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Naphtha: Prices may soften

Raghuvir Srinivasan

International and domestic naphtha prices have softened in the last one month following over-supply in the market. Far East naphtha is now being quoted at around $231 per tonne, down from around $270 per tonne a couple of months ago.

Domestic prices of naphtha were adjusted downwards by the oil companies recently following a fall in demand within the country and a drop in global prices. Naphtha is a deregulated commodity and oil companies decide on the price through a joint committee . The prices are generally linked to the landed price of naphtha imports.

Domestic naphtha demand has dropped in the last two months following the closure of the Dabhol power plant which runs on naphtha. Dabhol Power Company had an agreement with Indian Oil Corporation for supply of 1.2 million tonnes of naphtha in the current year at import parity price for its power plant.

In India, Dabhol is the biggest naphtha consumer from the power sector. The bulk of the demand for naphtha comes from petrochemical and fertiliser companies.

Reliance Industries, which operates a 7.5 million tonne naphtha cracker at Hazira uses both imported naphtha and production from the refinery of sister company, Reliance Petroleum at Jamnagar. Haldia Petrochemicals is the other big naphtha consumer for i ts 4.2 million tonne cracker near Kolkata. Indian Petrochemicals Corporation is now a minor player in the naphtha market with its only naphtha cracker (1.3 million tonnes) at Vadodara now operating at reduced levels.

Fertiliser companies are supplied naphtha at concessional prices to subsidise their final product.

Oil companies -- Indian Oil, Bharat Petroleum and Hindustan Petroleum -- have a joint committee which meets periodically to review prices of the decontrolled products.

The committee sets the prices for these products based on the import parity price and the demand-supply equation. These companies occasionally export small parcels of naphtha irrespective of domestic demand.

For example, Indian Oil recently put out a tender for supply of 25,000 tonnes of naphtha. Hindustan Petroleum exported a similar sized parcel recently. Oil companies typically export naphtha to exploit a concession whereby they can import 1.2 tonnes of c rude for every tonne of naphtha exported. Reliance Petroleum is a big exporter of naphtha in the international market.

The Government raised the import duty on naphtha from 5 to 10 per cent in April 2001 to plug large-scale imports of the product meant for adulteration of petrol. Given the price difference between the two, it was an attractive proposition to adulterate p etrol with naphtha.

Domestic naphtha prices are expected to remain subdued in the near term following reduced demand within the country. The soft international prices are also expected to continue in the near term casting a further spell on domestic prices.