Business Daily from THE HINDU group of publications
Saturday, Oct 07, 2006
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Business Daily from THE HINDU group of publications Saturday, Oct 07, 2006 ePaper |
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Corporate
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Interview
Reliance has been one of the backbones of the current market rally in the past few weeks. But there has been lot of doubts arising about its immediate future prospects, especially with crude prices slipping. Mr Jal Irani, Head of Research at Macquarie, gives his view on GRMs (gross refining margins) and Reliance's bread and butter business — petrochemicals. Mr Irani says that refining margins may be offset by a rise in petrochem margins. According to him, RIL's Q2 profit is likely to grow by 6per cent. He further adds that petrochem margins may dip due to lower Chinese demand. Excerpts from CNBC-TV18's exclusive interview with Mr Irani: Aren't petrochemical margins shooting up? Yes, both the polyester and polymer margins, which are two parts of petrochemicals have shot up. Polymer margins have shot up by 32 per cent in the last quarter to reach near all-time highs. Polyester margins have shot up by 80 per cent odd of all-time lows. So, indeed they have been very strong. Could you also put in perspective what has been happening with refining margins because it has been going down. Can the petrochemical margins spike offset the refining margins dip for this quarter? Refining margins have gone down by roughly about $2 a barrel for the quarter. And for Reliance Industries, the refinery business is actually two-thirds of its turnover, while petrochemicals is one-third of its turnover. So, the significant increase in margins for the petrochemical business, which is the smaller part of the business, should largely offset the dip in refining margin business. For the second quarter, where do you expect average GRMs for Reliance to be at? We expect that the profit should grow by roughly about 6 per cent. It is not a stunning profit growth. But as compared to most people, who expect flat to even or perhaps negative earnings, we believe that the petrochemical margins surging will more than offset it. In fact, Reliance may come in with a mild surprise at a nominal profit growth. Are there any concerns on input cost pinching the petrochemical margins? On the contrary, in the last quarter, naphtha, which is the primary input for petrochemicals, has dipped by about 5 per cent, while product prices have gone up. Both raw materials and product prices have moved in their favour. Interestingly, while oil prices have fallen, on the back of which naphtha prices have fallen, being a refinery derivative, the product cycle is very tight at the moment. In Asia, four cracker units have been shut down recently for maintenance. So, there is a significant shortage of petrochemicals at the moment, globally at a time, when raw material prices are going down. Hence, margins have expanded very significantly. Do you expect to see this demand-supply mismatch and this aberration because of the shutdown continuing for the next quarter or so, which could keep petrochemical margins strong? October has started off very strongly. Seasonally, we have been seeing a dip in Chinese demand, so margins may drift down a bit. In the next six months, Iran's capacity will come on stream for polymer. So, this petrochemical may see strong margins continuing in the near term. But the other stream, which is polyester, may not see very significant global capacity increase. Also the price of the substitute product, cotton is moving up. And as a result, polyester margins should continue rising, while polymers should drift lower after about six months.
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