The curse that is circular debt has been quite a menace to the economy in general and country's refinery sector in specific during August. The government's failure to inject adequate liquidity in the system during August led to refineries operating at low turnovers, subsequently, country's rising fuel need spurred the import bill.
The refinery production for the first two months of FY10 portrays a gloomy picture depicting an 11 percent decline year on year. The numbers reveal that liquidity constraints, mainly owing to non-payment by the largest oil marketing firm PSO, restricted refineries' ability to pay for crude oil imports. The working capital requirements need could have hurt more to cash starved refineries.
To make matters worse, POL consumption during the period went 19 percent north ways -added pressure on the nation's import bill. Relatively lower price differential to the alternative, pushed petrol demand during the period by a staggering 41 percent during August. Peak electricity demand season boosted furnace oil requirement by 37 percent at a time when refineries lowered their furnace oil output by 14 percent.
The severity of the problem can be gauged by the fact that refineries during the period operated at only 63 percent of their efficiency level (87 percent last year). This, coupled with the sharp rupee slide soured the oil import bill for the month to staggering $1.9 billion. Circular debt's contribution in the form of reduced production worsened the current account balance by a hefty sum of $636 million.
Current events indicate that the ongoing month of September may not have a happier tale to tell. Half the month is gone and the much talked government TFCs are only in the news reports. The country's treasury managers' promise to eradicate circular debt from the system by the start of Sep'09 was meant to be broken.
How will the Rs 90 billion proposed TFC will erase the circular debt issue from the country once and forever as quoted by our Finance Minister is highly questionable - but perhaps deserves a separate note. The Eid festival looming round the corner may well push the TFC issue even farther - but another month of very high import bill and under utilisation at refineries is rest assured.
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Refinery production
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000 TONS 2MFY10 2MFY09 % CHG
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MS 212 213 -1%
KERO 23 35 -34%
JP-1 106 99 7%
HSD 534 610 -12%
LDO 12 16 -25%
FO 447 520 -14%
Others 63 70 -9%
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Total 1,396 1,562 -11%
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POL demand
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000 TONS 2MFY10 2MFY09 % CHG
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MS 321 228 41%
KERO 22 31 -29%
JP-1 106 99 7%
HSD 1,301 1,300 0%
LDO 12 15 -20%
FO 1,672 1,221 37%
Others 127 89 43%
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Total 3,561 2,983 19%
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