha led GRM growth

Improvement in FO prices remained the major reason for healthy Jan-12 GRMs. FO discount to crude oil narrowed by USD3 to USD-7.15/bbl, which is lowest in 23 months. FO prices jumped on the back of strong demand from the Singapore marine fuels market especially before Chinese New Year. Unusually large FO procurement from China’s refiners as a feedstock propped up prices and spread during the month.

MS witnessed the highest improvement in prices where it’s spread against crude oil improved by USD3.52/bbl to USD0.6/bbl. Heavy refinery outages in Europe and closure of Petroplus, one of the largest refineries in Europe, resulted in severe supply tightness and led to higher MS prices. Naphtha spread also improved by USD2/bbl to -8.59/bbl. Naphtha demand in the first quarter of calendar year is traditionally higher than in other quarters. This is because naphtha crackers rely solely on naphtha as feedstock due to lower LPG availability. LPG is alternative feedstock for naphtha crackers.

Sharp improvement in GRMs; ATRL and PRL the key beneficiaries

For the first 8 months of FY12, ATRL, NRL and PRL’s GRMs are 11%, 8% and 60% higher than FY11 average GRMs. This implies that strong earnings performance shall continue during FY12 as well.

ATRL appears to be the foremost beneficiary of the rising MS, Naphtha and FO spread as these products combined constitute 55% of its products slate. ATRL’s Jan-12 GRM widened 51% to USD4.94/bbl. Closure of refineries in Europe and upcoming driving season (starts from April) implies that MS spread is expected to remain buoyant for the remainder of FY12, thereby benefitting ATRL. Due to heavy reduction in FO discount, PRL’s GRM improved by USD1.74/bbl to USD3.05/bbl. NRL’s Jan-12 GRM averaged USD6.98/bbl.

NRL: Base oil prices shall witness further improvement

International base oil prices have started showing stability, due to which NRL, which is sole base oil producer in Pakistan, had upward revised its base oil prices by 4-6% on January 22, 2012. Furthermore, due to recent refinery closure and upcoming planned refinery maintenance period (commences from March), shortage of Group 1 base oil (produced by NRL) is expected to resurface in the coming months. Unlike Group 2, Group 1 base oils have not been witnessing any capacity enhancement during the last 2-3 years. NRL derives more than 80% of its earnings from lube segment. Likely improvement in base oil prices suggest NRL could strongly bounce back in 2HFY12.

Economic & Political News

CPI inflation soars to 10.1%

The inflation, measured through the Consumer Price Index (CPI), rose to 10.1% in January from 9.6% in December 2011. The rise in inflation is mainly driven by increase in energy and food prices in January.

75 products from Pakistan: WTO Okays EU duty waiver

The World Trade Organization’s (WTO) Council on Trade in Goods (CTG) on Wednesday unanimously approved the much-awaited the European Union (EU) waiver on duties for 75 products from Pakistan, allowing duty-free import of 75 products from Pakistan.
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