Falling Crude Prices - Special Market Report

8/9/2019 Falling Crude Prices - Special Market Report

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Falling

CrudeA slide in crude oil prices may help

brighten balance sheets of India Inc.


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Crude Prices Dipped 42% in CY-2014

till December 12

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• Since the beginning of the year 2014, crude oil

prices plunged 42 per cent to $61.85 per barrels in

the international markets on December 12 against$107.78 per barrels on January 1. In the domestic

market, it declined from Rs 6,858 per barrel on

January 1 to Rs 3,961 per barrel on December 12. At

present, crude is hovering near to its five year low

levels.

Background


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The Fall Can Be Attributed To

Couple Of Factors

• Robust supplies and low demand has beendominating factor for such a sharp drop in prices.

• Currently, US is producing 8.5 million barrels per

day (mbpd) the highest amount of crude in thelast 28 years. The Organization of the PetroleumExporting Countries (OPEC) are also producing the30 mbpd limit.

• Slowdown in China, Euro zone and other advancedeconomies too lead to lower crude prices.


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The Fall Can Be Attributed To

Couple Of Factors

•Libya and Iraq, one of the major OPEC producerscontinued with its high production. At presentLibya’s production has restarted to 600,000barrels per day out of the total 1.6 million barrels

per day capacity.• Iraq also has ambitions to greatly increase above

its present three million barrels a day

•

Expectations of tighter US monetary policyboosted the value of the dollar


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Production

and Consumption

• Since crude oil prices are largely influence by the

supplies from the OPEC, the supplies from the cartel

becomes a dominant factor.

• OPEC nations supply 30 mbpd which is around one

third of the total global supplies of 90 mbpd.

• Demand for OPEC crude is estimated at 29.5 mbpd

in 2014. In 2015, it is seen averaging 29.2 mbpd.


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Production

and Consumption

• According to the OPEC, the estimate for world oil

demand growth in 2014 remains at 1.05 mbpd.

• For 2015, the forecast for world oil demand growth

stands at 1.19 mbpd, with total world oil

consumption expected to reach 92.38 mbpd.


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Where Crude is heading?

•

At present oil markets are dominated by amplesupplies amidst slowing Euro-zone, China andJapan, the largest crude consuming nations.

• The actions by the central banks to prop up their

respective economies might result in to strengthin the industrial activity in turn creatingincremental demand for crude.

• For next one year. We see Brent heading towards

$82 while MCX crude oil can head higher towardsRs 5,800 per barrel.


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Sectors Which Benefit From

Softening Of Crude Oil Prices

• The most direct beneficiary of the global commodity

softening are the transportation and manufacturing

sector where input costs comes down proportionately.

• The softness in crude oil will also benefit upstreamplayers especially ONGC as it provides huge discount

(nearly 80 per cent) to the oil marketing companies.

Downstream oil and gas companies who sell the fuelthrough retail outlets as HPCL, BPCL and IOC stand

likely to gain due to fall in crude oil prices.


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• The fall in crude prices is also beneficial for paintcompanies as it will lead to better gross margin.Raw materials for paint companies includetitanium dioxide, additives, pigments, resins and

solvents — most of these are crude derivatives.According to an industry estimates, a 10 per centdrop in crude prices will improve gross marginsby 150-250 basis points. We believe Asian Paints

in the decorative paint segment and KansaiNerolac in the industrial paint segment will seesome margin growth due to fall in crude prices.


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• Natural rubber is the main raw material used in

manufacturing tyres, although synthetic rubber is als

used. Synthetic rubber is produced from the polyme

found in crude oil. The other primary ingredient intyre rubber is carbon black. Carbon black is a fine, so

powder created when crude oil or natural gas is

burned with a limited amount of oxygen.


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• A drop in crude prices will also be positive for tyre

companies which have already seen operating margi

expand to double digits in the last few quarters due t

a steady fall in natural rubber prices. On a year-to-dabasis, rubber prices plunged nearly 30 per cent in th

domestic markets till December 12.


