Indian refiners sitting on a Rs16,000-crore inventory pile: Crisil

Oil refineries in India have built up a huge unsold inventory due helped by falling crude oil prices in the past few months and are sitting on a Rs16,000-crore inventory mount in the third quarter of the 2014-15 fiscal, rating agency Crisil stated in a report.

A bulk of the inventory built up during the four months from September to December is still lying with refiners with stockists and dealers parting with a lower share, heightening the under-recovery problem of state-run refiners despite a steep fall in oil prices.

Crude oil prices, which fell by more than half during the great plunge, have now climbed back to levels around $55 per barrel. However, a return to the pre-September levels is unlikely in the near future as the threat of US shale oil still looms.

"This will mean inventory losses of around Rs16,000 crore for refiners, traders and manufacturers of downstream petroleum products because their raw material purchases would have been at higher prices," Crisil said.

Crisil said its estimates were based on an analysis of about 250 Crisil-rated companies, including refiners, traders, polymer processors, and bulk and specialty chemical manufacturers.

These firms have an average inventory of about 45 days. These inventories typically range from 30 to 60 days, depending on the location of the plant, processing time, and price outlook, Crisil said.

Oil marketing companies have gained from higher profit margins as crude prices declined as they have only partly passed on the profit margins from retail sales of petrol and diesel to consumers.

Higher inventories will, however, put pressure on crude prices allowing for lower working capital requirements for oil marketing companies, leading to fewer short-term borrowings and ultimately lower interest cost.

"Support from the government, given its strategic importance, higher profit margins on marketing of oil products, lower dependence on subsidy payments, and lesser working capital loans will sustain the credit profiles of oil refiners," Crisil chief analytical officer Pawan Agrawal said.

For chemical traders and downstream processors of crude, polymers and chemicals, the impact of high inventories will depend on their product mix and hedging policies, he said.

"We expect the impact to be higher on credit profiles of companies that have weak debt protection metrics, elevated gearing levels, and higher inventory holding," said Agrawal.