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• Petroleum products are also used to form raw

material for packaging in the form of tubes, bottles,

covers etc. We believe companies like ColgatePalmolive, Emami and HUL are the key beneficiaries

of lower packaging costs. Fall in packaging cost may

improve operating cost of these companies in near

future.


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• Auto companies will also benefit because

ownership cost of vehicles will come down because

of falling oil prices. We believe further fall of Rs 3

per litre in petrol prices will lead to annual savingsof around Rs 4,200 for car owners. We see the fall in

crude oil price is a positive for Hero MotoCorp and

Maruti Suzuki.

hi h fi


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• Lastly, plastic companies are also the biggest

beneficiaries of falling crude prices as crude is also used

in plastic making as main raw material. We believe, the

fall in crude oil prices will soften the polymer prices.Going forward, we see Sintex Industries and Supreme

Industries, a clear beneficiaries of fall in crude oil price.

S hi h fi


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Softening Of Crude Oil Prices • According to reports, petrol consumption in plastic making

for different kind of plastics are as under

In Kg/ l Min Max

PVC 0.75 1.65

Polyethylene 0.57 0.72 Polypropylene 0.54 0.68

Polystyrene 0.50 0.72

Polyethylene Terephthalate 0.47 1.28

Polycarbonate 0.37 1.10


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Companies Likely To Benefit

Oil Marketing Companies• Oil marketing companies, which refine crude oil

into petroleum products will benefit due to

falling crude prices.• Falling crude oil is beneficial for oil marketing

companies such as HPCL, BPCL and IOC.

•

The fall in crude prices will help OMCs toreduce losses and improve margins.


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Oil Marketing Companies

• During January 1 and December 16 this year, share

price of BPCL, HPCL and IOC jumped 85.23 per cent,

130.19 per cent and 56.49 per cent, respectively, to

Rs 647.55, 551.20 and 326.05.

• OMCs under-recoveries stood at Rs 1,39,869 crore

in 2013-14. We believe falling crude oil prices and

deregulation of diesel prices will help OMCs toreduce under-recoveries.


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Asian Paints

• A fall in crude oil prices will help Asian Paints.

The company has maintained its leadership

position in the Indian decorative paints market,

it also managed to increase its volume market

share to 54 per cent. Titanium dioxide is a key

raw material for paint companies such as AsianPaints and is derived from crude oil. Thus,

falling crude oil prices is a key positive.


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Asian Paints

• Since the beginning of the ongoing calendar

year, the share price of Asian Paints jumped 52

per cent to Rs 759.25 on December 16 against

Rs 499.85 on January 1. It touched its 52-week

high of Rs 809.25 on December 8.


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Asian Paints

• We expect net profit of the company will grow

19 per cent and 22 per cent in 2014-15 and

2015-16, respectively. Operating profit margin

of the company will also grow by 30-32 basis

points during the same years.


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Asian Paints

• According to reports, the benefit of falling

crude oil can be benefit can be measured from

the fact that during 2004-05 to 2007-08, when

crude oil prices surged, the company's cost of

raw material costs as a percentage to revenue

had risen to 55-60 per cent from about 50 percent levels.


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Hindustan Unilever

• On a year-to-date basis till December 16, the

share price of FMCG major HUL jumped 34 per

cent to Rs 768 against Rs 571.80 on January 1.

It touched its 52-week high of Rs 828.75 on

December 8.


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Hindustan Unilever

• We believe HUL will also benefit by way of lower

packaging costs, as packaging products are a

derivative of crude. This will help to boost margins

at a time when competition is cut-throat andvolumes are low.

• We believe an expansion of between 2 to 3 per cent

in the earnings per share of HUL for every 10 percent fall in crude prices, by way of lower input costs


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Other Companies Likely To Benefit

• 1) Tyre Companies: MRF, JK Tyre and CEAT• 2) Plastic Companies: Sintex and Supreme Inds.

• 3) Paint Companies: Kansai Nerolac

• 4) Colgate Palmolive and Emami (Indirectbeneficiaries due to likely fall in packaging cost)

• 5) Aviation companies like Jet Airways can also

gain due to fall in ATF.


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THANK YOU

Falling Crude Prices - Special Market Report

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